Gas prices could continue to rise for years

Crude oil, the world’s largest and most widespread commodity, is weird. It’s strange both as a physical object and as a phenomenon that underpins the global economy. Every day, mankind drives steel tubes several miles underground and sucks up magic rock juice, made up of dead marine insects. After 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 supporting “the Liberty and the Law” during the Civil War.

Even today, some oil facts can inspire a sense of divine awe. Each gallon of gasoline includes 98 metric tons of ancient marine life, compressed by geology and chemistry into a liquid that can propel a 2,000 pound car the distance a man can travel in a 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 weird too. Most of the time, the world doesn’t need to think about the pipelines, tankers, and onshore storage tanks that transport oil around the world and enable something like a spot market for it. Yet Russia’s invasion of Ukraine has brought the system to the fore. Over the past two weeks, the global oil benchmark has jumped near $130 a barrel, falling below $100 today. Even though the United States imports relatively little Russian oil, domestic gasoline prices have jumped. The global oil system has been disrupted enough that one of its central elisions is now having a material effect on just about everyone in America. Because even though oil has a world price, oil isn’t really one thing at all.

What we call oil is actually more of a general class of chemicals than a single substance. All oil falls along two axes. First, the oil can be acid Where sweet, a range that indicates the amount of sulfur contained in the crude. Acid oil contains a lot of sulphur; sweet, very little. Sulfur causes particularly harmful forms of pollution – when burned it forms sulfur dioxide, which causes heart and lung problems, generates smog and produces acid rain – so sour crudes require further refining and processing before they can become usable products.

Second, oil can be heavy Where light, a trait called its “density”. It describes something more fundamental. Crude oil is a mixture of hydrogen and carbon atoms bound together by chains. When a crude is heavy, these strings are long and huge, giving the consistency of putty or window putty. In a light crude oil, the chains are short and small, making the oil closer to water. At the lighter end of this range, you end up with a hydrocarbon so airy it’s not 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 thing – just vary different densities of hydrocarbons,” Rory Johnston, oil market analyst and founder of the Commodity Context newsletter, said.

The petroleum products we use to power cars, trucks and planes also vary in density. Gasoline has shorter strings than diesel, which, in turn, has shorter strings than bunker fuel, the viscous mud used to power cargo ships. Yet a heavy oil can still produce a light fuel. “With the right chemistry and the right equipment, you can convert that stuff into something more like gasoline in a really cracking moment,” Johnston told me. That’s what a refinery does: hitting longer chains of hydrocarbons with heat and chemicals over and over until they separate into something more usable.

The upshot of all of this is that heavy, sour crudes can fetch less money on the world market than lighter or sweeter crudes because they require more refining and processing to turn them into something useful on the economic plan. In December, the United States imported 405,000 barrels of petroleum and other petroleum products from Russia. More than half of these imports were classified as “unfinished oils” by the federal government. But in the industry, Johnston said, people use a different name for these barrels: “Russian sludge.” These Russian fuels are among the heaviest and most acidic crudes in the world.

This is why, against all odds, the United States imports so many – and why replacing them is not entirely a matter of matching the volume lost to sanctions.

In the late 2000s, oil and gas companies expected that the United States would soon need to start importing far more oil and gas than it historically needed. It would have to process dirty, cheap crude oils, like those extracted from the tar sands of western Canada, in huge quantities to meet its needs. The Gulf Coast then had, and still has, the largest fleet of oil refineries in the world, and companies began preparing those refineries for decades of heavy, muddy imports. Today, America’s 129 refineries excel at converting heavy fuels with high sulfur content into usable mid-grade fuels such as diesel.

Which is kind of funny, because the prediction that justified their construction—that the United States would eventually depend on cheap crude oil from abroad—turned out to be wrong. By the late 2000s, American engineers had learned how to unlock hidden oil deep below the surface using a technique called “hydrofracturing” or fracking. These companies have flooded the market with the largest year-over-year increase in oil supply in history, Johnston said. And in a punchline appropriate to the anxieties of the time, the shale produced some of the smoothest, lightest crudes in the world. Refineries had invested tens of billions of dollars processing heavy, sour crudes for a future that never happened.

Or…that never happened enough as they had imagined. Today, many Gulf Coast energy companies fuel their refineries with a cost-optimized mix of sweet, light crudes and heavy, sour crudes, Johnston said. These produce a range of refined products — gasoline, diesel, jet fuel, bunker fuel — more cheaply than light shale oil alone would, Johnston said. With Russian oil imports now banned, these refiners may have to manage a less optimal mix of crude imports than they would like.

This is partly why the United States has started moving towards importing oil from Venezuela, which produces dirty, sour crude, much like that of Russia. But the more important reason is that Venezuela — and Iran, which the Biden administration would also like to put back on the market — has barrels of oil. The world was once predicted to burn 100 million barrels of oil a day in 2022. Losing Russia cuts off 10% of those barrels, and even if Iran and Venezuela both resold oil on the world market, they would represent less than half of Russia’s total.

Russian sanctions could also affect the global oil market for years to come. For now, the cargo of most Russian tankers was bought and sold before the war started, Johnston said. But if the country is struggling to find a buyer for its oil, it will still try to produce as long as possible, gradually filling its fleet of tankers and its onshore storage. Only then would he consider stopping production from some wells, Johnston said. But this entails a risk for the country’s producer status, because “closing” the wells harms their long-term production capacity: it is not easy, in other words, to turn a well off and on without permanently hurting him.

If Russia is to take the unprecedented step of shutting down its wells, it risks never recovering its full production capacity. And given how many Western oil companies have pulled out of the country altogether, they may lack the know-how and investment to revive them, even if sanctions eventually ease, Johnston said. In other words, even if gas prices fall in the short term, they may be bound to rise for years to come.

About Dwayne Wakefield

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