Linkages between the markets for crude oil and the markets for refined products

To understand the crude oil price determination process it is necessary to extend the analysis beyond the markets for petroleum. Crude oil prices are determined in two closely related markets: the markets for crude oil and the markets for refined products. Crude oil is a raw material used in the refinery in a joint products process. For a given level of crude oil supply, the value of petroleum lies in the value of refined products produced from it. An econometric-linear programming model was developed to capture the linkages between the markets for crude oil and refined products. In the LP refiners maximize profits given crude oil supplies, refining capacities, and prices of refined products. The objective function is profit maximization net of crude oil prices. The shadow price on crude oil gives the netback price. Refined product prices are obtained from the econometric models. The model covers the free world divided in five regions. The model is used to analyze the impacts on the markets of policies that affect crude oil supplies, the demands for refined products, and the refining industry. For each scenario analyzed the demand for crude oil is derived from the equilibrium conditions in the markets for products. The demand curve is confronted with a supply curve which maximizes revenues providing an equilibrium solution for both crude oil and product markets. The model also captures crude oil price differentials by quality. The results show that the demands for crude oil are different across regions due to the structure of the refining industries and the characteristics of the demands for refined products. Changes in the demands for products have a larger impact on the markets than changes in the refining industry. Since the markets for refined products and crude oil are interrelated they can\u27t be analyzed individually if an accurate and complete assessment of a policy is to be made. Changes in only one product market in one region affect the other product markets and the prices of crude oil