Theories on How Capacity Constraints Drove Light-Heavy Differentials
•Overall world refining capacity limit
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•Constraints on conversion capacity
SIn this section, we will explore a different view of what has been behind the rapid increase in light-heavy crude oil differentials in 2004.  This view attributes capacity constraints – both distillation and conversion capacity -- as the main drivers behind the high light-heavy price differences.

SThis issue is being addressed for two reasons.
– The first is that from a refiner’s perspective, understanding the drivers behind the 2004 light-heavy crude price difference will affect projections of the future behavior of that price difference – e.g., when will it fall and how much it might fall.
–The second reason is that consumers and policymakers are concerned over price effects of strained supply, and these theories may have placed too much emphasis on the relationship between refinery constraints and prices in 2004.