It appears as if North America is becoming energy independent.
For several years, there has been virtually no oil in our nation's power grids and our electricity is energy independent. Domestic oil is experiencing similar trends; for the first time in decades, the U.S. increased domestic production and decreased consumption. Now, for the first time since 1949, the U.S. has become a net exporter of refined products.
The Energy Information Administration reports strong global demand helped propel distillate exports. Refiners had access to increased supplies of crude oil imports from Canada, which topped 2 million barrels per day in 2011 for the first time, and from North Dakota's Bakken formation.
To be clear, the U.S. remains a net importer of crude oil. But U.S. refineries are using that oil to produces a variety of petroleum products, including naphtha, gasoline, kerosene/jet fuel, gas oil or diesel distillate, lubricating oil, heavy gas/fuel oil, and residuals. Many of these products are consumed domestically, but a growing number are being shipped to foreign markets.
The fact the U.S. recently became a net exporter of refined products raises interesting questions about the Keystone XL pipeline, the price of gasoline and domestic drilling. The Keystone pipeline is a project designed to import more crude from Canada to U.S. refineries (the project recently failed to get enough votes in Congress to be built). Given that the U.S. is now a net exporter of petroleum products, do we really need to import additional Canadian oil to achieve the national goals of energy security and energy independence?
Another question addresses gasoline prices. If we "Drill Here, Drill Now," will we pay less at the local gas station, as Newt Gingrich suggests, or will we simply export more petroleum products?
Finally, is "our oil" really ours?
Exporting high-valued refined products helps the U.S. in several ways. First, it helps the balance of payments. According to the Commerce Department, petroleum products ranked second in value of all U.S. exports in 2011 at $111.1 billion per year (automobiles were first). This is up 60% from 2010.
Second, exporting $111 billion per year worth of refined products derails the argument that importing crude oil damages the economy. At least a third of what America spends on foreign crude oil comes back in the form of revenues from exported products.
Also, building and operating pipelines and refineries creates jobs. Most of these jobs are high-paying and permanent.
Because crude oil is internationally fungible, international markets benefit when North America drills for more crude oil. Like crude oil, refined products are participating in international markets and their pricing is influenced by normal market forces. If Americans are unwilling to pay market prices for domestically produced refined products, other countries appear willing to take it off our hands. So, it is not "our oil" unless we consume all of it -- and we are not.
Just who is buying American petroleum products? According to the EIA's December 2011 report, Mexico, the Netherlands and Canada were the top three customers for American products. Trailing the top three are Chile, Brazil and China. Surprisingly absent from the top of EIA's list is Japan, which bought less of our products than Panama did.
They are not all buying the same product. Mexico imports a considerable amount of finished motor gasoline. The Netherlands is the top importer of U.S. fuel oil. Canada imports jet fuel, fuel oil and a variety of other refined products from the U.S.
Selling to these countries are companies such as Exxon Mobil (XOM), BP (BP), Total SA (TOT) and other major integrated oil and gas companies. But America's newfound position as a net exporter of refined products has been a boon to independent oil refiners such as Valero Energy (VLO), Marathon Petroleum (MPC), HollyFrontier (HFC) and Western Refining (WNR), which benefit from plentiful oil supplies in the middle of the country.
Phillips 66, the refining business that's being spun off by ConocoPhillips (COP), should also benefit. However, Phillips 66 remains part of ConocoPhillips until second quarter, possibly May, when the parent company expects to complete the spinoff.
Free markets provide surprising opportunities for American energy companies. As North America produces more fuels, and as crack spreads (the difference between the price of crude oil and petroleum products) increase, exporting becomes an increasingly profitable business.
I assume that Newt Gingrich has honorable intentions. But his oversimplification of complex energy markets may be raising false expectations and stimulating inappropriate reactions. Under free markets, "Drill Here, Drill Now, Pay Less" may not necessarily lower domestic energy prices to the levels he suggests.
