The Myth of Crude Oil

SMITH BRAIN TRUST — Something historic happened on New Year’s Eve 2015 in Texas. Less than two weeks after lawmakers lifted a 40-year ban on exporting U.S. oil, the first tanker of crude left Corpus Christi headed for Europe. But considering that the United States is a net importer of crude, why export anything at all? Smith School professor Charles E. Olson explains.

“The fact is crude oil is not crude oil,” says Olson, a longtime energy industry executive. “There are numerous grades with different properties that have different prices.” Likewise, not all refineries are created equal. “Some refineries have the capability to process lower-grade crudes into finished products,” Olson says. “Numerous U.S. refineries have these capabilities and can obtain lower grade imports at a lower price than U.S. crude.”

If U.S. companies cannot export their high-grade crude, then they must refine it at home — even when doing so is not cost effective. “It boils down to a problem of optimization,” Olson says. “Remember, transportation costs by tanker are very low. Thus, eliminating the export ban on U.S. crude will free up markets to match the right crude with the right refinery.”

Related: Olson explains the relative calm after the Dakota Accesss Pipeline Storm. Read more...