What Is an Oil Refinery?
Let me tell you directly: an oil refinery is an industrial plant that takes crude oil and refines it into various usable petroleum products, such as diesel, gasoline, and heating oils like kerosene. You should know that these refineries act as the second stage in the crude oil production process, right after the upstream extraction, and they fall under the downstream segment of the oil and gas industry.
The process starts with distillation, where I heat the crude oil to extreme temperatures to separate the different hydrocarbons.
Key Takeaways
Understand this: an oil refinery processes crude oil into useful products like gasoline, kerosene, or jet fuel through distillation. Refining is a downstream operation, though many integrated companies handle both extraction and refining. Refineries and traders use the crack spread—the difference between production costs and market prices of petroleum products—to hedge against crude oil price fluctuations in the derivatives market.
Understanding Oil Refineries
Oil refineries play a crucial role in producing transportation fuels and more. Once separated, the crude oil components can go to different industries for various uses. For instance, lubricants might head straight to industrial plants after distillation, but other products need further refining before they reach you or other end users. Major refineries handle hundreds of thousands of barrels of crude oil every day.
In the industry, we call the refining process the 'downstream' sector, while crude oil production is 'upstream.' The term downstream reflects how oil moves down the value chain to the refinery for processing into fuel. This stage also covers selling petroleum products to businesses, governments, or individuals like you.
According to the U.S. Energy Information Administration, from a 42-gallon barrel of crude oil, U.S. refineries produce 19 to 20 gallons of motor gasoline, 11 to 12 gallons of distillate fuel (mostly diesel), and four gallons of jet fuel. They also make more than a dozen other products, including liquids for the petrochemical industry to create chemicals and plastics.
'Cracking' Crude Oil
An oil refinery operates 24 hours a day, every day of the year, and it needs a large workforce. These facilities pause for a few weeks annually for maintenance and repairs. A single refinery can cover land equivalent to hundreds of football fields. Companies like Koch Pipeline Company are well-known in this space.
The 'crack' or crack spread is a trading strategy in energy futures that sets up a refining margin. It's a key indicator of earnings for oil refining companies. This approach lets them hedge risks from crude oil and petroleum products. By buying crude oil futures and selling petroleum product futures at the same time, a trader creates an artificial position in oil refinement via a spread.
The Nelson Complexity Index measures a refinery's sophistication; more complex ones produce lighter, more valuable products from oil. The proportions of products from crude oil affect crack spreads, including items like asphalt, aviation fuel, diesel, gasoline, and kerosene. Sometimes, these proportions shift based on local market demand. The type of crude oil matters too—heavier crudes are harder to refine into lighter products like gasoline, and simpler refineries may struggle with them.
Refinery Services
Oil refining is strictly a downstream function, but many companies also have midstream and upstream operations. This integration lets firms like Exxon, Shell, and Chevron handle oil from exploration to sale. High oil prices actually hurt the refining side because demand for products like gas is price-sensitive. When prices drop, though, selling value-added products gets more profitable. Pure refining companies include Marathon Petroleum Corporation, CVR Energy Inc., and Valero Energy Corp.
Refiners and service companies both push for more pipeline capacity. Refiners want it to cut costs of transporting oil by truck or rail. Service companies benefit from designing and laying pipelines, plus ongoing maintenance and testing income.
Oil Refinery Safety
Oil refineries can be hazardous workplaces. Take the 2005 accident at BP's Texas City refinery: explosions happened during the restart of a hydrocarbon isomerization unit, killing 15 workers and injuring 180. The U.S. Chemical Safety Board reported that a distillation tower flooded with hydrocarbons, over-pressurized, and released a geyser from the vent stack.
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 one started operations in 2019 in Texas.
How Much Crude Oil Does It Take to Make a Gallon of Gasoline?
One barrel of oil, which is 42 gallons, produces 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 is the price difference between a barrel of crude oil and its refined products, like gasoline. Traders watch changes in it as signals for price movements in oil and refined products.
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