oiler1930

Insiders Preparing for Major Drop in Oil Prices

The postulate that independent refineries will obtain a better crack spread, the difference between price of products (~10 bbl gasoline/15 bbl oil and ~5 bbl of heating oil/diesel fuel, when crude prices drop faces a structural flaw:
a crude producer gets 15% of sales tax exempt for a depletion allowance, in recognition of the oil pool being finite and not getting reproduced in situ. A converter, ie refinery, is liable for full net profits from production. An independent refiner is at the mercy of the integrated producer who gets 15 % of his sales exempted for production, and full tax liability for as much of the downstream activity that he chooses to own and operate.

The independent producer gets the tail end of the market when prices tumble to his cost or less; the independent refiner gets just enough margin to barely break even. Both activities may use commodity contracts to hedge their activities by selling forward production at a price estimated to guarantee some sort of profit, and for the refiner, buying forward crude and selling gasoline and heating oil contracts to protect a spread.

Direct ownership of production, carefully cost monitored, can pay an oilman a decent income. Direct ownership of an independent refinery seems to lead to bankruptcy.

With all that said, I believe that Valero is also a producer as well as a refiner, and qualifies as an integrated entity. They are not part of the seven sisters, such as the Siamese twins Exxon Mobil was once two of same, but are still a substantial world producer.