Today’s octane economics
Because octane can seem confusing, consider a more familiar commodity, wine.
Imagine you own a vineyard. You produce wine for $4/bottle, distribute it in cases for $24/bottle and sell it in your shops for $34/bottle. Your margin is $20/bottle for case sales and $30/bottle for bottle sales.
A neighbor makes identical wine and sells it under her brand at the same prices.
This year, your grapes went bad. To maintain your business, you are buying wine from your competitor in cases at $24/bottle, relabeling it, and selling it for $24/bottle by the case and $34/bottle in the shop. So now your margin is $0/ bottle for case sales and $10/bottle for bottle sales.
Now suppose your sales mix is 50% cases/50% bottles. Then your average margin was $25 using your home-grown grapes and $5 today. Your profit margin went down by a factor of 5.
Your profit margin went down by a factor of 5.
This is what’s happening with octane today. The winemakers are North American refiners. The commodity is the octane-barrel. Case sales are spot sales and bottle sales are rack sales.
The numbers represent real octane-barrel margins — efficient refiners can produce incremental octane for $0.40/octane-barrel, they can sell (or buy) it for $2.40/octane barrel on the spot market and $3.40/octane-barrel at the rack.
On the surface, everything looks fine — until you pull up the income statement and see your profit has been crushed.
I believe this is root cause of refiners’ record low margin capture rates today. The Tier 3 gasoline specification is destroying “home-grown” octane barrels and crushing profit margins.
Conclusion
Deep desulfurization to meet the Tier 3 gasoline specification is destroying home grown octane barrels. When refiners buy octane blend stocks to replace them, the octane balance is restored, but profit margin is crushed.
Recommendation
Immediate remedies are available. Refiners should:
- take a fresh look at Tier 3 strategies
- optimize their gasoline desulfurizers today.
That is our specialty.
Hoekstra Research Report 8
In a 3-year research project, our client group developed new methods and tools to avoid hidden pitfalls with Tier 3 gasoline. All our data and tools are available to anyone for immediate application at negligible cost. Just see this offer letter and join our client group by sending a purchase order today: Hoekstra-Trading-Offer-letter-Research-Report-8-refiners-under 1 million barrels/day
