How does the oil market work?

I always hear on the news that X amount of our nation’s oil comes from country A and Y amount from country B. But isn’t oil sold like other commodities in an international market?

If I’m correct (which I might not be), how can we even tell where our oil comes from and why should it matter?

…Well maybe that last question is opening up a can of worms, but my basic question is this: How does oil get from the underground to my local Citgo? Does it in fact go to an international commodities market or is it simply a direct transaction between private companies?

Where it comes from is tracked:

Many people would be surprised to see 3 of the top 4 sources for the US are Canada, Mexico and Nigeria. Canada is far and away the #1 source of foreign oil for the US

Remember that all commodities have basis costs in addition to the commodity costs, which reflect transport.

So you can see nat gas at Henry Hub, but you’ll have bases for Zone 5 or Zone 3 or whatever.

Another common quote you’ll see is NYMEX CL Cushing, which is a future on WTI at Cushing, OK. But even though little towns don’t trade liquid, you can get rack rates down to city levels from companies liek Hightower.

Transport always matters.

There are commodities markets for crude oil and most of its refined products, and even a few byproducts.

If you’ve got an oil well, you can sell your crude on the open market, or you can pipe it to your own nearby refinery, if you have one. If you’re a refinery, you can take your refined gasoline, diesel, kerosene, jet fuel, yadda yadda, and sell them on the open market, or pipe them to distribution agents that you may own (say, gas stations.)

Back in the day, Standard Oil was famous for vertically integrating their entire supply chain; they owned the wells, the pipelines, the refineries, and the gas stations. Due to anti-trust actions, the companies no longer work that way for the most part. The big ones all still own various staged of the business from wells to retail, but they all buy from each other and sell to each other at each point along the supply chain. Most gas stations are franchised now, for example, and buy their fuel from the lowest bidder that week in the local gasoline market. As an example, BP owns wells, pipelines, and refineries throughout the US, but if you go to a BP gas station, it’s probably a franchise owned by a local business owner, who has a relatively small chance of buying his gasoline from BP, and if he does, there’s a small chance that it was actually refined at a BP refinery, and if it was, there’s a small change that it got there through a BP pipeline, and if it did, there’s a small chance that it was pumped from a BP-owned well.

OK. But how does this relate to the post from Bijou Drains? Do we get most of our oil from Canada and Mexico due to low trade laws? Is it just as simple as free market economics?

I think the point that’s perhaps been missed here is that oil as a commodity doesn’t necessarily have a very direct impact on what physically happens to the oil in the supply chain. Most of what goes on is futures trading, where traders buy contracts for x amount of x crude delivered on x date. It’s not as if the traders physically buy the oil, take delivery and then sit on it until someone wants to buy it.

On the physical side, most oil simply gets shipped to wherever it’s the most convenient to ship it, hence most of our oil imports coming from Canada and Mexico. But that hardly means we’re immune from the market effects of middle eastern oil-- it’s fairly cheap to ship by supertanker and so if it made sense to do so, that North American crude could go to Europe and China instead of middle-eastern crude. In that sense, it isn’t particularly relevant where the oil we physically use comes from, but it is still true that the price of oil we’ve come to rely on depends largely on continual supply from places like Saudi Arabia and Venezuala, even if we’re not physically using that much of their oil.

There is a “spot” market in oil, which is the purchase of oil as needed at the last minute, and a contracted market for long-term oil purchases. The former pulls from any sources available. The latter is known into the future and involves standard relationships with the big oil companies. The latter also dominates the former, probably by orders of magnitude, making it easier to know who is getting their oil where.