<How the Energy Crisis Will Help My Diet The Oil Drum DrumBeat: July 19, 2006>

132 comments on Feeding the Beast

Comments can no longer be added to this story.

| Show without comments | PDF version

Sunlight on July 18, 2006 - 6:21pm Permalink | Subthread | Comments top
I would triple underline that fat discount of heavy crude to light crude with explanation marks, as key to VLO profitability. VLO lives by the "crack spread," ie, the difference in price between crude oil and usable refined products such as gasonline, kerosene, and distillates. Not too long ago a  crack spread of around 2 bucks was considered reasonable. That $14/ barrel discount for Mayan crude is almost pure operating profit for VLO after allowing for the lower proportion of high quality product that one gets from heavier crude. These guys have to be printing money right now.

Even if the crude price drops back from current levels, two longer term factors would seem to weigh in VLO's favor (1) The long lead time for competitors to bring on additional heavy crude refining capacity, and (2) The increasing percentage of heavy crudes on offer as light crude deposits peak and drop off. Indeed some like JDH think light crude has peaked already, while reserving judgment on the timing of the overall oil peak.

Comments can no longer be added to this story.
smekhovo on July 19, 2006 - 2:59am Permalink | Subthread | Parent | Comments top
Let me repeat it again. As a percentage of the price, the light /heavy spread is not higher than it used to be!
I'm not convinced that light sweet oil is running out quicker than heavy sour (unless we count oil sands/tar as heavy sour).
Comments can no longer be added to this story.
Jack on July 19, 2006 - 3:20am Permalink | Subthread | Parent | Comments top
Do you have any documentation of this?

I'm not disagreeing. However, this is contrary to conventional wisdom and the basic point is very important.

Claims that light oil has peaked and that refining capacity, particularly complex, is constrained would both lead to an increased spread. In the past, I have charted spreads fro EIA data and noted the increase, however I have not adjusted for price.

Spreads can be viewed as being created by refining configurations. If the spreads have not grown, it brings much of what is said about current refining into doubt.

I may try to chart this later, but won't have time for a few hours and don't have a website to post it on.

Comments can no longer be added to this story.
Oil CEO on July 19, 2006 - 4:24am Permalink | Subthread | Parent | Comments top
I think he's basing it on the fact that the spread has roughly doubled or tripled over the historical average as per Jubak's article, while during the same time frame the price of oil has roughly doubled or tripled.

You can post anything you want on my site. I'll even post it for you here. Send me images or Excel spreadsheets. theoilceo@yahoo.com

Comments can no longer be added to this story.
Jack on July 19, 2006 - 4:59am Permalink | Subthread | Parent | Comments top
Thanks for the website offer. I'll probably take you up on it one of these days.

I think you are right about the spread question. Since refinery configurations determine spread, I suppose an absolute figure could be viewed as more relevant than a relative figure.

By this I mean, if the refining industry expends an average of $5 more to refine a heavy crude, it should cost about $5 less. So a $15 dollar spread is telling us something, even though in terms of the base price it is unchanged.

I do think this is worth exploring as it is another useful clue to what is going on out there.

Thanks for the Jubak link. Not sure the guy should put his photo up there though.

Comments can no longer be added to this story.
Oil CEO on July 19, 2006 - 5:20am Permalink | Subthread | Parent | Comments top
I have nothing to do with spread question. In fact I know very little about the spread issue. Any credit is due smekhovo. I was only trying to debunk him, when I realized he might have a point.

Jubak's great. I'm glad Dave finally got turned on to him. Very smart guy and totally "with it" on energy issues. He follows the money. I can only hope he pays attention to environmental and moral issues with the same tenacity.

As far as his photo...what, you don't like large mustaches? I guess only AlphaMaleProphetOfDoom and his girlies would be impressed.

Comments can no longer be added to this story.
smekhovo on July 19, 2006 - 5:18am Permalink | Subthread | Parent | Comments top
Evidence of my view is that the spread between light sweet crude and, for example, Urals - which is significantly heavier and sourer than Brent or WTI, but less so than Maya - is actually much less than it used to be as a percentage of price.
Comments can no longer be added to this story.
Jack on July 19, 2006 - 6:40am Permalink | Subthread | Parent | Comments top
OK. You are probably right. I'm still going to track down the data. I found a great spreadsheet of crude price hiistories at EIA one day, but can't locate it now. Should get it done tonight.

However, after further reflection, I think it is the absolute spread ($ terms)that matters, not the relative spread (% of crude price).

Spreads between crudes are basically determined by the cost differential between converting heavy crudes and light crudes to products. As I noted above, if the average cost of converting a Urals slate to a given product slate is $5 more than the cost of converting WTI, the spread should be about $5.

If the spread has gone up in proportion to the oil price, I do think it represents a lack of light crudes and/or complex refineries. Absent these constraints, I think the spread would have remained consistent in nominal terms and shrunk in relative terms.

Valero's refining margin is basically fixed. They, like other highly complex refineries, make money when the spread is large in absolute terms. The crude price itself and the value of the spread realtive to it are not important.

Comments can no longer be added to this story.
nero on July 19, 2006 - 9:48am Permalink | Subthread | Parent | Comments top

The fundamental spread tht determines profiablility is the price differential between cost per barrel of heavy sour crude and the price they get for the products produced from that barrel of oil.  

Part of the reason for the discount for heavy sour crude is because it doesn't produce as much gasoline.  If that is the dominant reason for the spread then it makes good sense that the spread betweeen heavy and light should remain constant on a percentage basis.  

If on the other hand the spread is really there to compensate the refiner for the added cost of refining the stuff then it should remain constant on an absolute basis.  

In the real world it would be a mixture of the two, it is probably best just to attempt to track the spread between their cost of materials(heavy crude) and the weighted average of the price they get for the products.  

Comments can no longer be added to this story.
oilmanbob on July 19, 2006 - 2:34pm Permalink | Subthread | Parent | Comments top
I am not an expert in refining, but I do know that crude is sweetened at a refinery by mixing it with hydrogen with a catalist and taking the resulting hydrogen sulfide gas and removing the sulfur by freezing it so the sulfur drops out, or burning the hydrogen sulfide. All of this process is energy intensive-the hydrogen comes from natural gas. Gas prices are fairly low right now, but, as they rise will raise the refining costs. I haven't the slightest idea about how much gas is needed, but probably someone who knows can fill us in.
Comments can no longer be added to this story.
tate423 on July 19, 2006 - 2:47pm Permalink | Subthread | Parent | Comments top
This being the case you would think the gas going forward will cause exponential price increases at the pump as we pay twice to make gas from crude?  Would this be fair?
Comments can no longer be added to this story.

132 comments on Feeding the Beast

Comments can no longer be added to this story.

| Show without comments | PDF version