More on oil refinery economics

Today’s column wraps up the discussion started last week on the general economic characteristics of oil refineries. After completing that I will proceed to discuss the specific instance of mini refineries. The wrap-up will seek to 1) elaborate on the crack spread (introduced last week); and 2) address briefly the technics of markets and contracts for crude oil and refined products. paper market has developed to the point where they have become today an excellent medium for managing, if not eliminating, oil refinery risks and uncertainties.

Spot contracts are those where trading takes place at current market rates. These contracts specify quantities, locations, and time (usually short-term, 10-25 days). Forward contracts have customized future delivery dates that also specify volumes and location for delivery. Future contracts are financial instruments designed for taking delivery of an underlying oil contract at a specific settlement date. These last contracts are part of the family of derivatives, so termed because their value derive from the underlying instrument. In these markets there are both commercial traders (those in the oil business) and non-commercial traders (such as investment banks, speculators, and pension funds).