Crude oil, the world’s most important and ubiquitous commodity, is strange. It is strange both as a physical object and as a phenomenon underlying the world economy. Every day, humanity drives steel pipes several miles underground and sucks out the magical rock juice, which is made of dead ocean bugs. After oil prospectors discovered oil in Titusville, Pennsylvania in 1859, sparking the world’s first oil rush, Northerners wondered if oil was America’s divine reward for upholding “freedom and law” in the country. Civil war.
Even today, some facts about oil can instill a sense of divine awe. Each gallon of gasoline contains 98 tons of ancient marine life, compressed by geology and chemistry into a liquid that can push up to 2,000 pounds as the distance a man could travel in one day. Burning that gallon of gasoline also releases 20 pounds of carbon dioxide into the atmosphere, where it will eventually warm the climate and acidify the ocean.
The oil market is also strange. More often than not, the world doesn’t need to think about pipelines, oil tankers, and land-based storage tanks that ferry oil around the world and allow for something like a spot market for it. Yet the Russian invasion of Ukraine brought the system to the fore. Over the past two weeks, the global oil benchmark has jumped to nearly $ 130 a barrel, before dropping below $ 100 today. Even though the US imports relatively little Russian oil, domestic gasoline prices have risen. The global oil system has been disturbed enough that one of its central elisions now has a material effect for almost everyone in America. Because even though oil has a global price, oil really isn’t what at all.
What we call oil is actually more of a general category of chemicals than a single substance. All oil falls along two axes. First, oil can be acid gold sweet, a range that indicates the amount of sulfur in the crude oil. Sour oil has a lot of sulfur; sweet, Very little. Sulfur causes particularly unpleasant forms of pollution: when burned, it forms sulfur dioxide, which causes heart and lung problems, generates smog and produces acid rain, so acid crudes need more refining and processing before they can become usable products.
Second, oil can be heavy gold light, a trait called “density”. This describes something more fundamental. Crude oil is a mixture of hydrogen and carbon atoms linked together in chains. When a crude oil is heavy, those chains are long and huge, giving the texture of window putty or putty. In a light crude oil, the chains are short and small, making the oil more like water. At the lighter end of this range, you are left with a hydrocarbon so airy it isn’t liquid at all: methane gas, just four hydrogen atoms bonded to one carbon atom. Methane is the main hydrocarbon in natural gas. “Oil and gas are functionally the same, just different hydrocarbon densities,” Rory Johnston, oil market analyst and founder of the Commodity Context newsletter, Tell me.
The petroleum products we use to power cars, trucks and planes also vary in density. Gasoline has shorter chains than diesel, which, in turn, has shorter chains than bunker fuel, the heavy sludge used to power merchant ships. Yet heavy oil can still produce light fuel. “With the right chemistry and equipment, you can convert that kind of stuff into something more like gasoline just by trying a little,” Johnston told me. This is what a refinery does: hitting longer chains of hydrocarbons with heat and chemicals over and over again until they split into something more usable.
The result of all of this is that heavy, acidic crudes can bring less money to the global market than lighter or sweeter crudes because they require more refining and processing to be turned into something economically useful. In December, the United States imported 405,000 barrels of oil and other petroleum products from Russia. More than half of these imports have been classified as “crude oils” by the federal government. But in the industry, Johnston said, people use a different name for these barrels: “Russian mud.” Those Russian fuels are some of the heaviest and most acidic crudes in the world.
This is why, counterintuitively, the US imports so much of them and why replacing them is not entirely a matter of matching the volume lost due to sanctions.
In the late 2000s, oil and gas companies expected that the United States would soon have to start importing far more oil and gas than it historically needed. It would have to process dirty, low-cost crude oils, such as those extracted from the tar sands of western Canada, in huge volumes to meet its needs. The Gulf Coast then had, and still has, the largest fleet of oil refineries in the world, and companies have begun preparing these refineries for decades of heavy, muddy imports. Today, America’s 129 refineries excel at converting sulfur-containing heavy fuels into usable medium-quality fuels such as diesel.
Which is pretty funny, because the prediction that justified their construction – that the US would ultimately depend on cheap crude oil from abroad – turned out to be false. By the late 2000s, American engineers had learned how to unblock hidden oil deep beneath the surface using a technique called “hydrofracturing” or fracking. These companies flooded the market with the largest year-over-year increase in oil supply in history, Johnston said. And in a punchline suited to the anxieties of the age of the years, shale has produced some of the sweetest and lightest crudes in the world. The refineries had invested tens of billions of dollars in processing heavy, acidic crude oils for a future that never came.
Or … that it never came Rather as they had imagined. Today, many Gulf Coast energy companies fuel their refineries with a financially optimized mix of sweet, light and heavy, acidic crudes, Johnston said. These produce a range of refined products – gasoline, diesel, jet fuel, bunker fuel – at a lower price than light shale oil alone, Johnston said. With Russian oil imports now banned, those refineries may have to manage a less optimal crude oil import mix than they would like.
This is partly why the United States has started to tiptoe to import oil from Venezuela, which produces crude as dirty and sour as Russia’s. But the most important reason is that Venezuela – and Iran, which the Biden administration also wants to bring back to the market – has barrels of oil. It was once predicted that the world would burn 100 million barrels of oil a day in 2022. Russia’s loss reduces 10% of those barrels, and even if Iran and Venezuela sold oil on the global market again, they would make up less than half of total of Russia.
Russian sanctions could also affect the global oil market for years to come. For now, the cargo ship on most Russian oil tankers was bought and sold before the war began, Johnston said. But if the country struggles to find a buyer for its oil, it will still try to produce as long as possible, gradually filling its tanker fleet and storage onshore. Only then would it consider shutting down production at some wells, Johnston said. But this entails a risk for the country’s status as producer, because “closing” wells damages their ability to produce in the long term: it is not easy, in other words, to shut down and re-ignite a well without permanently damaging it.
If Russia is to take the unprecedented step of closing its wells, then it may never regain their full production capacity. And given the number of Western oil companies that have withdrawn completely from the country, the know-how and investment needed to reactivate them may be lacking, even if sanctions eventually lift, Johnston said. In other words, even if gas prices fall in the short term, they could be set to rise in the years to come.