WEBVTT 00:00:01.723 --> 00:00:04.190 What I hope to do in this video is to explore the relationship 00:00:04.190 --> 00:00:07.124 between oil and gas prices, and you do see that there is 00:00:07.124 --> 00:00:10.440 a very strong correlation between how they trend. 00:00:10.440 --> 00:00:15.073 This right over here is oil prices quoted at a specific point on the planet 00:00:15.073 --> 00:00:17.974 This is dependent on where you are and as you can see this is 00:00:17.974 --> 00:00:22.155 in US dollars per barrel. In early 2008 around $100 00:00:22.155 --> 00:00:24.555 It went up to about $140 then came back down 00:00:24.605 --> 00:00:29.405 and then it's been trending up ever since, now it's about $100 per barrel 00:00:29.405 --> 00:00:33.590 this is where we see the oil prices on a per barrel basis 00:00:33.590 --> 00:00:37.441 And then related to that you see the gas of gasoline 00:00:37.441 --> 00:00:40.173 this is even more geographically specific because not only do you have 00:00:40.173 --> 00:00:42.014 transportation costs but you also have very 00:00:42.368 --> 00:00:46.922 region specific taxation for oil and sometimes 00:00:46.922 --> 00:00:50.190 regulation but taxation is the big part of it 00:00:50.190 --> 00:00:52.256 but you do see that it trends up when oil prices 00:00:52.256 --> 00:00:54.291 trend up, and then it goes down and this is on 00:00:54.291 --> 00:00:56.623 a per gallon basis and these are the prices right 00:00:56.623 --> 00:00:58.855 over here in New York. But they don't move competely 00:00:58.855 --> 00:01:02.406 locked up, if anything you can see that the oil price on a per 00:01:02.406 --> 00:01:05.072 barrel basis is much more volatile than the gasoline 00:01:05.072 --> 00:01:07.722 prices right over here but there is the same 00:01:07.722 --> 00:01:09.907 general trend, when the oil prices moves up 00:01:09.907 --> 00:01:13.106 this tends to move up but it's not always in the same 00:01:13.106 --> 00:01:16.124 percentage but there's definitely a relationship. 00:01:16.124 --> 00:01:18.840 Now, before trying to figure out when you pay, say 00:01:18.840 --> 00:01:22.273 $4 at the pump how much up that is oil and how much 00:01:22.273 --> 00:01:24.708 is refining and how much is transportation 00:01:24.708 --> 00:01:26.806 Let's at least kind of build up to that 00:01:26.806 --> 00:01:29.625 to think about how does the oil even end up in your 00:01:29.625 --> 00:01:34.973 car, then we can build up that price of the oil. 00:01:34.973 --> 00:01:37.707 Or, the price of the gasoline I should say. 00:01:37.707 --> 00:01:40.506 This right over here, you're probably familiar with these, 00:01:40.506 --> 00:01:43.174 these are oil rigs, two very different types: this 00:01:43.174 --> 00:01:46.208 This is an offshore oil rig, this is a land based oil rig 00:01:46.208 --> 00:01:48.706 but they're both doing the same fundamental thing: 00:01:48.706 --> 00:01:51.490 they're drilling into the ground until they get to a pocket of oil 00:01:51.490 --> 00:01:54.041 and then they will pump that oil out 00:01:54.041 --> 00:01:56.140 and try to transport it to the market somehow, first 00:01:56.140 --> 00:01:59.123 going through a refinery. Offshore is really fast and it 00:01:59.123 --> 00:02:02.341 really is an engineering marvel how they do it 00:02:02.341 --> 00:02:04.606 It might be sitting out here in the ocean and it will 00:02:04.606 --> 00:02:06.990 literally go to the bottom of the ocean, go to the sea 00:02:06.990 --> 00:02:10.240 floor and then drill from there to actually get to the 00:02:10.240 --> 00:02:12.890 oil pockets so it's really an engineering marvel 00:02:12.890 --> 00:02:14.806 and you have to be very careful, it can be very dangerous 00:02:14.806 --> 00:02:17.090 working on an oil rig and obviously if there's an accident 00:02:17.090 --> 00:02:19.807 it can be an environmental nightmare like we saw 00:02:19.807 --> 00:02:22.241 with the BP situation but it is undoubtedly an 00:02:22.241 --> 00:02:25.606 engineering marvel. Now, once you have that oil you need 00:02:25.606 --> 00:02:27.939 to get it to a refinery so that the oil can be 00:02:27.939 --> 00:02:31.874 broken up into its useful parts, and the way it 00:02:31.874 --> 00:02:34.990 is typically transported to a refinery is some combination 00:02:34.990 --> 00:02:38.105 of a pipeline or an oil tanker, this right over here is actually 00:02:38.105 --> 00:02:43.756 the Alaskan pipeline, it takes oil from the very northern part 00:02:43.756 --> 00:02:46.273 of Alaska to the southern part so that it can then be 00:02:46.273 --> 00:02:49.389 put onto oil tankers which can then transport it anywhere 00:02:49.389 --> 00:02:52.106 in the world to refineries. It could go straight to a tanker 00:02:52.106 --> 00:02:55.891 actually in some offshore places you could use a tanker or sometimes if they're 00:02:55.891 --> 00:02:58.874 close enough to land they actually might have a pipeline 00:02:58.874 --> 00:03:01.773 that will take it to land where it can go to a refinery 00:03:01.773 --> 00:03:05.305 or go to an oil tanker so that it can be transported 00:03:05.305 --> 00:03:08.957 even farther. And then from there it gets to a refinery 00:03:08.957 --> 00:03:12.390 So we can start to think about how the price of oil is built up 00:03:12.390 --> 00:03:15.741 before we even think about what a refinery 00:03:15.741 --> 00:03:19.423 even does. So let's say that the current price of oil 00:03:19.423 --> 00:03:25.007 and I kind of rigged the numbers, to work out fairly well 00:03:25.007 --> 00:03:27.856 But let's say the current price of oil is $90 per barrel. 00:03:34.579 --> 00:03:39.781 So a barrel (this is just a units thing) is equal 00:03:39.781 --> 00:03:44.248 to 42 gallons. So if I say I have a barrel of water 00:03:44.248 --> 00:03:47.332 I'm really saying that I have 42 gallons of water. 00:03:47.332 --> 00:03:49.415 And now all 42 gallons of crude oil do not turn into 00:03:49.415 --> 00:03:54.999 42 gallons of gasoline, out of 42 gallons 00:03:54.999 --> 00:03:57.995 of crude oil you can get about 19 or 20 gallons of 00:03:58.149 --> 00:04:04.114 gasoline, to make the numbers easy I'll just go with 20. 00:04:08.206 --> 00:04:14.697 And then the rest will be other stuff, so 22 gallons of other stuff 00:04:14.697 --> 00:04:17.748 It might not even be 22 gallons, some of it will just be 00:04:17.748 --> 00:04:21.714 waste, some of it will be by-products some of it is actually 00:04:21.714 --> 00:04:25.181 used to fuel the refining process. 00:04:25.181 --> 00:04:29.864 I won't write that number, the rest is "other stuff." 00:04:29.864 --> 00:04:33.797 So let's say, this refinery is paying $90 per barrel 00:04:33.797 --> 00:04:38.430 when it gets it, so that incorporates what the oil procuders 00:04:38.430 --> 00:04:41.582 are getting, and it also takes care of the transportation 00:04:41.582 --> 00:04:45.198 costs to the refinery, and let's say jsut for the sake 00:04:45.198 --> 00:04:49.431 of argument that the refinery can sell 00:04:49.431 --> 00:04:51.864 Let's say that it doesn't even take care of the transportation 00:04:51.864 --> 00:04:53.814 network, let's say there are people willing to buy directly 00:04:53.814 --> 00:04:56.614 from the refinery at the refinery, they are willing to buy 00:04:56.614 --> 00:05:07.631 gasoline at $3.25 per gallon, so the gas at refinery, 00:05:07.631 --> 00:05:10.964 people are willing to spend, the transporters are willing to pay them 00:05:10.964 --> 00:05:21.394 $3.25 per gallon, and so from this barrel they're going 00:05:21.394 --> 00:05:23.847 to get 20 gallons of gasoline, they can sell that 00:05:23.847 --> 00:05:28.031 at $3.25 per gallon so you're going to have 00:05:28.031 --> 00:05:43.864 20 * 3.25 = $65 for the gasoline 00:05:43.864 --> 00:05:45.781 And then let's just say, for the sake of argument, 00:05:45.781 --> 00:05:51.147 they get $35 for the other stuff 00:05:51.147 --> 00:05:53.131 Some of this other stuff is actually quite useful, it's stuff like 00:05:53.131 --> 00:05:56.265 motor oil, it could be jet fuel, it could be natural gas 00:05:56.265 --> 00:06:00.114 All sorts of... and it can obviously be fuel to actually fuel 00:06:00.114 --> 00:06:05.597 the refinery, and so let's actually start building this up over here 00:06:05.597 --> 00:06:14.015 so one way to think about it, let me draw it this way 00:06:14.015 --> 00:06:18.915 so the price we're up to $3.25, this is what the price is 00:06:18.915 --> 00:06:23.559 exiting the refinery, what the refinery is getting for it. 00:06:28.482 --> 00:06:35.047 So, let's say this is one dollar, this is two dollars, 00:06:35.047 --> 00:06:39.614 and this is three dollars, and they're getting $3.25 00:06:39.614 --> 00:06:43.147 $3.25 would be like that, that is what the 00:06:43.147 --> 00:06:45.397 refinery is getting and one way to think about it 00:06:45.397 --> 00:06:49.666 It's not completely... not all of their profit is coming from the gasoline 00:06:49.666 --> 00:06:51.797 But one way to think about it is the refinery, after refining 00:06:51.797 --> 00:06:57.113 all of this barrel of crude oil that they paid $90 for, 00:06:57.113 --> 00:06:59.463 they're going to get $65 for the gasoline and then 00:06:59.463 --> 00:07:06.166 they're going to get $35 for the other stuff 00:07:06.166 --> 00:07:09.665 so they made a combination of $100. They were able to buy 00:07:09.665 --> 00:07:12.898 crude oil at $90, do what they had to do, and then 00:07:12.898 --> 00:07:16.347 they were able to sell it for $100, so one way to think 00:07:16.347 --> 00:07:20.898 about it, at least in this situation, 90% of what they were 00:07:20.898 --> 00:07:24.532 getting for it is their cost, it breaks down between 00:07:24.532 --> 00:07:27.397 the other stuff and the gasoline, so it's not super easy to break 00:07:27.397 --> 00:07:30.797 down, but you can say in this example a good chunk 00:07:30.797 --> 00:07:35.965 of it was the cost of gasoline. And it obviously depends how 00:07:35.965 --> 00:07:39.248 you account for it but a good chunk of it is the cost of 00:07:39.248 --> 00:07:45.681 the crude, and this right over here you could say is 00:07:45.681 --> 00:07:49.697 how much the refinery actually makes and that the amount 00:07:49.697 --> 00:07:52.614 it actually gets versus what it costs, so the amount 00:07:52.614 --> 00:07:55.964 they actually get for the product they produced versus the crude oil 00:07:55.964 --> 00:07:58.515 that they had to pay for, this margin is often called 00:07:58.515 --> 00:08:04.863 the crack spread. Just to understand what a refinery 00:08:04.863 --> 00:08:08.847 is doing, it's breaking up the crude oil into its various parts 00:08:08.847 --> 00:08:11.131 It's actually a very simple, well I don't want to say "simple process" 00:08:11.131 --> 00:08:13.647 When you look at a refinery you obviously don't think it's a 00:08:13.647 --> 00:08:16.015 simple thing, but the idea for the process is actually 00:08:16.015 --> 00:08:21.298 fairly straightforward, it takes the crude oil 00:08:21.298 --> 00:08:25.347 and it heats it up through a boiler, so right over here 00:08:25.347 --> 00:08:29.814 the crude is getting really hot. This is the boiler, 00:08:29.814 --> 00:08:34.916 the boiler is often fueled by some of the outputs of 00:08:34.916 --> 00:08:42.881 that oil, and then it goes into a distillation column. 00:08:42.881 --> 00:08:47.265 That's why you see all the towers over here in an oil refinery 00:08:47.265 --> 00:08:49.881 Those are the distillation columns, and so in the 00:08:49.881 --> 00:08:52.432 distillation columns the different parts of the oil have 00:08:52.432 --> 00:08:54.881 different boiling temperatures. So the very long 00:08:54.881 --> 00:08:57.547 carbon chains in the oil have very high boiling 00:08:57.547 --> 00:08:58.998 temperatures, so as hot as they are they're not 00:08:58.998 --> 00:09:02.682 going to boil, they're going to stay in their liquid form 00:09:02.682 --> 00:09:05.265 down here, and then the slightly shorter chains are 00:09:05.265 --> 00:09:08.715 going to boil and evaporate a little bit but 00:09:08.715 --> 00:09:10.714 then as they rise they're going to cool down and 00:09:10.714 --> 00:09:13.464 then they might condense right over here and they can 00:09:13.464 --> 00:09:16.981 be pulled away in pipes, and then things that have 00:09:16.981 --> 00:09:19.964 slightly shorter chains than that will go a little bit higher 00:09:19.964 --> 00:09:22.498 before cooling to even lower temperatures before going 00:09:22.498 --> 00:09:24.115 back into a liquid state, and they can be collected 00:09:24.115 --> 00:09:26.432 over here... all the way until you get to the very 00:09:26.432 --> 00:09:29.363 shortest chains, like the natural gas, that would be 00:09:29.363 --> 00:09:32.197 collected out of the top. The gasoline that you put 00:09:32.197 --> 00:09:38.281 in your car might be collected right over here from this 00:09:38.281 --> 00:09:41.515 So essentially you're breaking up that oil into 00:09:41.515 --> 00:09:43.115 its different parts. As for some of the different parts.. 00:09:43.115 --> 00:09:44.715 this might be motor oil over here, the thing you use to 00:09:44.715 --> 00:09:47.681 lubricate, not fuel, your engine. You might have 00:09:47.681 --> 00:09:50.397 jet fuel up here, then you have a whole ton of different 00:09:50.397 --> 00:09:52.097 fuels, this might be kerosene, and all sorts of things... 00:09:52.097 --> 00:09:56.197 you are able to take out of that crude oil. 00:09:56.197 --> 00:09:57.865 But anyway, let's get back to the gasoline. 00:09:57.865 --> 00:10:01.365 So the refinery got $3.25, now we have to 00:10:01.365 --> 00:10:04.781 transport that gasoline, so let's say 10 cents for 00:10:04.781 --> 00:10:08.582 transportation. This is at about $3.25 here, so now 00:10:08.582 --> 00:10:12.780 we're going to have 10 cents for transportation 00:10:16.903 --> 00:10:19.798 I'll just write transportation for short. 00:10:19.798 --> 00:10:22.214 And then it goes to the gas station, and as I mentioned 00:10:22.214 --> 00:10:25.614 gas is heavily heavily taxed and it depends on what jurisdiction 00:10:25.614 --> 00:10:28.332 what country or even states within countries 00:10:28.332 --> 00:10:31.031 but for the sake of simplicity let's just say that 00:10:31.031 --> 00:10:33.265 it's taxed at about 50 cents a gallon, which is not that 00:10:33.265 --> 00:10:36.532 different from what it's taxed at in many states. 00:10:36.532 --> 00:10:38.814 So now we're at 50 cents a gallon so that would be 00:10:38.814 --> 00:10:52.499 right around... this is tax right over here going 00:10:52.499 --> 00:10:55.631 to the state and federal government, so let's see 00:10:55.631 --> 00:10:58.547 $3.25 is what the refinery got, 10 cents for transportation gets 00:10:58.547 --> 00:11:05.097 us to $3.35, 50 cents for tax gets us up to $3.85 00:11:05.097 --> 00:11:10.833 and then now we're at the gas station, it'll essentially 00:11:10.833 --> 00:11:13.281 cost $3.85 for the fuel, but the gas station 00:11:13.281 --> 00:11:15.481 needs to make some money to pay their costs 00:11:15.481 --> 00:11:19.665 so the gas station sells you that fuel at a $4 per gallon 00:11:19.665 --> 00:11:26.148 So you might say, hey! they gas station made 15 cents 00:11:26.148 --> 00:11:40.797 But actually a huge amount of that 15 cents goes to the 00:11:40.797 --> 00:11:43.031 credit card processors because most people 00:11:43.031 --> 00:11:45.082 pay at the pump with their credit cards, so that's why 00:11:45.082 --> 00:11:47.348 some gas stations like it, even give you a discount when 00:11:47.348 --> 00:11:49.498 you pay in cash because of that 15 cents, as much as 00:11:49.498 --> 00:11:53.547 or in general about 5 cents of that will go 00:11:53.547 --> 00:12:04.332 to the credit card fees. So the retailer will be 00:12:04.332 --> 00:12:09.214 left with about 10 cents of margin. 00:12:09.214 --> 00:12:11.631 So anyway, hopefully that gives you a sense of how 00:12:11.631 --> 00:12:14.981 crude oil turns into gasoline, and when you pay at the pump 00:12:14.981 --> 00:12:18.749 what is the breakdown for the different players 00:12:18.749 --> 00:12:22.249 and how much of the money is going to those different 00:12:22.249 --> 99:59:59.999 players.