Transforming Crude Oil into Essential Products
An oil refinery is an industrial plant that transforms crude oil into various usable petroleum products such as diesel, gasoline, and heating oils. Oil refineries serve as the second stage in the crude oil production process following the actual extraction of crude oil. Refinery services are classified as a downstream segment of the oil and gas industry.
The refining process begins with distillation, where crude oil is heated at extreme temperatures to separate different hydrocarbons.
Key Takeaways
- An oil refinery is a facility that takes crude oil and distills it into various useful petroleum products like gasoline, kerosene, or jet fuel.
- Refining is classified as a downstream operation of the oil and gas industry, although many integrated oil companies conduct both extraction and refining services.
- Refineries and oil traders look to the crack spread, a measure of the difference in production cost and market price of various petroleum products in the derivatives market, to hedge their exposure to crude oil prices.
Understanding Oil Refineries
Oil refineries play a crucial role in the production of transportation and other fuels. Once separated, the crude oil components can be sold to different industries for a range of purposes. Lubricants can be sold to industrial plants immediately after distillation, while other products require more refining before reaching the final users. Major refineries have the capacity to process hundreds of thousands of barrels of crude oil daily.
In the oil industry, the refining process is commonly known as the “downstream” sector, contrasting with raw crude oil production or the “upstream” sector. The term downstream is associated with the notion that oil is sent down the product value chain to be processed into fuel. This stage also includes the sale of petroleum products to businesses, governments, and individuals.
According to the U.S. Energy Information Administration (EIA), U.S. refineries produce from a 42-gallon barrel of crude oil approximately 19 to 20 gallons of motor gasoline, 11 to 12 gallons of distillate fuel (most sold as diesel), and four gallons of jet fuel. More than a dozen other petroleum products are also produced in refineries. Petroleum refineries produce liquids used by the petrochemical industry to make a variety of chemicals and plastics.
“Cracking” Crude Oil
An oil refinery operates 24 hours a day, 365 days a year, with a large workforce. Refineries come offline or halt operations for a few weeks annually for seasonal maintenance and repair work. A refinery can occupy as much land as several hundred football fields. Famous oil refining companies include Koch Pipeline Company, and many others.
Crack spread is a trading strategy used in energy futures to establish a refining margin. It is one primary indicator of oil refining companies’ earnings. Crack spread allows refining companies to hedge against risks associated with crude oil and petroleum products. By simultaneously purchasing crude oil futures and selling petroleum product futures, a trader attempts to create an artificial position in the refinement of oil via a spread.
The Nelson Complexity Index (NCI) measures the sophistication of an oil refinery, indicating that more complex refineries can produce lighter, more refined and valuable products from a barrel of oil.
Proportions of petroleum products produced by a refinery from crude oil affect crack spreads. These products include asphalt, aviation fuel, diesel, gasoline, and kerosene. The proportion varies based on demand from the local market.
The type of crude oil processed also influences the mix of products. Heavier crude oils are more challenging to refine into lighter products like gasoline. Refineries using simpler refining processes may be limited in producing products from heavy crude oil.
Refinery Services
Oil refining is a purely downstream function, although many companies involved also have midstream and even upstream production. This integrated approach allows companies like Exxon, Shell, and Chevron to manage oil from exploration all the way to sale. Interestingly, the refining side of the business is affected differently by oil prices. High prices hurt the refining side due to price-sensitive demand for petroleum products, while low prices increase profitability from selling value-added products.
Refining pure plays include Marathon Petroleum Corporation, CVR Energy Inc., and Valero Energy Corp.
An area of mutual interest for service companies and refiners is expanding pipeline capacity and transport. Refiners want more pipelines to reduce transportation costs by truck or rail, while service companies profit from pipeline design, construction, maintenance, and testing.
Oil Refinery Safety
Oil refineries can be dangerous workplaces. For instance, in 2005, an explosion at BP’s Texas City oil refinery resulted in 15 deaths and injures to 180 others. This tragedy occurred when a distillation tower over-pressurized while being restarted, causing a hazardous vent stack release.
Common Questions About Oil Refineries
How Many Oil Refineries Are There in the United States?
As of January 1, 2021, there were 129 operable petroleum refineries in the United States. The most recent refinery began operation in 2019 in Texas.
How Much Crude Oil Does It Take to Make a Gallon of Gasoline?
One barrel of oil (42 gallons) produces around 19 to 20 gallons of gasoline and 11 to 12 gallons of diesel fuel.
What Is the Crack Spread?
In commodities trading, the crack spread reflects the price difference between a barrel of unrefined crude oil and the refined products derived from it. Traders monitor changes in the crack spread as a market signal for oil and refined products’ price movements.
Related Terms: crude oil, distillation, hydrocarbon, crack spread, Nelson Complexity Index.
References
- U.S. Energy Information Administration. “Oil and petroleum products explained: Refining crude oil”.
- U.S. Chemical Safety Board. “U.S. Chemical Safety Board Concludes Organizational and Safety Deficiencies at All Levels of the BP Corporation Caused March 2005 Texas City Disaster That Killed 15, Injured 180”.
- U.S. Energy Information Agency. “When was the last refinery built in the United States?”
- U.S. Energy Information Agency. “How many gallons of gasoline and diesel fuel are made from one barrel of oil?”
