Try as they might, medieval alchemists were unable to turn lead into gold.
But today's North American oil wizards are at work with their own magic wands, performing value-adding tricks. U.S. refineries are running full blast, turning domestic crude oil into higher-priced petroleum products for world markets. That alchemy is helping oil companies circumvent the 1975 U.S. oil export ban, for it's verboten to sell unrefined crude abroad, but fair trade to sell distilled liquids such as gasoline, diesel and naphtha.
Canadian oil producers can be thankful for the U.S. refinery magic. Alberta's oily products would be worth less than tin without this relief valve for flushing surplus black gold out of the North American system.
Our feature chart this week shows U.S. exports of oil by volume, highlighting the amazing growth of the new alchemy.
Not long ago, up to circa 2006, before the boom in U.S. shale oil, American exports of oil products were mostly refined lubricants, waxes, additives and a smattering of gasoline and diesel fuels. Outbound volumes were running a steady one million barrels a day (MMB/d). By 2007, large-scale resource plays like the oil sands, followed by hydraulically fractured shale oils, pumped up crude oil volumes quickly. Expanding refinery capacity was ready to handle some of the growth.
Market forces should allow for global trade in crude oil. But American crudes are legislatively banned from export due to lingering energy security sensitivities from the 1970s price shocks. And Canadian crudes are trapped inland due to lack of coastal access.
Unlike transmuting elemental lead to gold, energy products can be converted into different forms with relative ease. And so American refiners are working hard to convert crude oil to higher-value energy forms. New "pots and pans" called "condensate splitters" are being built to boil the crude oil just enough to sidestep export restrictions. Distillates, gasoline and other refined products are being shipped out at record pace, relieving pressure on the growth in domestic oil production.
U.S. exports of oil products have grown fourfold to over four MMB/d in the span of six years, paralleling oil production growth. The trend in Figure 1 is linear, growing by 0.4 MMB/d a year. Canadian oil volumes – overwhelmingly hostage to the continent – also fuel this modern day alchemy. As a consequence of rising U.S. petroleum exports, North American oil pricing has recently defied bearish predictions. Benchmark West Texas intermediate (WTI) is now trading closer in value to its international equivalents and Canadian discounts have diminished in kind too.
Physically, growth of this oil sorcery is limited by refinery capacity and the propensity of international markets to absorb all these different products without clobbering price. Notionally, there may be a crunch coming over the next couple of years, if not sooner. But wait: There is more energy philosophy in this story than just refining and exporting of oil products.
Elusive philosopher's stones were believed to be the magical substance that could transmute lead into precious metals like gold and silver. No one has found such a stone yet, but energy products – especially fossil fuels – can be chemically transmuted into different forms without such an elusive catalyst.
Carbon atoms can be rearranged in many different ways. Oil can be converted to a multitude of hydrocarbon liquids, coal can be made into natural gas, coal into petroleum liquids, natural gas to liquids, and all can be turned into electricity; the list goes on and on. Such energy transmutations are not necessarily the most efficient nor environmentally desirable. Nor do they always benefit the producer; right now the refiners are making gold. Railways are cashing in too, noting that energy, depending on its form, can be transported via different modes. Meanwhile, back at the wellhead, many producers are still showing some lead on their income statements.
Nevertheless, there is a broader lesson in this case study of American refining. The flexibility of energy products to masquerade in different forms is a big reason why the industry's market magic always seems to find its way around government policy and social impediments.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
Peter Tertzakian