EME 801
Energy Markets, Policy, and Regulation

Refinery Economics


Oil refineries produce value-added petroleum products from crude oil. Profitability is thus determined by several different variables:

  • Feedstock costs (primarily crude oil)
  • Fuel costs and other operational costs for the refinery itself
  • Costs of complying with emissions regulations (particularly NOx)
  • Market prices for the products produced.

Determining profitability for a specific refinery is very difficult, since data on operational and environmental compliance costs are generally not available. A rough measure could be obtained by calculating the cost of crude-oil feedstock (though to do this with precision would require knowledge of the crude blends used in a specific refinery) and comparing that cost with the market value of the suite of products produced at the refinery. This still requires more information than might be publicly available for a typical refinery, and is subject to market conditions for the various products produced.

A useful but simplified measure of refinery profitability is the “crack spread.” The crack spread is the difference in the sales price of the refined product (gasoline and fuel oil distillates) and the price of crude oil. An average refinery would follow what is known as the 3-2-1 crack spread, meaning for every three barrels of oil, the refinery produces an equivalent of two barrels of gasoline and one barrel of distillate fuels (diesel and heating oil). This ratio of refined product output closely mirrors the composition in Figure 2.4, but remember that the crack spread is only a first-order approximation of how profitable a refinery would be at the margin! The higher the crack spread, the more money the refinery will make, so it will be utilizing as much capacity it has available. Inversely, at some lower crack spread prices, it actually may be in the refinery’s best interest, due to costs for the plant, to scale back the amount of capacity utilized. Please see the appendix for an example and further elucidation of the crack spread.