Why Import Oil? Saudi Cargoes Help U.S. Refiners

Mark Green
Posted May 5, 2020

News reports of a “flotilla” of oil tankers from Saudi Arabia, sailing to the U.S. with more than 40 million barrels of crude oil in their holds for delivery this month, has many Americans questioning why the U.S. – the world’s largest oil and natural gas producer – imports any oil when oversupply associated with the government response to COVID-19 has a number of U.S. operators hurting financially.

Some think President Trump should send the oil fleet home or impose import tariffs. It’s a new chapter in an old debate over why the U.S. imports oil when our domestic production is among the globe’s leaders. In the case of this imported Saudi oil, the answer has much to do with the supply needs of the U.S. refining system.

Three important points:

1. There’s Crude Oil – and Then There’s Crude Oil

As API Chief Economist Dean Foreman explained in this blog, crude oil is a global commodity, and almost no one consumes it directly. It must be refined into fuels, feedstocks, materials and products that consumers buy and use in their daily lives.

Not all crude oil is the same. There are dozens of types of crude produced and used around the world – classified by specific gravity (light/medium/heavy) and sulfur content – with “sweet” being relatively low-sulfur oil and “sour” referring to crude with higher sulfur content.

Here’s a chart from the U.S. Energy Information Administration, plotting the different kinds of crude:

The U.S. refinery system is optimized to use a range of crude oils to make products from gasoline, jet fuel, diesel and lubricants to asphalt.

The Saudi shipment referred to in numerous reports is a medium sour crude, similar to some crudes produced in the Gulf of Mexico. At times, imported crude oil supplements domestic crude production.

It’s very different from U.S. West Texas Intermediate, which is light and “sweet.” The two crudes aren’t interchangeable in refiners’ systems. In addition, Saudi crude often is considered a “base load,” typically doesn’t spend time in storage and won’t take up U.S. storage space. Again, Saudi crude is needed by some U.S. refiners to optimize manufacturing of certain products. From Foreman’s blog:

[D]espite the rapid increase in domestic oil output, significant portions of the oil that is being produced here may not be what is needed to make all of the products Americans use. This underscores the need for flexibility in trading oil internationally – marketing supplies that might not match local needs to global buyers – which is integral to unlocking the United States’ productive potential.

2. Global Trade Flows of Oil are Normal

On any given day, U.S. refiners import more than 5 million barrels of oil to meet the needs of their customers. At the same time, U.S. producers and refiners exports millions of barrels of oil and refined products to the rest of the world.

In the case of the Saudi oil tankers, it’s important to realize that these imports were initiated before the COVID-19 crisis and are not unusual. Compared to the 2019 average of U.S. imports of Saudi crude, U.S. orders for Saudi crude last month were roughly the same. Saudi oil imports have been falling as U.S. energy production has increased. Last year Saudi imports were at their lowest level since 1985.

3. Refining is a Complex Process

The U.S. refining system runs 24 hours a day and 365 days a year to produce the fuels and products Americans use every day. For decades Saudi Arabia, among other countries, has been a reliable crude oil supplier to U.S. refiners and will continue to play an important role for decades to come.

Let’s wrap up with something we’ve been saying throughout the oil demand downturn associated with COVID-19: Markets should be allowed to work, and government interventions may do more harm than good.

In this case, blocking the import of medium sour Saudi crude or increasing its cost through tariffs likely would negatively impact U.S. refiners and their ability to produce valuable products used by U.S. consumers – and, in some cases, products that are exported to global customers with a value-added benefit to the U.S.