EIA Data Dive
A refinery produces many products: gasoline, diesel, jet fuel, fuel oil, propane, lubricants, chemical feedstocks, and waxes. The differences in prices between products and feedstocks drive investments, divestments, and day to day optimizations. Over time the output of US refineries have changed to reflect demands and changing prices:
Gasoline yield has essentially remained static, while there has been a steady increase in the percentage of jet/diesel molecules. Billions of dollars in investment have been made to upgrade lower value components (fuel oil) into jet/diesel. Production yields and returns on these investments are tied to prices. The following pair plot identifies which product prices are correlated with eachother:
All crude based products have high correlations with the price of crude as expected. Unsurprisingly given their molecular make-up, jet and diesel are almost perfectly correlated to eachother and the price of crude. The relative prices between products and crude is much easier to understand when displayed as a ratio:
The relative prices and elasticities between the major products becomes clear in the above format. Gasoline shows seasonality and elasticity impacts in its pricing, while jet fuel, diesel, and fuel oil have relatively constant ratios. To convert these relationships to a more meaningful number, a concept called a “crack spread” was developed as a metric to indicate profitability for refiners. For every three barrels of crude processed, refiners can make ~2 barrels of gasoline and ~1 barrel of diesel/jet fuel. This crack spread is equal to the combined price of two barrels of gasoline and one barrel of diesel/jet minus the cost of the crude to produce these. The crack spread is therefore an indicator of refiner profitability since the greatest cost to produce is the feedstock. The crack spread for the last decade is shown below:
One striking observation is that there essentially no correlation between the profit margin and the price of crude oil. Therefore, there is no inherent benefit from a hedging standpoint for upstream oil companies to be integrated with refineries. This observation helps explain ExxonMobil’s partial divestment of their refining businesses. Since 2012, ExxonMobil has sold refineries in Japan (multiple), Argentina, California, and Louisiana. There are rumors of further divestments. It would make sense for upstream oil companies to hold these refineries if margins increased when the price of oil was low, but without an inherent hedge or significant competitive advantage, they deliver mediocre returns on capital that could be reinvested in more profitable industries.
All data available from the EIA public website.