Despite all of the attention that it gets, no one actually wants crude oil – what people want are the various products that are derived from crude oil. These products include not only gasoline, heating oil, and so forth (which will be the focus of our discussions) but everyday consumer items like plastics, long underwear, and crayons. In this lesson, we’ll discuss markets for energy commodities that are refined from petroleum. While conditions in the crude oil market are highly influential in determining the prices of these products, in some sense each petroleum product market has a life of its own. Along the way, we will learn more about a system of accounting for crude oil and petroleum products that was developed after World War II and (despite its seemingly archaic nature) is still used today; why we don’t have more oil refineries even if gasoline prices are very high; and the strange connection between prices at the gas pump and the Federal Reserve.
By the end of this lesson, you should be able to:
- describe the physical processes that are utilized to convert crude oil into refined petroleum products;
- explain a “Petroleum Administration for Defense District”;
- construct a forward curve for gasoline and heating oil, and explain why they look different from forward curves for crude oil;
- calculate the “crack spread” for a refinery;
- explain why we don’t have more oil refineries even if gasoline prices are very high.
What is due for Lesson 2?
This lesson will take us one week to complete. Please refer to the Course Calendar for specific due dates. See the specific directions for the assignment below.
- Homework: Answer some questions about refinery economics and markets for refined petroleum products.
- Discussion: Use the Lesson 02 Discussion forum in Canvas to respond to the prompts about oil export policy and the price of gasoline.
If you have any questions, please post them to our Questions about EME 801? discussion forum (not email), located in the Lesson 00 module in Canvas. I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.