The global turmoil in energy prices is not the only problem brought about by shale oil and gas revolution in the U.S. While this revolution bolstered U.S. energy independence, the latest developments in the U.S. oil demand, refining, and storage have been far less predictable, and even seem downright illogical. Currently, the U.S. oil imports are growing, oil storage is record high and still on the rise, and American refineries are losing money from processing domestic light crude oil (with low viscosity and density) compared to imported heavy oil. This situation arose from domestic oil boom being at the right place at the wrong time.
Following the peak of domestic oil output and increasing imports over the past few decades until the shale oil industry shot up oil production in late 2000, American refineries had installed expensive coking units to process leftover heavy oil into higher value products such as naphtha, light oils, petroleum coke, and intermediate oils. In other words, margins for American refineries increased with processing imported heavy crude oil. Enter light oil crudes from domestic shale formations into the market. Running light crudes is not so profitable for U.S. refineries given that the latter are configured with expensive coking units designed to process mostly heavy crude oil. Given the uncertainty of long-term stability of light crude oil production in the U.S., refineries with coking units may stand idle or process light crudes at a loss.
Furthermore, because American refineries profit more from gasoline production than distillates (because U.S. motorists mostly consume gasoline than diesel) with the rising demand for gasoline, there are too much distillate products and not enough gasoline for domestic consumption. Given that domestic and global demand for diesel is not so strong at this point, the U.S. refineries have been storing the unwanted stocks of distillates. Meanwhile, gasoline demand is also growing in China and India and refineries in both countries are trying to get rid of surplus distillates by exporting them.
While American refiners are still enjoying strong margins, continued production of domestic light crude oil will mean more storage of unwanted distillates. The U.S. currently has more than 1.2 billion barrels in storage, most of which is light oil. Under the current market conditions, the cost of storage will remain important. If interest rates go up, which will increase the cost of building oil storage units, it will become more expensive to store oil. Therefore, the only way to absorb the storage glut will be to curtail the production of domestic crude oil. In turn, for American refineries to reap economic benefits from refining, overproduction of light crude oil needs to decrease and heavy oil runs should increase. Given the growing demand for gasoline and refineries built to process heavy oil, U.S. oil imports are already rising. Although the repeal of the four-decade-old export ban last year has not led to the decrease in oil storage or a significant jump in exports due to the global oil glut, the only way that the U.S. shale oil boom will be sustained is if it increases exports and global demand for crude oil and middle distillates will pick up pace. However, the status quo might last through 2016.