Table of Contents
- What is oil?
- Where does oil come from?
- What is offshore oil and gas?
- What is oil used for?
- What determines the price of oil?
- How does oil impact the environment?
1. What is oil?
Oil was formed from the remains of animals and plants (diatoms) that lived millions of years ago in a marine (water) environment before the dinosaurs. Over millions of years, the remains of these animals and plants were covered by layers of sand and silt. Heat and pressure from these layers helped the remains turn into what we today call crude oil. The word “petroleum” means “rock oil” or “oil from the earth.”
After crude oil is removed from the ground, it is sent to a refinery by pipeline, ship, or barge. At a refinery, different parts of the crude oil are separated into useable petroleum products. Crude oil is measured in barrels (abbreviated “bbls”).
A 42-U.S. gallon barrel of crude oil provides about 45 gallons of petroleum products. This gain from processing the crude oil is similar to what happens to popcorn, which gets bigger after it is popped.
A barrel’s capacity often depends on who uses the term, or what it contains. For example:
- 1 barrel (bbl) of petroleum or related products = 42 gallons
- 1 barrel of Portland cement = 376 pounds
- 1 barrel of flour = 196 pounds
- 1 barrel of pork or fish = 200 pounds
- 1 barrel of (US) dry measure = 3.29122 bushels or 4.2104 cubic feet
- A barrel may be called a “drum,” but a drum usually holds 55 gallons!
2. Where does oil come from?
Crude oil is produced in 31 states and U.S. coastal waters. In 2011, 56% of U.S. crude oil production came from five states:
- Texas (26%)
- Alaska (10%)
- California (9%)
- North Dakota (7%)
- Oklahoma (4%)
As of 2010, about one-third of U.S. crude oil was produced from wells located offshore in state and federally administered waters of the Gulf of Mexico.
Although total U.S. crude oil production generally declined between 1985 and 2008, it has been increasing since 2008. More cost effective drilling technology has helped boost production, especially in North Dakota, Texas, and the offshore Gulf of Mexico.
The United States is the world’s third largest crude oil producer, but only part of the Nation’s petroleum needs are supplied with crude oil and other liquids produced in the United States.
About 100 countries produce crude oil; the top five producing countries in 2011, and their share of total world production:
- Saudi Arabia (13%)
- Russia (12%)
- United States (11%)
- Iran (5%)
- China1 (5%)
After the fall of the Soviet Union, Saudi Arabia became the world’s top petroleum producer.
The United States consumed 18.8 million barrels per day of petroleum products during 2011, making us the world’s largest petroleum consumer (about 20% of world total).
In 2011, the United States relied on net imports (imports minus exports) for about 45% of the petroleum that we used.
The United States imported 11.4 MMbd of crude oil and refined petroleum products in 2011. We also exported 2.9 MMbd of crude oil and petroleum products, so our net imports (imports minus exports) equaled 8.4 MMbd.
In 2011, the United States imported 2.4 MMbd of petroleum products such as gasoline, diesel fuel, heating oil, jet fuel, and other products while exporting 2.9 MMbd of products, making the United States a net exporter of petroleum products.
Altogether, net imports of crude oil and petroleum products (imports minus exports) accounted for 45% of our total petroleum consumption in 2011, the lowest level since 1995.
U.S. dependence on imported oil has declined since peaking in 2005. This trend is the result of a variety of factors including a decline in consumption and shifts in supply patterns. The economic downturn after the financial crisis of 2008, improvements in efficiency, changes in consumer behavior and patterns of economic growth, all contributed to the decline in petroleum consumption. At the same time, increased use of domestic biofuels (ethanol and biodiesel), and strong gains in domestic production of crude oil and natural gas plant liquids expanded domestic supplies and reduced the need for imports.
In 2011, about 22% of our crude oil and petroleum product net imports came from the Persian Gulf countries of Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. Our five biggest sources of net crude oil and petroleum product imports were:
- Canada (29%)
- Saudi Arabia (14%)
- Venezuela (11%)
- Nigeria (10%)
- Mexico (8%)
U.S. petroleum imports rose sharply in the 1970s, and reliance on petroleum from the Organization of the Petroleum Exporting Countries (OPEC) grew. In 2011, about 52% of U.S. net petroleum imports came from OPEC countries, down from 70% in 1977. Since 1992, more petroleum has come into the United States from non-OPEC countries than from OPEC countries.
In addition to crude oil, the United States also imports refined petroleum products such as gasoline. Although the United States produces more than 90% of the petroleum products it consumes, it imported about about 1 million barrels per day of finished petroleum products in 2011.
In addition to imports of finished petroleum products such as gasoline, diesel fuel, and jet fuel, there are also imports of unfinished products used as refinery inputs and blending components. Unfinished oils are refined from crude oil at refineries outside the United States. Imported unfinished oils are used as inputs to U.S. refineries for processing into finished petroleum products. Imported gasoline blending components and fuel ethanol are blended at U.S. refineries and terminals to produce finished gasoline.
Because the United States is the world’s largest oil importer, it may seem surprising that it also exported about 3 million barrels a day of oil in 2011, almost all of it in the form of refined petroleum products. Due to various logistical, regulatory, and quality considerations, it turns out that exporting some barrels and replacing them with additional imports is the most economic way to meet the market’s needs. For example, refiners in the U.S. Gulf Coast region frequently find that it makes economic sense to export some of their gasoline to Mexico rather than shipping the product to the U.S. East Coast because lower-cost gasoline imports are available from Europe.
3. What is offshore oil and gas?
State land extends 200 miles out from where the shore begins. This 200-mile-wide band around the country is called the Exclusive Economic Zone (EEZ).
In 1983, President Reagan claimed the area of the EEZ in the name of the United States. In 1994, all countries were granted an EEZ of 200 miles from their coastline according to the International Law of the Sea.
There is a lot of activity just beyond the beach. The beach extends from the shore into the ocean on a continental shelf that gradually descends to a sharp drop, called the continental slope. This continental shelf can be as narrow as 20 kilometers or as wide as 400 kilometers. The water on the continental shelf is shallow, rarely more than 150 to 200 meters deep. The EEZ is part of the United States. The federal government manages the land under the sea on behalf of the American people.
The continental shelf drops off at the continental slope, ending in abyssal plains that are three to five kilometers below sea level. Many of the plains are flat, while others have jagged mountain ridge, deep canyons, and valleys. The tops of some of these mountain ridges form islands where they extend above the water.
Most of the energy we get from the ocean is extracted from the ground. Oil, natural gas, and minerals all come from the ocean floor.
In the Exclusive Economic Zone (EEZ), there are 30 basins that have been identified as containing oil and gas reserves. A few of these are already producing oil and gas. It is estimated that 30% of undiscovered U.S. gas and oil reserves are in the Outer Continental Shelf (OCS).
The first oil well was drilled in 1859, and by 1897 the first offshore oil well was drilled. It was at the end of a wharf, 300 feet out into the Pacific Ocean in Summerland, California. In 1953, individual States were given jurisdiction over lands within three miles of their shoreline, allowing the Minerals Management Service (MMS) to lease the rest of the EEZ and regulate recovery efforts. Early offshore drilling was generally limited to areas where the water was less than 300 feet in depth.
Offshore drilling looks very different today, supplying about 13% of the Nation’s natural gas production and about 33% of its crude oil production. Drilling rigs can now operate in water as much as two miles deep. Some drilling platforms stand on stilt-like legs that are embedded in the ocean floor. These huge platforms hold all the drilling equipment needed, as well as housing and storage areas for the work crews.
Floating platforms are used for drilling in deeper waters. These self-propelled vessels are anchored to the ocean bottom with huge cables and anchors. Once the wells have been drilled from these platforms, the production equipment is lowered to the ocean floor, sealed to prevent leakage. Wells have been drilled in 10,000 feet of water using these floating rigs.
Offshore oil producers take precautions to prevent pollution, spills and significant changes to the ocean environment. Offshore rigs are even designed to withstand hurricanes. Offshore production is costly — many times as expensive as land-based production. When wells no longer produce enough to be financially worthwhile, they are sealed and abandoned.
Nearly all current leasing and development activity occurs in the central and western Gulf of Mexico. There, more than 4,000 platforms are operating in waters up to 6,000 feet deep, and many rigs are drilling in waters approaching 10,000 feet. Right now most of the active wells and proved reserves are in the Gulf of Mexico. There are also 43 wells off California’s coast.
4. What is oil used for?
Crude oil and other liquids produced from fossil fuels are refined into the petroleum products that we use for many different purposes. Biofuels, such as ethanol and biodiesel, are also used as petroleum products, mainly in mixtures with gasoline and diesel fuel.
The United States consumes more energy from petroleum than from any other energy source. In 2012 total U.S. petroleum consumption was 18.6 million barrels per day, or 36% of all the energy we consumed.
1. Energy production. When petroleum products are burned to produce energy, they may be used to propel a vehicle, to heat a building, or to produce electric power in a generator.
Gasoline is the main petroleum product that is consumed in the United States. In 2007, gasoline consumption reached a record high of 9.3 million barrels a day (or 391 million gallons per day), before declining to about 8.7 million barrels per day in 2012. About 10% of the gasoline consumed in 2012 was actually ethanol mixed with gasoline.
Distillate fuel oil includes diesel fuel and heating oil. Diesel fuel is used in the diesel engines of heavy construction equipment, trucks, buses, tractors, boats, trains, some automobiles, and electricity generators. Heating or fuel oil is used in boilers and furnaces to heat homes and buildings, for industrial heating, and for producing electricity. Total distillate fuel oil consumption in 2012 was over 3.7 million barrels per day, or 20% of total petroleum consumption.
Liquefied petroleum gases (LPGs) include propane, ethane, butane, and other gases that are produced at natural gas processing plants and oil refineries. LPG consumption in 2012 was nearly 2.3 million barrels per day.
Propane, the major LPG consumed, is used in homes for space and water heating, clothes drying, cooking, and by farmers for heating greenhouses and livestock housing and drying crops. The chemical industry uses about half of all the propane consumed in the United States as a raw material for making plastics, nylon, and other materials. Propane is also used as an alternative transportation fuel.
Jet fuel, like gasoline, is mostly used for transportation. Jet fuel consumption in 2012 was 1.4 million barrels per day.
2. Raw material. In addition, petroleum may be used as a raw material (a “feedstock”) to create products such as plastics, polyurethane, solvents, asphalt, and hundreds of other intermediate and end-user goods.
5. What determines the price of oil?
Crude oil prices are determined by worldwide supply and demand. Crude oil and petroleum product prices are the result of thousands of transactions taking place simultaneously around the world, at all levels of the distribution chain from crude oil producer to individual consumer. Oil markets are essentially a global auction — the highest bidder will “win” the available supply.
On the demand side of the equation, world economic growth is the biggest factor. Growing economies require energy, and oil accounts for over 35% of the world’s total energy consumption. One of the major factors on the supply side is the Organization of the Petroleum Exporting Countries (OPEC), which can have significant influence on prices by setting production limits on its members, who together produce more than 40% of the world’s crude oil. OPEC countries have essentially all of the world’s spare oil production capacity, and possess about two-thirds of the world’s estimated crude oil reserves.
Disruptions in supply caused by natural and political events can also significantly affect prices. When the difference between production capacity and demand is very small, even the possibility of a supply disruption can cause oil prices to increase. Rapid and large oil price increases occurred in response to crude oil shortages caused by the Arab oil embargo in 1973, the Iranian revolution in 1979, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990. Hurricanes in the Gulf of Mexico have also caused oil prices to spike.
Different Types of Oil Market Transactions and Prices
Contract arrangements in the oil market cover the majority of oil that changes hands. Oil is also sold in spot transactions, meaning an “on the spot” purchase of a single shipment for immediate delivery at the current market price.
Oil is also traded in the futures markets. A futures contract is a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future. If oil producers wish to sell oil in the future, they can ensure their ability to do so, and ensure the price they will receive, by selling a futures contract today. Alternatively, if oil consumers will need to buy oil in the future, they can be sure of being able to do so, and be sure about what they will be paying, by buying a futures contract today. In addition to producers and consumers, futures contracts are also bought and sold by market participants who do not produce oil or consume oil. Speculators buy and sell futures contracts in anticipation of price changes, hoping to profit from those changes.
The Outlook for Crude Oil
World oil prices declined sharply in the second half of 2008 from their peak in mid-July of that year. While oil prices have generally trended upwards since that time, the future outlook for crude oil prices is highly uncertain. The U.S. Energy Information Administration considers the implications of a wide range of price scenarios in:
6. How does oil impact the environment?
Petroleum products give off the following emissions when they are burned as fuel:
- Carbon dioxide (CO2)
- Carbon monoxide (CO)
- Sulfur dioxide (SO2)
- Nitrogen oxides (NOX) and Volatile Organic Compounds (VOC)
- Particulate matter (PM)
- Lead and various air toxics such as benzene, formaldehyde, acetaldehyde, and 1,3-butadiene may be emitted when some types of petroleum are burned
Nearly all of these byproducts have negative impacts on the environment and human health:
- Carbon dioxide is a greenhouse gas and a source of global warming.
- SO2 causes acid rain, which is harmful to plants and to animals that live in water, and it worsens or causes respiratory illnesses and heart diseases, particularly in children and the elderly.
- NOX and VOCs contribute to ground-level ozone, which irritates and damages the lungs.
- PM results in hazy conditions in cites and scenic areas, and, along with ozone, contributes to asthma and chronic bronchitis, especially in children and the elderly. Very small, or “fine PM” is also thought to cause emphysema and lung cancer.
- Lead can have severe health impacts, especially for children, and air toxics are known or probable carcinogens.
Over the years, new technologies and laws have helped to reduce problems related to petroleum products. As with any industry, the Government monitors how oil is produced, refined, stored, and sent to market to reduce the impact on the environment. Since 1990, fuels like gasoline and diesel fuel have also been improved so that they produce less pollution when we use them.
If oil is spilled into rivers or oceans, it can harm wildlife. However, the amount of oil spilled from ships dropped significantly during the 1990s partly because new ships were required to have a “double-hull” lining to protect against spills.
Exploring and drilling for oil may disturb land and ocean habitats. New technologies have greatly reduced the number and size of areas disturbed by drilling, sometimes called “footprints.” Satellites, global positioning systems, remote sensing devices, and 3-D and 4-D seismic technologies make it possible to discover oil reserves while drilling fewer wells.
Natural Oil Seeps
While oil spills from ships and offshore platforms are the most well-known source of oil in ocean water, a lot of oil actually gets into water from natural oil seeps coming from the ocean floor. The natural seeps may be a “major” source of oil that enters the environment globally, but they are slow, small, and spread out over large areas, and the ecosystem has adapted to them, versus the catastrophic impact that a tanker or well spill has on the areas affected.
When a leak in a storage tank or pipeline occurs, petroleum products can also get into the ground, and the ground must be cleaned up. To prevent leaks from underground storage tanks, all buried tanks are supposed to be replaced by tanks with a double lining.
**The information on this website was obtained from various pages of the U.S. Department of Energy website (www.energy.gov) and the U.S. Environmental Protection Agency website (www.epa.gov). The data on this website was obtained from various pages of the U.S. Energy Information Administration website (www.eia.gov.). Please consult those websites for further information.