Oil Swap between United States and Mexico

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The bilateral relationship between United States and Mexico has been fostered by The North American Free Trade Agreement (NAFTA). Mexico is currently the 3rd largest trading country of the United States, second largest export market in 2015 and third largest imported goods provider. Agricultural products and service are the main trading products between these two countries. Nowadays, the trading has expanded to crude oil.  U.S. Department of Commerce’s Bureau of Industry approved that United States could exchange light, sweet crude oil for Pemex (Mexico state owned oil company) heavy sour crude in October 2015. Up to 75,000 barrels a day of light oil and condensate can be used for exchange. Light crude refers to petroleum that has low density and could flow freely at room temperature and sweet refers to a low sulfur petroleum. Heavy crude oil can’t flow freely at room temperature and the density is higher. The cost to produce light petroleum is higher than heavy crude and light petroleum yields a higher percentage of useful gasoline.  To get gasoline from heavy crude oil requires more advanced technology as it need to get ride of unwanted by products and contaminants.

 

Ever since 1970s oil crisis, United States has lost oil independence and as a result, forbid exporting crude oil to other countries except for Canada. U.S imported a large amount of heavy oil from Mexico and Canada. According to RBN Energy, U.S refiners imported about 700,000barrel oil from Mexico per day between January and May, 2015 but 1.1 million barrels per day in 2011. The decreasing import was because more Canadian heavy crude production. However, it requires to import similar amount of oil from Canada as well. Oil producers such as ConocoPhillips and Exxon Mobil as well as some members in Congress has argued to abandon this rule. And this swap can be seen as an impetus for this rule and indicates that U.S. Department of Commerce’s Bureau of Industry has be more flexible with existing law.

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Why swap

The crude production from Pemex has decreased for more than 10 years and importing U.S. crude will increase gasoline output. By mixing light and heavy petroleum, Pemex can produce more and higher quality gasoline and diesel. Mexico uses 300,000barrel oil more than it produce partially because Mexico refiners yield about 25% less gasoline per barrel than United States’ refiners. Thus, Mexico benefits from swap because of increased oil production efficiency. This kind of high quality energy will also benefit the environment. Mexico recently opened oil industry to foreign investment and United States may target at the lucrative contracts in Mexico oil industry. For U.S. producers, the price of crude oil keeps falling because of the shrinking demand globally and oversupply within the country. The price of crude within Unites States fell below international benchmark, Brent crude. In a free trade market, the price should be the same but U.S doesn’t allow oil exports and thus, the oversupply of oil lead to an even lower oil price. Some view this swap is a signal for future lifting the ban and if that is the case, the gap between U.S crude oil price and international benchmark price should be narrowed.

 

However, I don’t believe that this swap will cause major shift in both United States and Mexico oil market since the 75,000 barrel is too small in both market. This number is less than 1 percentage of current U.S. output. At the same time, U.S. Department of Commerce’s Bureau of Industry rejected other applications for swap with countries in Asia and Europe. However, the swap may further impact energy trade between Mexico and United States or even lead to oil export and import instead of exchanging in the future.

Reference:

  1. United States and Mexico trade https://ustr.gov/countries-regions/americas/mexico
  2. The Reasons for the Mexican-U.S. Oil Swap, Adam Hayes, CFA

http://www.investopedia.com/articles/investing/082115/reasons-mexicanus-oil-swap.asp

  1. S. approves landmark crude oil export swaps with Mexico, Timothy Gardner

http://www.reuters.com/article/us-usa-oil-exports-exclusive-idUSKCN0QJ1RI20150814

  1. Crude oil swaps with Mexico could provide economic and environmental benefits

https://www.eia.gov/todayinenergy/detail.cfm?id=22872

  1. Analysts: Little hope for more oil exports despite Mexico crude swaps, Robert Grattan

Analysts: Little hope for more oil exports despite Mexico crude swaps

 

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4 Responses to Oil Swap between United States and Mexico

  1. pengwangbrandeisedu says:

    First, I think it might be more fair to call it a commodity exchange instead of swap. Second, this exchange between light oil and heavy oil can be seen as an innovation and is beneficiary for both parties. Mexico can have a higher production and US can solve the problem of oversupply. Although the exchange volume right now is small, this can be a trigger for other innovations in trade between US and Mexico, considering the fact that US doesn’t allow oil exports. This is move can be seen a start of exchange policy between countries which have comparative advantages but facing with trade restrictions.

  2. YI Elaine Wang says:

    Thank you for posting this blog on oil import/export subject. I have been working for petroleum refinery research institute before so this kind of news is very interesting to me. Nothing can draw more attention than the gas price fluctuation as we need to fill our cars and the price of gas will heavily effect the cost of living. Oil economy is very important not only because it is related to our cost of living everyday but also it is linked to sovereignty. U.S, after the 70’s oil crisis, realized that dependent on oil will create national security issue so they banned the export of its oil but rather like to import oil. Since 2007, the advance of hydro-fracturing, or fracking for short, a.k.a. Shale tech has made the US able to extract light crude oil themselves as drillers with better price than world price. So nowadays US is more capable of producing and exporting the oil than before. But with the ban and without the international market, US oil producers can’t sell their crude oil at higher price, which can hurt economy and adversely affect future investment in oil drilling. In reality, US refinery is setup to crack the heavy or dense oil but not the ultralight oil so US still needs to import low quality crude oils. Overall US is in need of both importing heavy density crude oil and exporting extra light crude oils. For the economy development, it is better to let the market to decide what to import and export and how much given US is not completely dependent on oil import.

  3. Minh Pham says:

    Very interesting article. I believe this strategic exchange works in favor of both countries. The federal restriction established after the 1970’s oil crisis prevents United States from exporting crude oil. The long period of required oil imports also leads to lack of energy independence. However, the U.S domestic oil economy has become less and less dependent on the foreign oil imports since the period of 1970. This commodity exchange provides Mexico with access to the U.S lighter and more expensive crude oil, which increases refinery efficiency as it can process light crude oil much faster. For the United States, the heavy crude oil can be used to convert into derivatives such as jet fuel. From a political point of view, this deal from the U.S could encourage Mexico government to leverage oil services contacts to U.S companies as Mexico only recently opened its oil market to foreign investment in decades.

  4. Zoe Zhang says:

    I think this swap is kind of exporting oil products, but this action imposes more positive effects on both countries’ economy and has more limitations. It benefits mutually as heavy oil meets U.S. needs better and lighter oil encourages oil refiners in the Mexico to develop technology and move forward higher value added products. However, companies involved in the trade with Mexico will also have to show that the same volumes of oil are being sold and bought. That means U.S. will make more revenue than Mexico as lighter oil has higher prices. Although the volume now is not big, but this starting point would no doubly strengthen the U.S. domestic oil industry.

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