Last year, the energy trade between the U.S. and Mexico topped $65 billion. That trade represented 11.4% of our total oil imports, which puts our southern neighbor behind only Canada and Saudi Arabia in this category. The energy trade represented 13% of the overall trade between the U.S. and Mexico.
As an interesting side-note, the oil trade is much larger than the drug trade, which is estimated to be somewhere in the $19 billion to $29 billion range each year. Estimates regarding the total percentage of drugs in America that either originate in, or travel through, Mexico range from 40% to 67% of marijuana and 95% of all cocaine. While that’s still a saddening amount of drugs crossing our borders, it’s an interesting benchmark when thinking in terms of the energy trade between the two countries.
Further, the oil trade with Mexico highlights an interesting dynamic. Even as the U.S. imports a significant amount of Mexican oil, a large portion of that amount is returned in the form of refined petroleum products, mainly because our refineries are equipped to process the heavy crude that comes from Mexico. This crude can be purchased more cheaply than the light crude in the States and then exported back to Mexico or other countries in the form of refined products. It’s this global gas trade that’s causing a growing amount of the gasoline produced in the U.S. to disappear beyond our borders.
Simply put, a lot of oil and petroleum products flow back and forth between the two nations:
Source: Energy Information Administration.
Another reason refined products are moving off our shores is that Americans are driving less while also operating more fuel-efficient cars, all as international demand for refined petroleum products remains robust. This scenario has pulled more products into the export market, which is paying a premium. That’s been important to Valero Energy Corporation (NYSE:VLO), which has managed to capture an average of 20% to 25% of this export market.
The export market has indeed been robust, with Mexico being one of the most important markets:
Source: Valero Investor Presentation
This trade has been the driving force behind refiners like Phillips 66 (NYSE:PSX) and Marathon Petroleum Corp (NYSE:MPC) ramping up export capacity. Last quarter Phillips 66 was exporting around 150,000 barrels per day of gasoline and diesel while it has the capacity to export up to 320,000 barrels per day. The company aims to increase its export capacity to 500,000 barrels per day, or about a third of its total domestic output, in the near future. Meanwhile, Marathon Petroleum Corp (NYSE:MPC) has grown its exports from 35,000 barrels per day to a 131,000 barrels per day average this year.
Increased export capacity is important according to Tesoro Corporation (NYSE:TSO) CEO Gregory Goff who noted that the profitability of the refining industry will be increasingly dependent on its ability to expand export capacity in the future. Because fuel demand is waning in the U.S. refiners need to take advantage of the growing appetite for fuel globally. He also said that, “our country now ships more gasoline and distillates overseas than any other U.S. export.” While a lot of that is simply going back to Mexico, it’s important for that trend to continue in order for refining margins to stay high.
The energy trade between the U.S. and Mexico really is a two way street. American Gulf Coast refiners want to be able to purchase the discounted heavy sour Mexican crude which can trade between a $5 and $10 less than Brent crude oil. That helps to increase crack spreads and profitability at refiners. Because Mexican refineries aren’t as well equipped to handle this heavy crude oil it makes sense to ship it out to be refined and then reacquired it as a lighter grade product such as gasoline or diesel. Now, if only the drug trade was so beneficial to both sides.
The article The U.S. Imports More Oil Than Drugs From Mexico originally appeared on Fool.com and is written by Matt DiLallo.
Fool contributor Matt DiLallo owns shares of Phillips 66. The Motley Fool has no position in any of the stocks mentioned.
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