The Global Oil Market Is Based on a Fiction

Crude oil, the world’s most important and ubiquitous commodity, is weird. It is weird both as a physical object and as a phenomenon that underpins the world economy. Every day, humanity sticks steel tubes several miles underground and sucks out magic rock juice, which is made of dead ocean bugs. After prospectors discovered petroleum in Titusville, Pennsylvania, in 1859, igniting the world’s first oil rush, northerners wondered whether petroleum was America’s divine reward for upholding “liberty and law” in the Civil War.

Even today, certain facts about oil can instill a sense of divine awe. Each gallon of gasoline comprises 98 metric tons of ancient sea life, compressed by geology and chemistry into a liquid that can propel a 2,000-pound car the distance that a man could walk 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 on-land storage tanks that ferry oil around the world and allow for 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 to nearly $130 a barrel, only to fall below $100 today. Even though the United States imports relatively little Russian oil, domestic gasoline prices have surged. The global oil system has been disturbed enough that one of its central elisions is now of material effect to just about everyone in America. Because even though oil has a global price, oil is not really one thing at all.

What we call petroleum is actually more a general category of chemicals than a single substance. All oil falls along two axes. First, oil can be sour or sweet, a range that indicates how much sulfur is in the crude. Sour oil has a lot of sulfur; sweet, very little. Sulfur causes particularly nasty forms of pollution—when burned, it forms sulfur dioxide, which causes heart and lung problems, generates smog, and produces acid rain—so sour crudes need more refining and processing before they can become usable products.

Second, oil can be heavy or light, a trait called its “density.” This describes something more fundamental. Crude oil is a mix of hydrogen and carbon atoms bound together in chains. When a crude is heavy, those chains are long and enormous, giving the consistency of window putty or caulk. In a light crude, the chains are short and small, making the oil more like water. At the lightest end of this range, you’re left with a hydrocarbon so airy that it’s not liquid at all: the gas methane, just four hydrogen atoms bound to a carbon atom. Methane is the main hydrocarbon in natural gas. “Oil and gas are functionally the same thing—just varying different densities of hydrocarbon,” Rory Johnston, an oil-market analyst and the founder of the newsletter Commodity Context, told me.

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

The upshot of all this is that heavy, sour crudes can fetch less money on 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 petroleum and other oil 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.” Those Russian fuels are some of the heaviest and most sour crudes in the world.

That is why, counterintuitively, the United States imports so much of them—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 much more oil and gas than it had needed historically. It would have to process cheap, dirty crudes—such as those drilled from the tar sands of western Canada—in huge volumes in order to satisfy its needs. The Gulf Coast had then, and still has, the largest fleet of oil refineries in the world, and firms began preparing these refineries for decades of heavy, sludgy imports. Today, America’s 129 refineries excel at converting heavy, sulfur-ridden fuels into usable mid-grade fuels such as diesel.  

Which is kind of funny, because the forecast that justified their construction—that the U.S. would eventually depend on cheap crude oil from abroad—proved false. By the late 2000s, American engineers had learned to unlock the oil hidden deep beneath the surface using a technique called “hydrofracturing,” or fracking. These companies flooded the market with the biggest year-over-year increase in oil supply in history, Johnston said. And in a fitting punch line to aughts-era anxieties, shale produced some of the world’s sweetest, lightest crude. The refineries had invested tens of billions of dollars in processing heavy, sour crudes for a future that never arrived.

Or … that never arrived quite as they had imagined. Today, many Gulf Coast energy companies feed their refineries a financially 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 would alone, Johnston said. With Russian-oil imports now banned, those refiners may have to run a less optimal mix of crude imports than they might like.

That’s partly why the United States has begun tiptoeing toward importing oil from Venezuela, which produces a dirty, sour crude much like Russia’s. But the more important reason is that Venezuela—and Iran, which the Biden administration would also like to bring back on the market—has barrels of oil. The world was once projected to burn 100 million barrels of oil a day in 2022. Losing Russia cuts out 10 percent of those barrels, and even if Iran and Venezuela both sold oil again on the global market, they would make up less than half of Russia’s total.

The Russia sanctions could also affect the global oil market for years to come. For now, the cargo 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, then it will still try to produce as long as possible, gradually filling up its tanker fleet and onshore storage. Only then would it consider shutting off production at some wells, Johnston said. But that carries risk for the country’s status as a producer, because “shutting in” wells damages their long-term ability to produce: It’s not easy, in other words, to turn a well off and on without permanently hurting it.

If Russia has to take the unprecedented step of shutting off its wells, then it may never recover their full production capacity. And given the number of Western oil companies that have withdrawn from the country completely, it may lack the know-how and investment needed to turn them back on, even if sanctions eventually do recede, Johnston said. In other words, even if gas prices fall in the short term, they may be destined to rise for years to come.