Ignore the Boom in Oil That Isn’t Oil at Your Peril

To the untrained eye, the words “crude,” “petroleum” and “oil” are quasi-synonymous. This columnist often uses them interchangeably, trading accuracy for legibility. Ask any specialist, though, and they each have different meanings. And herein lies the problem of today’s petroleum market: There’s a lot more oil than crude.

Looking only at the crude portion, the balance of supply and demand looks relatively tight — so prices should be rising. But add in every other flavor — so-called condensates, natural gas liquids1and biofuels — and instead the balance looks loose; thus, prices are down.

Back in the late 1990s, crude accounted for almost 90% of the petroleum market, so it was a good proxy for overall supply and demand. Counting barrels of crude gave you the measure of the market. Since then, however, three developments have turbocharged the contribution of those other oils: rising biofuel output, surging production of NGLs thanks to the US shale revolution, and OPEC nations using a loophole to bypass their self-imposed output limits. The result? The share of crude in the total oil market has dropped to 74%.

The most common error is to focus solely on crude, called “black oil” by some, and ignore the rest. I hear many bulls saying that other liquids aren’t real oil. That’s nonsense; they’re part of the larger petroleum pool. And they displace crude, particularly in the petrochemicals industry. The US offers the most extreme example of how big a difference the segregation makes. The most recent monthly data shows the US pumped 13.49 million barrels per day of crude in December; but it also produced 7.1 million barrels of NGLs, lifting total oil liquids to 20.6 million barrels — and there’s an additional 1.44 million barrels of biofuels.

The development of the global biofuel industry, converting corn and sugarcane into ethanol in the 2000s, is well understood. But other elements — condensates and NGLs, the US shale boom, and the tricks that some OPEC countries play to pump more — don’t receive the attention they should.

First, a petroleum primer. Crude is the stuff that comes out of the ground before it’s refined. Condensates and NGLs are byproducts of natural gas extraction but ultimately flow into the pool of oil liquids. The main difference between condensates and NGLs is where they get separated from the gas: at wellheads for condensates, and at gas processing plants for NGLs. Both are a mix of similar hydrocarbons: ethane, propane, butane, isobutane, pentane and pentane plus. Most of those are feedstocks for the petrochemical industry, but also for cooking fuel, and as blend stocks for gasoline production.

The boom in NGL and condensates output has been accompanied by a shift in global oil demand growth toward, precisely, petrochemical products. Last year, more than half of the growth in global petroleum consumption came from ethane, propane and butane. This year, more than 40% will come also from the same three products.