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Oil is a fungible commodity, meaning oil of different grades and origins is largely interchangeable. This doesn’t mean all oil is the same on a chemical level; different grades of oil have different sulfur content and viscosities, which affect refinement needs and extraction efforts, respectively. But just as a $10 bill minted in San Francisco has the same value as one made in Philadelphia, a barrel of crude oil produced in Saudi Arabia has a comparable value as a barrel of crude produced in Venezuela. Consumers can blend grades of crude oil at will to achieve the desired mixture, and benchmark prices have created a highly integrated price structure in the international market that reinforces the interchangeability of oil.

The fungibility of oil has important implications for how the global energy market and national security intersect. It diminishes the importance of OPEC and other large producers such as Russia in determining the world oil prices. For example, if the origin of a barrel of crude oil doesn't matter to global trade, other producers could step in and increase their output if an energy giant like Saudi Arabia cuts its production in an attempt to raise prices. In the past, global producers have done just that as they have made up for supply disruptions that occurred during the Gulf War and the 2002 Venezuelan oil strike, representing prime examples of fungibility at work.

Natural gas is not as easily transportable as oil. It needs to be either compressed for pipeline transport or liquefied for tanker transport. For LNG transport, gas needs to be cooled to below 260°F, stored on a tanker, and sent to a specialized import terminal to be transferred into a pipeline network. These differences in transportation costs means that there is more variation in in pricing between countries, and it is not as fungible as oil. 

Oil Drums

Oil drums. (Jess Sloss)