0:00:01.723,0:00:04.190 What I hope to do in this video is to explore the relationship 0:00:04.190,0:00:07.124 between oil and gas prices, and you do see that there is 0:00:07.124,0:00:10.440 a very strong correlation between how they trend. 0:00:10.440,0:00:15.073 This right over here is oil prices quoted at a specific point on the planet 0:00:15.073,0:00:17.974 This is dependent on where you are and as you can see this is 0:00:17.974,0:00:22.155 in US dollars per barrel. In early 2008 around $100 0:00:22.155,0:00:24.555 It went up to about $140 then came back down 0:00:24.605,0:00:29.405 and then it's been trending up ever since, now it's about $100 per barrel 0:00:29.405,0:00:33.590 this is where we see the oil prices on a per barrel basis 0:00:33.590,0:00:37.441 And then related to that you see the gas of gasoline 0:00:37.441,0:00:40.173 this is even more geographically specific because not only do you have 0:00:40.173,0:00:42.014 transportation costs but you also have very 0:00:42.368,0:00:46.922 region specific taxation for oil and sometimes 0:00:46.922,0:00:50.190 regulation but taxation is the big part of it 0:00:50.190,0:00:52.256 but you do see that it trends up when oil prices 0:00:52.256,0:00:54.291 trend up, and then it goes down and this is on 0:00:54.291,0:00:56.623 a per gallon basis and these are the prices right 0:00:56.623,0:00:58.855 over here in New York. But they don't move competely 0:00:58.855,0:01:02.406 locked up, if anything you can see that the oil price on a per 0:01:02.406,0:01:05.072 barrel basis is much more volatile than the gasoline 0:01:05.072,0:01:07.722 prices right over here but there is the same 0:01:07.722,0:01:09.907 general trend, when the oil prices moves up 0:01:09.907,0:01:13.106 this tends to move up but it's not always in the same 0:01:13.106,0:01:16.124 percentage but there's definitely a relationship. 0:01:16.124,0:01:18.840 Now, before trying to figure out when you pay, say 0:01:18.840,0:01:22.273 $4 at the pump how much up that is oil and how much 0:01:22.273,0:01:24.708 is refining and how much is transportation 0:01:24.708,0:01:26.806 Let's at least kind of build up to that 0:01:26.806,0:01:29.625 to think about how does the oil even end up in your 0:01:29.625,0:01:34.973 car, then we can build up that price of the oil. 0:01:34.973,0:01:37.707 Or, the price of the gasoline I should say. 0:01:37.707,0:01:40.506 This right over here, you're probably familiar with these, 0:01:40.506,0:01:43.174 these are oil rigs, two very different types: this 0:01:43.174,0:01:46.208 This is an offshore oil rig, this is a land based oil rig 0:01:46.208,0:01:48.706 but they're both doing the same fundamental thing: 0:01:48.706,0:01:51.490 they're drilling into the ground until they get to a pocket of oil 0:01:51.490,0:01:54.041 and then they will pump that oil out 0:01:54.041,0:01:56.140 and try to transport it to the market somehow, first 0:01:56.140,0:01:59.123 going through a refinery. Offshore is really fast and it 0:01:59.123,0:02:02.341 really is an engineering marvel how they do it 0:02:02.341,0:02:04.606 It might be sitting out here in the ocean and it will 0:02:04.606,0:02:06.990 literally go to the bottom of the ocean, go to the sea 0:02:06.990,0:02:10.240 floor and then drill from there to actually get to the 0:02:10.240,0:02:12.890 oil pockets so it's really an engineering marvel 0:02:12.890,0:02:14.806 and you have to be very careful, it can be very dangerous 0:02:14.806,0:02:17.090 working on an oil rig and obviously if there's an accident 0:02:17.090,0:02:19.807 it can be an environmental nightmare like we saw 0:02:19.807,0:02:22.241 with the BP situation but it is undoubtedly an 0:02:22.241,0:02:25.606 engineering marvel. Now, once you have that oil you need 0:02:25.606,0:02:27.939 to get it to a refinery so that the oil can be 0:02:27.939,0:02:31.874 broken up into its useful parts, and the way it 0:02:31.874,0:02:34.990 is typically transported to a refinery is some combination 0:02:34.990,0:02:38.105 of a pipeline or an oil tanker, this right over here is actually 0:02:38.105,0:02:43.756 the Alaskan pipeline, it takes oil from the very northern part 0:02:43.756,0:02:46.273 of Alaska to the southern part so that it can then be 0:02:46.273,0:02:49.389 put onto oil tankers which can then transport it anywhere 0:02:49.389,0:02:52.106 in the world to refineries. It could go straight to a tanker 0:02:52.106,0:02:55.891 actually in some offshore places you could use a tanker or sometimes if they're 0:02:55.891,0:02:58.874 close enough to land they actually might have a pipeline 0:02:58.874,0:03:01.773 that will take it to land where it can go to a refinery 0:03:01.773,0:03:05.305 or go to an oil tanker so that it can be transported 0:03:05.305,0:03:08.957 even farther. And then from there it gets to a refinery 0:03:08.957,0:03:12.390 So we can start to think about how the price of oil is built up 0:03:12.390,0:03:15.741 before we even think about what a refinery 0:03:15.741,0:03:19.423 even does. So let's say that the current price of oil 0:03:19.423,0:03:25.007 and I kind of rigged the numbers, to work out fairly well 0:03:25.007,0:03:27.856 But let's say the current price of oil is $90 per barrel. 0:03:34.579,0:03:39.781 So a barrel (this is just a units thing) is equal 0:03:39.781,0:03:44.248 to 42 gallons. So if I say I have a barrel of water 0:03:44.248,0:03:47.332 I'm really saying that I have 42 gallons of water. 0:03:47.332,0:03:49.415 And now all 42 gallons of crude oil do not turn into 0:03:49.415,0:03:54.999 42 gallons of gasoline, out of 42 gallons 0:03:54.999,0:03:57.995 of crude oil you can get about 19 or 20 gallons of 0:03:58.149,0:04:04.114 gasoline, to make the numbers easy I'll just go with 20. 0:04:08.206,0:04:14.697 And then the rest will be other stuff, so 22 gallons of other stuff 0:04:14.697,0:04:17.748 It might not even be 22 gallons, some of it will just be 0:04:17.748,0:04:21.714 waste, some of it will be by-products some of it is actually 0:04:21.714,0:04:25.181 used to fuel the refining process. 0:04:25.181,0:04:29.864 I won't write that number, the rest is "other stuff." 0:04:29.864,0:04:33.797 So let's say, this refinery is paying $90 per barrel 0:04:33.797,0:04:38.430 when it gets it, so that incorporates what the oil procuders 0:04:38.430,0:04:41.582 are getting, and it also takes care of the transportation 0:04:41.582,0:04:45.198 costs to the refinery, and let's say jsut for the sake 0:04:45.198,0:04:49.431 of argument that the refinery can sell 0:04:49.431,0:04:51.864 Let's say that it doesn't even take care of the transportation 0:04:51.864,0:04:53.814 network, let's say there are people willing to buy directly 0:04:53.814,0:04:56.614 from the refinery at the refinery, they are willing to buy 0:04:56.614,0:05:07.631 gasoline at $3.25 per gallon, so the gas at refinery, 0:05:07.631,0:05:10.964 people are willing to spend, the transporters are willing to pay them 0:05:10.964,0:05:21.394 $3.25 per gallon, and so from this barrel they're going 0:05:21.394,0:05:23.847 to get 20 gallons of gasoline, they can sell that 0:05:23.847,0:05:28.031 at $3.25 per gallon so you're going to have 0:05:28.031,0:05:43.864 20 * 3.25 = $65 for the gasoline 0:05:43.864,0:05:45.781 And then let's just say, for the sake of argument, 0:05:45.781,0:05:51.147 they get $35 for the other stuff 0:05:51.147,0:05:53.131 Some of this other stuff is actually quite useful, it's stuff like 0:05:53.131,0:05:56.265 motor oil, it could be jet fuel, it could be natural gas 0:05:56.265,0:06:00.114 All sorts of... and it can obviously be fuel to actually fuel 0:06:00.114,0:06:05.597 the refinery, and so let's actually start building this up over here 0:06:05.597,0:06:14.015 so one way to think about it, let me draw it this way 0:06:14.015,0:06:18.915 so the price we're up to $3.25, this is what the price is 0:06:18.915,0:06:23.559 exiting the refinery, what the refinery is getting for it. 0:06:28.482,0:06:35.047 So, let's say this is one dollar, this is two dollars, 0:06:35.047,0:06:39.614 and this is three dollars, and they're getting $3.25 0:06:39.614,0:06:43.147 $3.25 would be like that, that is what the 0:06:43.147,0:06:45.397 refinery is getting and one way to think about it 0:06:45.397,0:06:49.666 It's not completely... not all of their profit is coming from the gasoline 0:06:49.666,0:06:51.797 But one way to think about it is the refinery, after refining 0:06:51.797,0:06:57.113 all of this barrel of crude oil that they paid $90 for, 0:06:57.113,0:06:59.463 they're going to get $65 for the gasoline and then 0:06:59.463,0:07:06.166 they're going to get $35 for the other stuff 0:07:06.166,0:07:09.665 so they made a combination of $100. They were able to buy 0:07:09.665,0:07:12.898 crude oil at $90, do what they had to do, and then 0:07:12.898,0:07:16.347 they were able to sell it for $100, so one way to think 0:07:16.347,0:07:20.898 about it, at least in this situation, 90% of what they were 0:07:20.898,0:07:24.532 getting for it is their cost, it breaks down between 0:07:24.532,0:07:27.397 the other stuff and the gasoline, so it's not super easy to break 0:07:27.397,0:07:30.797 down, but you can say in this example a good chunk 0:07:30.797,0:07:35.965 of it was the cost of gasoline. And it obviously depends how 0:07:35.965,0:07:39.248 you account for it but a good chunk of it is the cost of 0:07:39.248,0:07:45.681 the crude, and this right over here you could say is 0:07:45.681,0:07:49.697 how much the refinery actually makes and that the amount 0:07:49.697,0:07:52.614 it actually gets versus what it costs, so the amount 0:07:52.614,0:07:55.964 they actually get for the product they produced versus the crude oil 0:07:55.964,0:07:58.515 that they had to pay for, this margin is often called 0:07:58.515,0:08:04.863 the crack spread. Just to understand what a refinery 0:08:04.863,0:08:08.847 is doing, it's breaking up the crude oil into its various parts 0:08:08.847,0:08:11.131 It's actually a very simple, well I don't want to say "simple process" 0:08:11.131,0:08:13.647 When you look at a refinery you obviously don't think it's a 0:08:13.647,0:08:16.015 simple thing, but the idea for the process is actually 0:08:16.015,0:08:21.298 fairly straightforward, it takes the crude oil 0:08:21.298,0:08:25.347 and it heats it up through a boiler, so right over here 0:08:25.347,0:08:29.814 the crude is getting really hot. This is the boiler, 0:08:29.814,0:08:34.916 the boiler is often fueled by some of the outputs of 0:08:34.916,0:08:42.881 that oil, and then it goes into a distillation column. 0:08:42.881,0:08:47.265 That's why you see all the towers over here in an oil refinery 0:08:47.265,0:08:49.881 Those are the distillation columns, and so in the 0:08:49.881,0:08:52.432 distillation columns the different parts of the oil have 0:08:52.432,0:08:54.881 different boiling temperatures. So the very long 0:08:54.881,0:08:57.547 carbon chains in the oil have very high boiling 0:08:57.547,0:08:58.998 temperatures, so as hot as they are they're not 0:08:58.998,0:09:02.682 going to boil, they're going to stay in their liquid form 0:09:02.682,0:09:05.265 down here, and then the slightly shorter chains are 0:09:05.265,0:09:08.715 going to boil and evaporate a little bit but 0:09:08.715,0:09:10.714 then as they rise they're going to cool down and 0:09:10.714,0:09:13.464 then they might condense right over here and they can 0:09:13.464,0:09:16.981 be pulled away in pipes, and then things that have 0:09:16.981,0:09:19.964 slightly shorter chains than that will go a little bit higher 0:09:19.964,0:09:22.498 before cooling to even lower temperatures before going 0:09:22.498,0:09:24.115 back into a liquid state, and they can be collected 0:09:24.115,0:09:26.432 over here... all the way until you get to the very 0:09:26.432,0:09:29.363 shortest chains, like the natural gas, that would be 0:09:29.363,0:09:32.197 collected out of the top. The gasoline that you put 0:09:32.197,0:09:38.281 in your car might be collected right over here from this 0:09:38.281,0:09:41.515 So essentially you're breaking up that oil into 0:09:41.515,0:09:43.115 its different parts. As for some of the different parts.. 0:09:43.115,0:09:44.715 this might be motor oil over here, the thing you use to 0:09:44.715,0:09:47.681 lubricate, not fuel, your engine. You might have 0:09:47.681,0:09:50.397 jet fuel up here, then you have a whole ton of different 0:09:50.397,0:09:52.097 fuels, this might be kerosene, and all sorts of things... 0:09:52.097,0:09:56.197 you are able to take out of that crude oil. 0:09:56.197,0:09:57.865 But anyway, let's get back to the gasoline. 0:09:57.865,0:10:01.365 So the refinery got $3.25, now we have to 0:10:01.365,0:10:04.781 transport that gasoline, so let's say 10 cents for 0:10:04.781,0:10:08.582 transportation. This is at about $3.25 here, so now 0:10:08.582,0:10:12.780 we're going to have 10 cents for transportation 0:10:16.903,0:10:19.798 I'll just write transportation for short. 0:10:19.798,0:10:22.214 And then it goes to the gas station, and as I mentioned 0:10:22.214,0:10:25.614 gas is heavily heavily taxed and it depends on what jurisdiction 0:10:25.614,0:10:28.332 what country or even states within countries 0:10:28.332,0:10:31.031 but for the sake of simplicity let's just say that 0:10:31.031,0:10:33.265 it's taxed at about 50 cents a gallon, which is not that 0:10:33.265,0:10:36.532 different from what it's taxed at in many states. 0:10:36.532,0:10:38.814 So now we're at 50 cents a gallon so that would be 0:10:38.814,0:10:52.499 right around... this is tax right over here going 0:10:52.499,0:10:55.631 to the state and federal government, so let's see 0:10:55.631,0:10:58.547 $3.25 is what the refinery got, 10 cents for transportation gets 0:10:58.547,0:11:05.097 us to $3.35, 50 cents for tax gets us up to $3.85 0:11:05.097,0:11:10.833 and then now we're at the gas station, it'll essentially 0:11:10.833,0:11:13.281 cost $3.85 for the fuel, but the gas station 0:11:13.281,0:11:15.481 needs to make some money to pay their costs 0:11:15.481,0:11:19.665 so the gas station sells you that fuel at a $4 per gallon 0:11:19.665,0:11:26.148 So you might say, hey! they gas station made 15 cents 0:11:26.148,0:11:40.797 But actually a huge amount of that 15 cents goes to the 0:11:40.797,0:11:43.031 credit card processors because most people 0:11:43.031,0:11:45.082 pay at the pump with their credit cards, so that's why 0:11:45.082,0:11:47.348 some gas stations like it, even give you a discount when 0:11:47.348,0:11:49.498 you pay in cash because of that 15 cents, as much as 0:11:49.498,0:11:53.547 or in general about 5 cents of that will go 0:11:53.547,0:12:04.332 to the credit card fees. So the retailer will be 0:12:04.332,0:12:09.214 left with about 10 cents of margin. 0:12:09.214,0:12:11.631 So anyway, hopefully that gives you a sense of how 0:12:11.631,0:12:14.981 crude oil turns into gasoline, and when you pay at the pump 0:12:14.981,0:12:18.749 what is the breakdown for the different players 0:12:18.749,0:12:22.249 and how much of the money is going to those different 0:12:22.249,9:59:59.000 players.