Crack Spreads and Capacity Utilization in the US Refinery

We present an equilibrium model of the prices of crude oil and refined products that accounts for supply and demand shocks, the elasticity of the supply and demand markets, and the characteristics of the production and adjustment costs of refiners. We use the model to examine the relation between refinery capacity utilization and the spread between crude oil prices and the price of refined products, commonly known as the crack spread. We find empirically that, consistent with the predictions of the model, the crack spread is highly correlated with capacity utilization at low frequencies, but that, at high frequencies, there is no evidence of Granger causality between either the crack spread and capacity utilization, or vice versa. Our model provides a basis for constructing structural models of the refinery industry to better understand the dynamics of crack spreads