4 ms·

Eh, I just read about oil on the internet but my understanding is that oil is not at all fungible. Refineries are constructed and operated with specific grades

Eh, I just read about oil on the internet but my understanding is that oil is not at all fungible. Refineries are constructed and operated with specific grades of crude in mind. Though they can can process other grades with a few years of process tweaks, it comes with an efficiency (ie. profit) hit. Our gulf coast refining capacity is built with heavy sour crude coming from Central and South America in mind, but most of our indigenously extracted oil is light sweet. It's more profitable to just trade for the crude our infrastructure is built for than to refine the wrong crude, but this does expose us to the global market prices. [1] https://www.fsmetals.com/about-us/blog/americas-light-sweet-problem https://www.fsmetals.com/about-us/blog/americas-light-sweet-... [2] https://epic.uchicago.edu/news/why-do-we-import-russian-and-other-foreign-oil-when-we-have-a-lot-of-it-in-the-u-s/ https://epic.uchicago.edu/news/why-do-we-import-russian-and-...

eru 4y ago
Oil is fungible at the margins. You are right that there's some limit to the fungibility.
Retric 4y ago
The feedback across years is still a short enough time periods for markets to adjust. Oilfields generally last a long time as there is little incentive to drill a lot of holes and add hundreds of millions in equipment to empty one in 5 years or less. Instead companies extract oil across decades so when a new oil filed gets tapped regional prices shift, refineries adapt, until regional prices quickly match global ones long before the well is dry. Fracking is something of an exception, but it’s still dependent on having refineries to process the stuff.
balderdash 4y ago
This is mostly right, but it’s more a range of potential grades a refinery is set up for, but you can get to those grades by blending, in which case it could be cheaper to buy a heavy and light cargo to get to a medium grade than buy a medium grade cargo…

eru 4y ago

Oil is fungible at the margins. You are right that there's some limit to the fungibility.

Retric 4y ago

The feedback across years is still a short enough time periods for markets to adjust. Oilfields generally last a long time as there is little incentive to drill a lot of holes and add hundreds of millions in equipment to empty one in 5 years or less. Instead companies extract oil across decades so when a new oil filed gets tapped regional prices shift, refineries adapt, until regional prices quickly match global ones long before the well is dry. Fracking is something of an exception, but it’s still dependent on having refineries to process the stuff.

balderdash 4y ago

This is mostly right, but it’s more a range of potential grades a refinery is set up for, but you can get to those grades by blending, in which case it could be cheaper to buy a heavy and light cargo to get to a medium grade than buy a medium grade cargo…