U.S. had until recently turned to Russian crude to service more isolated coastal markets and keep refineries running at optimal levels

Colin Eaton/WSJ

HOUSTON
EnergiesNet.co 03 14 2022

The fracking boom made America the world’s biggest oil producer a few years ago, but the U.S. until recently was still importing millions of barrels each day from other parts of the world, including Russia.

In the wake of Russia’s invasion of Ukraine, the Biden administration is banning Russian oil imports into the U.S. Expecting an expanded response by Western governments to Vladimir Putin’s aggression,  refiners have already balked at buying Russian oil, and banks are refusing to finance shipments of Russian commodities, according to traders, oil executives and bankers.

The situation has led the White House to step up appeals to oil-rich nations in the Middle East, countries under U.S. sanctions such as Venezuela, and Western private-sector companies to help fill the gap by augmenting oil production. But it is unclear whether those efforts will yield significant results.

Here is a look at why the U.S. was still importing Russian crude and where it had been going.

How much oil had the U.S. been importing from Russia?

The U.S. still consumes far more oil than companies extract domestically, requiring it to import some supplies. But it is less reliant on Russia’s oil than Europe and takes only a small portion of its imported crude from Russia.

America gets most of its crude imports from Canada, Mexico and Saudi Arabia. Smaller countries in Latin America and West Africa also typically send more crude to the U.S. than Russia had been sending.  

About 8% of U.S. imports of oil and refined products, or about 672,000 barrels a day, came from Russia last year, said Andy Lipow, president of Lipow Oil Associates LLC in Houston, citing figures from the Energy Information Administration. Setting aside refined products, Russian oil alone made up roughly 3% of the nation’s imports, about 200,000 barrels a day. 

In mid-2021, U.S. imports of Russian crude hit the highest levels in about a decade, and had been trending higher in recent years, EIA data show. But Russian crude has never made up a large part of the U.S. oil supply system, Mr. Lipow said. 

If the U.S. exports millions of barrels a day from the Gulf Coast, why was it importing Russian oil?

The Jones Act, passed a century ago, has effectively limited the size of vessels that are allowed to transport goods between U.S. ports. That has left oil buyers on the West Coast and East Coast effectively unable to get supplies shipped out of the Gulf Coast. 

The Gulf Coast, where oil companies shipped out about 3 million barrels a day in December, is connected by pipelines to the Permian Basin of West Texas and New Mexico and Cushing, Okla., the nation’s oil storage hub. https://b1a8d1a1585aefa8e95f8ed3e1ce4c3f.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html

It isn’t profitable for companies to ship oil from that region to the U.S. East and West Coasts by such small ships, so refiners along those coasts, lacking pipeline connections from the Permian and Cushing, mostly import it from overseas.

Why do U.S. refineries need different varieties of crude?

The U.S. was buying Russian oil in part to feed refineries that need different grades of crude with a higher sulfur content to make fuel at top capacities. U.S. refineries were designed decades ago to use heavier grades of crude, often with higher levels of sulfur, when domestic supplies were lower.

In recent years, Russian crude has filled some of the gap around the world left behind by sanctions on Venezuela and Iran, which crippled the flow of that type and similar types of oil from those two countries to refiners in the Gulf Coast and elsewhere, Mr. Lipow said. 

Where was Russia’s oil going in the U.S.?

Roughly half of the oil that the U.S. had been importing from Russia was going to the West Coast, where refiners take crude deliveries from overseas largely because they aren’t connected by pipelines to the Permian Basin, the largest U.S. oil field. West Coast refiners had been taking Russian crude that is shipped out of the port of Kozmino on the country’s eastern side on the Pacific Ocean.  

Another quarter of that oil, roughly 50,000 barrels a day, was going to the East Coast, where refiners also aren’t connected by pipeline to the current top sources of U.S. oil production. The remaining quarter often ended up in the Gulf Coast, where Russia’s Urals grade of crude, which has a higher level of sulfur than most of the crude produced in the U.S., is considered profitable for use in refineries designed to run so-called sour grades of oil. 

What might happen if the U.S. and other countries slow the flow of Russian crude?

Moves to hamper the flow of Russian crude had been interpreted by the oil market as another hit to already tight global supplies, which could further raise costs on consumers. The U.S. and other major oil-consuming nations said that they would release 60 million barrels from emergency stockpiles to boost global supplies. Still, oil and gasoline prices have remained high on concerns about tightening supplies.

Though they had trended downward for part of the week, U.S. oil prices remained over $105 a barrel on March 11, after talks to revive a nuclear deal with Iran broke off, at least temporarily ending the prospect of a pact that could lead to additional Iranian crude supplies hitting global markets.

Some refiners had already been refusing to buy Russian oil due to the risk that they could be ensnared by sanctions, as the war triggered a reordering of the world’s oil flows. Global market participants were beginning to contemplate the previously unthinkable question of how they would cope without Russian oil supplies.

Collin Eaton at collin.eaton@wsj.com

wsj.com 03 11 2022