Energy Production Committee

Understanding the Petroleum Industry

Price Overview | Demand | Supply | Trade and Imports | Refining | Stocks
What's Hot: Demand | Supply | Trade and Imports | Refining | Stocks

Trade and Imports

• As we have seen, the regional patterns of global supply and of global demand are quite different. This disparity is resolved through inter-regional trade, i.e. imports and exports. The 3 large consuming regions, North America, Europe and Asia-Pacific, are all net importers. All the other regions are net exporters.

• The largest individual importer, both net and gross, is the U.S. (See U.S. Regional Review). But that does not translate into North America being the largest regional importer, because the other two countries in the regional group, Canada and Mexico, are two of the United States’ three top suppliers. Instead, the largest regional importer is Asia-Pacific. On the other side of the equation, the Middle East heavily dominates inter-regional export flows, despite the strong growth in production in other areas in recent years.
• Crude and products flow to the markets that, from the supplier’s perspective, value them most highly, i.e. give the supplier the highest revenue, once all relevant costs have been netted out. Everything else being equal, this means that oil moves to the nearest markets first, because their transportation cost is lowest, and then to ones increasingly further away, and thus with increasingly higher transportation costs, until all the oil is placed. However, everything else, such as tariffs, fees, import/export bans, maximum usable ship size, refinery configurations, product needs and politics, frequently is not equal between different markets. Therefore, trade flows do not always follow the simple "nearest first" pattern.
• The sharp changes in regional supply/demand patterns in recent years had a major impact on world trade flows. The center of gravity of world oil supply moved westward, with the strong growth in Latin American supplies, while the center of gravity of world oil demand moved eastward, under the influence of the Asian boom. Thus, self-sufficiency increased in the Atlantic Basin, but declined in the East and around the Pacific Rim. As a result, Asia-Pacific acted like a magnet (see What's Hot) on world oil trade flows, pulling them eastward.
• The Middle East acts as a balance wheel for the oil market. Hence, the eastward swing in trade flows has meant fewer Middle East barrels moving west and very many more moving east. This has not left Atlantic Basin markets like the U.S. and Europe deprived. They are reveling in a rising tide of supply from the North Sea, West Africa and Latin America, all of which are much closer and so provide what are referred to as "short haul" imports.
• Trade is measured in three main ways: size of cargo, i.e. weight or volume; shipping needs, i.e. ton-miles; or value. All three measures agree that the oil trade is the world’s largest, but they differ over the state of its health. In volume terms, oil trade grew in 1997, as it has every year since 1987. However, world oil trade obviously declined in value terms after 1996, when tight supply drove prices to their highest levels since the Persian Gulf conflict in 1990/91. Less obviously, it also started to decline in ton-mile terms, as average voyage length declined faster than the volume grew.
• Average voyage length is declining for several reasons: the surge in short haul imports in the Atlantic Basin, the shift in Middle East exports away from the U.S. (longer) to Asia (shorter), and the return of Iraqi crude exports, most of which only move the short distance from the Black Sea end of the Iraq-Turkey pipeline to the Mediterranean. This decline is likely to accelerate with the production cutbacks that have been adopted during 1998, thus keeping a lid on the cost of shipping.
• Crude oil makes up almost 80% of world oil trade, because of the variety factors that argue for siting refineries close to consumers rather than close to the wellhead. (See Refining section.) Thus, it is crude primarily that is shipped long distances. Most product moves are intra-regional.
• The products trade is largely a balancing function, helping the global market to be more efficient and therefore keeping consumer prices lower than they otherwise would be. Some refineries have been built expressly to serve an export market, e.g. in Singapore and the Middle East for East Asia, and in the Caribbean for the U.S. East Coast, so those product flows always occur. But most product trade is a response to local supply and demand getting temporarily out of balance. Thus, the Asian crisis has turned Japan into a product exporter. Similarly, Europe has been a large supplier of gasoline to the U.S. in recent years, because the surprise of dieselization left it with surplus gasoline capacity. On the other hand, when it has been extremely cold, Europe has received heating oil from the U.S., even though the U.S. is traditionally a heating oil importer during the winter.

• The difference between demand and domestic supply in just one region or country is net imports, i.e. imports minus exports. In the U.S., whose thirst for and dependence on imports has been growing sharply since the mid-1980’s, net imports reached a record 9.2 million B/D in 1997.

Chart: U.S. Supply, Demand and Net Imports, 1973-1997

• They would be significantly higher if the U.S. did not have 1.3 million B/D of supply in addition to its crude and NGL production. This expands total domestic supply by over 15%. The majority of this non-production supply comes from processing gain, the volume gain that occurs as crude is processed into lighter, lower density products. Another 300 thousand B/D comes from synthetic hydrocarbons, such as ethanol and MTBE, which are mainly used to meet the legislative requirements on oxygenate content in gasoline. Both volumes have been growing.
• Despite its large supply gap (demand exceeding domestic supply), the U.S. also exports oil, because various logistical, regulatory and quality issues can make exporting the optimal economic choice. These exports (see What's Hot) are typically an order of magnitude smaller than imports. They averaged around 1.0 million B/D in 1997, as they have done every year since 1991.
• Imports therefore reached 10.2 million B/D of crude and products in 1997. This was almost double the 1982-1985 average, and kept the U.S. firmly at the top of the world importer rankings. All except the Canadian-sourced volumes arrived by tanker. However, as with supply and demand -- the determinants of imports, after all -- the story is not one of just growth, but of cycles. For example, after reaching 8.8 million B/D in 1977, imports underwent a dramatic, 5-year slide, which was the direct consequence of the post-1978 collapse in demand (see U.S. demand).

• Import dependency, the percentage of demand met by imports, has fluctuated broadly in line with imports. Gross dependency reached 55% in 1997, while net dependency exceeded 49% and looks virtually certain to exceed the once politically sensitive 50% level in 1998. (Gross dependency is based on total imports, while net dependency is based on imports minus exports.) Such dependency levels raise few eyebrows internationally, since many industrialized countries are at 90-100%.
• Crude oil has consistently dominated U.S. imports, for the same reasons that it dominates world trade flows. It has also consistently borne the brunt of the volume swings. In 1997, imports comprised 8.2 million B/D of crude oil and 1.9 million B/D of products, an 80:20 mix. Measured against 1982-1985, when the most recent low for total imports occurred, this marks a 4.9 million B/D increase for crude oil imports but just a 0.1 million B/D increase for products imports. This strong bias toward incremental crude is fed by declining U.S. production, and as discussed, by U.S. refiners’ success in pushing capacity utilization rates up to unprecedented levels (see Refining Section).
• The rapid growth in crude imports in the 1990’s has been unexpectedly accompanied by a steady swing toward crudes from near-by, "short-haul" sources (see What's Hot). Western Hemisphere crudes are now in the majority. At the same time, the proportion of crude imports from the Middle East has dropped from 30% to 20%. Since the Middle East producers are reluctant, for political reasons, to see their share of the U.S. market shrink too far, the U.S. crude market is becoming increasingly competitive.

• Although the change in mix has lessened U.S. dependence on the politically unstable Middle East, it does not follow that the U.S. is correspondingly less vulnerable to price shocks. Since oil is a global market, the impact of a disruption in a supplying region on U.S. prices is determined ultimately by world and not U.S. dependency on that region.
• However, in the short term, U.S. dependency can matter, and U.S. import sources have become increasingly concentrated. Nearly 2/3 of all crude imports come from just 4 countries: Mexico, Venezuela, Saudi Arabia and Canada. Adding in the North Sea and Nigeria raises the proportion to ¾. The supply chain into the U.S. from several of these suppliers is very short. Hence, the initial impact on the U.S. of a major disruption in some of these producing countries could be severe.
• The relative stability of U.S. product imports (see What's Hot) only applies to their volume. There have been significant structural shifts in the product mix. Most recently, the primary shift has been a large increase in gasoline blending components by the refiners. This has been aimed at mitigating some of the negatives for price and supply security that have resulted from the fragmentation of the U.S. market by the spread of specialty products (see What's Hot).
• There is an enormous range in both the volume of imports and exports and the level of import dependency between the different regions within the U.S. At one extreme is the East Coast, the most supply deficit region because of the paucity of both refining and production there. The East Coast refines only 1/3 of what it consumes, yet still has to import almost all of the crude it runs. It fills the product gap with supplies from other parts of the U.S., particularly the Gulf Coast, and with imports, taking over half of all the products that come to the U.S.

• At the other extreme is the Gulf Coast. As the main refining and petrochemical center for the U.S., it dominates both crude oil imports and product exports, and runs the East Coast a close second as a product importer. Also, all of the Midwest’s non-Canadian crude imports – which averaged over 700 thousand B/D in 1997 - move through the Gulf Coast’s ports and pipelines. The Gulf Coast has had to accommodate the bulk of the growth that has taken U.S. imports to record highs. Despite earlier concerns, the region’s infrastructure has proved flexible enough to handle the challenge.

For more info, go to What's Hot in Trade

• The Asian Magnet
• Shift in U.S. Import Origin
• U.S. Exports
• U.S. Product Imports
• Market Fragmentation, from the Trade Side

To see graphs, go to Trade Graphs

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