Last week on Wall Street, oil prices dipped into negative numbers, The New York Times reported. The anomaly occurred when contracts for May oil futures collapsed. Where does so much oil come from and how is it processed?
On April 20 and April 21, oil prices went berserk, dipping as far down as -$37.63. “That means that if you happen to be in a position to take delivery of 1,000 barrels of oil in Cushing, Okla., in the month of May—the quantity quoted in the relevant futures contract—you could have been paid a cool $37,630 to do so,” the Times article said.
So how did this happen? According to the Times piece, “When you read a news article or hear an economist mention the price of oil, it typically refers not to a physical barrel filled with viscous liquid but to the price of a futures contract that trades on the Chicago Mercantile Exchange. By convention, the ‘price of oil’ is the going per-barrel price reflected in a futures contract for the ensuing month.”
The reason oil went negative was because travel has become so limited during the coronavirus pandemic that there’s far less need for oil. With more oil being produced than is required, prices plummeted, leaving many baffled as to where so much oil comes from.
Where Oil Begins
Oil powers much of our daily lives, from providing fuel for our vehicles to lubricating industrial equipment. A popular claim is that all oil was once dinosaurs, but this is misleading.
“This substance originated as marine organisms—primarily plankton and algae—that accumulated on the bottom of the sea, 10 to 600 million years ago,” said Dr. Stephen Ressler, Professor Emeritus from the United States Military Academy at West Point. “Over time, these organisms decomposed into compounds of carbon and hydrogen, which were embedded within sedimentary layers that eventually hardened into fine-grained shale called source rock.”
Dr. Ressler said that as the source rock faced continuing heat and pressure over time, this organic material got distilled into petroleum and natural gas. Of course, since then, it has become a major industry, leading businesses to develop new ways to extract it.
Historically, these have included the use of a drilling rig on land to pump deep into the ground and extract oil or offshore drilling, which involves keeping a drilling rig stationary on the ocean. However, using acid and other high-pressure liquids can break up the rock in which oil resides, in a process called hydraulic fracturing or “fracking.”
From the Ground to Your Gas Tank
When oil has been extracted from its subterranean deposits, it’s far from ready for sale.
“This unrefined crude is a mixture of oil, natural gas, water, and various impurities,” Dr. Ressler said. “Immediately after extraction, these components undergo preliminary separation at a processing facility, typically located right there in the oil field. Only after this processing does the stuff actually qualify as crude oil.”
Dr. Ressler said that this is where pipeline systems enter the picture. Crude is sent along oil pipelines to refineries, where it is separated into usable components. Since the components boil at different temperatures, the crude is heated and the components separate naturally.
“The typical refinery incorporates many other processes, such as removing impurities, cracking heavy alkane molecules to produce more gasoline, and improving the gasoline’s combustion properties,” he said. “All of these processes are the work of chemical engineers, who design and implement the elaborate industrial system that transforms unrefined crude—a geological product of our Earth—into the highly refined fuels that keep our technology-intensive civilization in motion.”
Dr. Stephen Ressler contributed to this article. Dr. Ressler is Professor Emeritus from the United States Military Academy at West Point. He earned a B.S. from West Point and an M.S. and a Ph.D. in Civil Engineering from Lehigh University, as well as a Master of Strategic Studies from the U.S. Army War College.