Supply of finished products

General information

A simplified flow chart of the supply chain from the refinery to the end-user is shown below.

Figure 4.5 ● Supply of Finished Products

Crude oil as it comes out of the ground is a raw material with limited use. Although it can be used as a burning fuel, the real potential of crude oil is reached when it is refined into a range of products, which will be useful for specific purposes to the final consumer (e.g. gasoline for transportation). The objective of refining is to add value to the raw material, as the total of the refined products should be more valuable than the feedstock.

There are many refinery processes used to transform crude oil. The first basic phase, however, in the refinery process is distillation. Crude oil is heated and fed into a fractionating column at atmospheric pressure, resulting in a separation of the crude oil into 4-6 broad cuts. Beyond the atmospheric distillation unit are more complex units, in which each stream is redistilled to provide a better yield and more precise cut of the final products.

Imports and exports

General information

One of the basic economic realities of oil is that it is often found in areas far removed from the consuming markets. Two-thirds of the reserves of crude oil are either in the Middle East or in Russia, while almost 90% of the oil is consumed in other areas.

This is why oil needs to be shipped from producing zones to consuming regions. As oil is a liquid and compact form of energy, transportation is made relatively easy. Oil can be transported in tankers, pipelines, railways and trucks, and a vast transportation network exists between producing and consuming regions.

The information required on origins and destinations of the imported and exported oil is of prime importance. Indeed it is important for a country to know from which export country it is dependent for its oil supplies, as in case of an export supply crisis, it can determine how much is imported from that particular country. Similarly, although slightly less important, it is useful to know what the destinations are of the oil exports, so that in case of disruption it is known which export countries will be affected.

Stock levels and changes

General information

Oil stocks are a critical element of information in an oil balance. The majority of oil stocks are essential to keep the global supply system operating. Stocks allow for the balance between supply and demand; stocks are drawn to help meet demand

when supply falls short, while a stock build offers an outlet for oil products to flow

when supply exceeds demand. Not to include stock data in the oil balance leads to

a lack of transparency in the market. The trend in stocks is important for many oil analysts when making an evaluation of the oil market situation.

Stocks are a leading indicator of prices: the level of oil stocks often determines the price, e.g. when oil stocks are low it means that there may be a shortage or a need for replenishing, which indicates that prices might be rising. On the other hand, if the industry is amply supplied with the right oil, there may be a price reduction expected. This is why it is important to have information on the situation of oil stocks

in the world.

Information on product stocks can be as important as crude oil stocks. For example, crude oil stocks give an indication of the availability of crude to refineries in each country, and therefore are evidence on how well the refineries might provide the domestic market. On the other hand, information on low gasoline stocks before the driving season, or low heating oil stocks before the winter can be a warning signal to refineries, oil companies and governments that not only prices could rise, but shortages might possibly occur – e.g. heating oil problems experienced in autumn 2000.

Data on oil stocks are of particular importance for strategic decisions made by governments or larger oil companies. Aggregate and timely stock information is needed in order to look at longer-term planning so as to ensure adequate supplies

to meet demand. Governments require extensive stock information so that they can react appropriately when oil supply disruptions occur (both nationally and internationally). Oil stocks are a critical element of information in an oil balance.

Primary stocks are held by the various companies supplying the markets: ranging from producers, refiners to importers. They are held in refinery tanks, bulk terminals, pipeline tankage, barges and coastal tankers (if they stay in the same country), tankers in port (if they are to be discharged at port) and in inland ship bunkers. Additionally, stocks held for strategic purposes by governments (e.g. US Strategic Petroleum Reserve) or by stockholding organisations (e.g. EBV in Germany) are included in the primary stock category.

Secondary stocks are stocks in small bulk plants (marketing facilities below a certain capacity, e.g. 50 000 barrels in the United States, which receive their products by rail or truck) and retail establishments.

Tertiary stocks are stocks held by end-consumers; these can be power plants, industrial entities or consumers in the residential/commercial sector.