SFactors affecting light-heavy crude price differences stem from three areas: crude market, refining, and the product market, each of which can vary in its influence. any one factor does not change alone.  The issue is to sort out the major versus minor influences in 2004.  EIA previously examined how these factors affected crude price differentials in different time periods.  (See URL below)
	http://www.eia.gov/pub/oil_gas/petroleum/presentations/1998/california_crude_oil_prices/index.html
	SRegarding the crude market, one would expect the differential to increase if heavy crude oil supply is increasing relative to light crude oil supply.  Also, absolute crude price changes affect the light-heavy crude price differential through crude price’s influence on the product market, which will soon be described.  In fact, we will show that crude price increase is the largest factor influencing the differential market in 2004.
	SGenerally refiners with the ability to upgrade the heavy ends of the barrel run their downstream upgrading units at or near capacity.  If additional heavy crude oil comes on the market, some refiners that buy the crude oil cannot run more heavy ends through their upgrading equipment, so they produce more residual fuel, thereby getting less product value from that crude oil.  This, in turn, means they will want to pay less for the heavier crude oil.
		–If crude oil price levels stay elevated for a sustained period, the depressed price of the heavier crude oils provides an incentive for more upgrading equipment in order to make better use of the “cheaper heavy crude oil” and decrease residual fuel production.
		–But note the irony.  If enough refiners add upgrading, the demand for heavier crude oil increases and the “cheap” crude will no longer be so cheap.
	SProduct markets reflect the value a refiner can achieve from their crude oils.  Product markets react both to the crude market and refiners’ actions, which will be described on the next slide.