|SSome market observers have said that the
increase in crude oil price is being driven by the fact that the latest
increases in crude oil production have been mostly heavy crude oils, and
heavy crude oils are the wrong crude oils to serve demand needs. They contend
that what is really needed by refiners is light, low-sulfur crude oil, and
that production of the wrong crude oil is driving up prices.
|SMy view is production of heavy crude oil
increases the price difference between light and heavy crude oil, and that an
increase in this price difference does not translate to a higher overall
price. In fact I argue just the
opposite -- that high crude oil prices tend to increase the price difference
apart from any increases in heavy crude oil production. High light-heavy crude price differences do
not drive higher prices. The dynamics
of situation are described on this slide.
|SHigher crude oil prices increase the price
difference between residual fuel prices and prices for gasoline and
distillate. Residual fuel price is
affected by alternative fuel prices and generally does not increase with
crude oil prices. That by itself,
tends to keep the prices of heavy crude oils from increasing as fast as light
|SIf marginal volumes of crude oil production
are heavy, that further depresses heavy crude oil prices.
|SFinally, if refineries are running at high
utilizations, one might expect yield of residual fuel to increase as
conversion capacity becomes fully utilized, which helps to keep heavy crude
oil prices lower than lighter crude oils.
|SBut those heavy crude oils are still used, and
having those volumes is better than not having any increased volumes