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.
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.
- United States and Mexico trade https://ustr.gov/countries-regions/americas/mexico
- The Reasons for the Mexican-U.S. Oil Swap, Adam Hayes, CFA
- S. approves landmark crude oil export swaps with Mexico, Timothy Gardner
- Crude oil swaps with Mexico could provide economic and environmental benefits
- Analysts: Little hope for more oil exports despite Mexico crude swaps, Robert Grattan