CAPACITY

This text it about the notion of capacity and there types. the market's ultimate represents the sum of the physical capacities of the industry's various functions.

Nature and money determine the capacities.

There are production capacity, pipeline capacity, refining capacity, and storage capacity.

Now I tell you about Production capacity. It’s a function of reserves and the capital invested in producing equipment. Economics determines the rate and extent of field development. Crude prices, and expectations for them, are crucial.

Production capacities are reported in two subcategories. One is a maximum rate called a surge capacity. Fields cannot produce at surge capacity for extended periods because there are pressure problems with producing reservoirs and the inability of equipment to operate at maximum rates forever. Next subcategory is the maximum sustainable production rate, which measures the highest rate of production.

Then I will tell you about the capacities of transportation and storage functions Petroleum can pass through at rates that depend on pipe diameters, the power of pumping equipment installed, viscosity of the petroleum, and the extent of efforts to reduce friction. Capacities in each case depend on investments.

Another kind of capacities is refining capacities. The basic process, the first main step in refining, is distillation. In it, crude oil and other inputs are heated to the point of boiling. Heavier, less volatile substances condense first Lighter components of crude, or fractions, condense later.

Capacities are measured in barrels per stream day, which is the maximum processing rate during a period of operation.

A refiner can add capacity by building more distillation capacity and by widening or eliminating the constriction. This process is called debottlenecking.

The market increasingly wants more light products and less of the heavy ones. A rough way to measure the relative refining productivity of plants, countries, or regions is to compare their ratios of distillation capacity to upgrading capacity.

Planners have to predict demand patterns for the various petroleum products. Thus the ability to invest at all depends on current and expected refining profitability.

Types of oil

This text is about types of oil and it’s prices. The term "oil" can mean crude oil or petroleum products. products are worth more than crude for the same reason. Processing adds value.

prices for a single product vary from region to region. Gasoline prices, posted as they are in most places for all the world to see, can vary from one urban intersection to the next and usually do. Patterns of supply and demand vary geographically. Economic health changes from place to place.

crudes vary tremendously in quality and composition. The main parameters of crude quality are density and sulfur content. Density is measured by something called API gravity, which is expressed in degrees. Crudes with relatively high API gravities are considered light; those with lower API gravities are heavy. There also are medium or intermediate weights. heavy crudes have API gravities below 25°; mediums have API gravities of 25-32°; lights have API gravities higher than that.

Sulfur content is measured as a simple weight percent. Crudes with more than 1.5% sulfur are considered sour. Those containing less sulfur are" said to be sweet. Sweet crudes, because they do not require the added cost of desulfurization in processing, have higher values.

Grades of crude by these main determinants of value range from heavy and sour on the low end to light and sweet on the high. There are other factors of crude quality, such as volatility, pour point, viscosity, and concentrations of metals and other materials. In the market density and sulfur content are by far the most common quality measures.

Now I want to tell you about prices of oil. Price variances of one crude against a marker are called differentials, which must be calculated for haul distances as well as quality.

First is the spot prices. That is, they are the prices refiners pay for marginal volumes of crude, generally purchased cargo by cargo. They are distinguished from term prices, which are determined by contracts for continuous deliveries.

Quotes for spot transactions at refining centers are usually cif prices. Cif prices thus represent not just the price of the crude but also the costs of transporting it to market.

At the other end of the scale are fob prices. The fob price represents crude costs at a seller's loading terminal to a buyer paying his own transportation, insurance, and other expenses. It should be obvious that cif prices vary with distance to market.

Oil Industry Structure

Part I

1. Oil industry really is a collection of industries, each characterized by a unique profession.

What consumers know as gasoline, heating oil, lubricating oil, diesel, and other petroleum products start out as crude oil. In its natural state, crude oil has little value. For one thing, in its natural state, it usually is underground, where it can do no one any good. For another, its underground location begins as an unknown. Oil underground has no value, therefore, until someone first finds it and then conveys it to the Earth's surface, or at least proves that the conveyance is economically and technically feasible. Even then, however, the crude has value only in its potential to be converted into useful fuels. Usually, crude as it comes out of the ground is dark, gooey¹ stuff, mixed with mud and salt water and containing metals and perhaps sulfur and other chemicals. It might be black, green, brown, sometimes orange, or occasionally nearly clear. The really good stuff is nearly clear and very fluid, free of sulfur and other contaminants, approaching gasoline in chemical composition. The really bad stuff is so thick that it must be heated in order to flow, high in sulfur and metal content. To be worth anything, crude of any quality must be chemically transformed. The deliberate chemical change falls under a broad industry category called processing.

2. Crude oil, then, must be found, extracted, and processed. And between these steps it must be transported from place to place. The oil industry segment that searches for oil is called exploration. Extraction is called production. Processing is called refining. And transporting is called, well, transportation. These functions often are categorized as "upstream" or "downstream." The upstream business, including exploration and production, provides the oil industry's raw material. The downstream business is the manufacturing part of the industry; it takes the raw material, crude oil, and turns it into valuable products through the process of refining.

Professional disciplines differ widely among these various functions, which is why the industry seems so much like a collection of businesses to people familiar with it. Exploration, for example, employs the sciences of geophysics and geology. Production involves sophisticated engineering oriented to the behavior of underground rock. In both upstream businesses, the crucial field activity is drilling, which is a professional and engineering specialty.

3. Until the mid-1980s, the upstream industry segments tended to function discretely. A geophysicist produced a seismic section and interpreted it to produce a map of the underground. A geologist combined the geophysical information with field observations and information from any wells drilled in the study area to generate a "prospect" — a location to be drilled. Then a drilling crew, nowadays employees of a contractor and not the prospect-generating company, moved onto the location to drill a hole several thousand feet, or several tens of thousands of feet, into the ground to test the geologic theory. If the hole, or well, found oil in sufficient quantity, the production engineers took over to decide how best to get it out. The engineers' work led to field development, which normally included the drilling of more wells, installation of equipment to handle produced fluids, and perhaps a program of water injection or other method of enhancing production.

4. All these physical steps still must be performed. Since the mid-1980s, however, extremely powerful computers have made it possible for oil companies to blend information from each of the professional disciplines. Now, geophysicists work more closely with geologists than before in prospect generation, and petroleum engineers may enter the picture so that a prospective development pro­gram becomes available before the first well has been started. The effect has been a blending of once-distinct functions, although the sequence of upstream steps has not changed much.

5. The downstream petroleum industry employs a different set of professionals, mainly chemists and engineers. Refining is a complex function that takes the generally big molecules, constituting crude oil, and turns them into little, more useful molecules that can be mixed to make gasoline and other products. In general, chemists figure out what needs to be done, and refining engineers figure out how to do it. Related to their activities are those of marketing specialists who think of ways to make consumers buy their products rather than those of competitors.

6. Connecting oil fields with refineries and refineries with service stations and home heating oil distributors is the transportation network. It includes tank trucks, ocean-going tankers, barges, pipelines, and storage facilities. Transportation, too, makes up a business. In fact, trucking, pipelining, and shipping are all very distinct businesses, each with its own professional specialty.

Part II

7. This, in very simple terms, is the mechanical part of the oil market, the industry that produces what economists call supply. We will examine the parts in greater detail later. What is important at this point is to recognize the unique characteristics of the petroleum supply functions and the people who perform them. Indeed, as hydrocarbon molecules pass from function to function, their ownership often changes. The number of ownership changes varies widely.

8. These disparities of function and ownership have important economic implications². They relate to the organization of companies, patterns of trade, and market behavior.

Some companies, for example, organize around particular functions. Thus there are independent producers, which specialize in upstream work. Their concentrations may be even narrower; some independents focus on exploration, while some prefer to conduct only development and production operations. And there are independent refiners, which concentrate on processing and marketing.

9. Other companies organize around the concept of integration — ownership of both upstream and downstream operations. An integrated company thus finds and produces crude oil, refines it, and markets the products.

Integration introduces an interesting paradox of interests, the understanding of which is crucial to an understanding of petroleum economics. High crude-oil prices benefit producers for obvious reasons: The producer of 20 B/D of crude makes more money when crude sells for $22/bbl than when the price falls to $15. To refiners, the crude-oil price is a feedstock cost. All else being equal — especially product prices — a refiner makes more money from $15/bbl crude than from its dearer alternative.

10. An integrated company looks at crude prices from both perspectives. At least in theory, it both sells crude (from its upstream divisions) and buys it (in its downstream units), even when the transactions occur internally. The advantages of integration have been the subjects of lively economic debate since John D. Rockefeller controlled the market. Whatever its other merits and drawbacks, integration brings into focus the vital dual nature of crude oil prices as both key determinant of producer revenues

Economics is a Science

Every day it becomes more apparent that economics plays a major role in our lives. Our decisions on what profession to enter, where to work, and where to live are based in large part on economic considerations. If we own a business, economic factors dictate whether or not we earn a profit and continue to operate or fail and go into bankruptcy. Economics applies directly to the earning of our incomes and to the spending of our money. Aside from the direct application of economics to our lives, we are also affected indirectly. Economic policies help determine the level of produc­tion and employment in our nation, the amount of taxes we pay, how much aid we give to developing nations, and how much of our resources we devote to preserving our natural environment. Economic measures influence the prices we pay, the purchasing power of our money, the availability of goods and services, and our standard of living.

We must keep in mind the fact that a science is an organized body of truth coordinated, arranged, and systematized with reference to general laws or principles. Frequently when a person thinks of science, one thinks of the physical sciences, such as physics, chemistry, and biology.

There are also, however, nonphysical sciences, which include philosophy, mathe­matics, psychology, politics, and economics. Economics is considered to be a science because it is an organized body of truth coordinated, arranged, and systematized with reference to certain general laws and principles.

As a science, economics is related to other sciences. Since some of its laws, such as the law of diminishing returns, are based on physical phenomena, economics is related to physics. Since it operates within a nation, it is related to the political structure of that nation and, therefore, to political science. Income determines the standard of living. A low standard leads to social problems. Thus, economics is related to sociology. Since it deals with human behavior, it shares this phase of its study with psychology. For example, the reasons why individuals spend or save are psychological as well as economical. Economics is also related to philosophy. Economic acts are human acts, and human acts constitute a proper subject for ethics, a branch of philosophy. Occasionally someone advocates an economic doctrine that is in contradiction to a moral principle. In such a case, the moral principle should take priority over the economic principle.

Economics, especially at the advanced level, is closely related to mathematics. Economic theory and analysis today not only rely on the use of statistics, econometrics, calculus, linear programming, and other math­ematical tools, but much progress has also been made through computer application to economic problems. In its relationships with both physical and nonphysical sciences and exact and non-exact sciences, economics is certainly related to logic, the science of sound thinking, just as any study should be. It is senseless to study any subject without adhering to the rules of logic, whether reasoning from a particular instance to a general principle or from a general principle to a particular application.

Text C

Economics is a science that is concerned with the production, distribution, and consump­tion of goods and services. It is a science because it is an organized body of truth co­ordinated, arranged, and systematized with reference to certain general laws and prin­ciples.

Production is a process that brings about the creation or addition of utility. Several types of utility exist, including form, place, time, and possession utility.

Distribution as used in economics generally refers to the allocation of the total product or income among the factors of production. The factors of production are labor, land, capital, and entrepreneurship. They are reimbursed in the form of wages, rent, interest, and profits, respectively, for their contribution toward the total product. Several theories exist that seek to explain distribution.

Consumption is the utilization of a good or a service. It is the ultimate end of all economic activity. Wealth is our total collection of eco­nomic goods. An economic good is one that is material, useful, scarce, and transferable. Any activity that is useful, scarce, transferable, but not material is an economic service.

Goods can be classified as economic goods, free goods, and public goods. Economic goods may be divided into two groups, consumer goods and capital goods. Income is equivalent to the total goods and services produced over a given period.

Economics is related to other sciences, such as physics, psychology, sociology, political

science, and philosophy. Logic, a branch of philosophy, is essential for the development of sound economic reasoning. Prudential judg­ments frequently enter into the determination of economic goals and principles as well.

There is a distinction between economic theory and economic policy. The first deals with the rules and principles to be used under a given set of economic conditions. The latter deals with what we actually do under such conditions. Differences between the two fre­quently occur, since economic policy is often modified by political, social, and military policy. Economic problems and issues often can be presented in the form of a decision tree showing alternatives and choices. After proper analysis a prudential judgment can be made regarding alternative solutions.

The study of economics is divided into two broad areas: microeconomics, dealing with the actions of the individual, the firm, and the industry; and macroeconomics, dealing with aggregates, such as total production, employ­ment, and income.

Text A

Great Economists and Their Theories.

The word "economics" is derived from oikonomikos, which means skilled in household management. Although the word is very old, the discipline of economics as we understand it today is a relatively recent development. Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to an industrial society. Despite the enormous differences between then and now, the economic problems with which society struggles remain the same:

• How do we decide what to produce with our limited resources?

• How do we ensure stable prices and full employment of our resources?

• How do we provide a rising standard of living both for ourselves and for future generations?

Progress in economic thought toward answers to these questions tends to take discrete steps rather than to evolve smoothly over time. A new school of ideas suddenly emerges as changes in the economy give fresh understandings and make existing doctrines obsolete. The new school becomes the consensus (единодушный) view, which will be changed by new ideas.

This process continues today and its motivating force remains the same as that three centuries ago: to understand the economy so that we may use it wisely to achieve society's goals.

The Classical School of economic theory began with the publication in 1776 of Adam Smith's monumental work, The Wealth of Nations. Adam Smith was a Scottish philosopher and a pioneering political economist. This work in details describes consequences of economic freedom. The discussion of such concepts as a role of egoism, a division of labor, functions of the market and an international value of free economy are included in the book. "The Wealth of Nations" has formulated economy as a science, having started the doctrine of free business.

Smith stated economic laws which have explained the work of the free market and, till now, is a basis of economic education. Smith's the most known aphorism - “an invisible hand of the market” - is a phrase, which he used for an explanation of egoism as the effective lever (рычаг) in distribution of resources.

Charles Marx was the founder of scientific communism. The Marx’s doctrine has opened the laws of social development. Writing during the mid-19th century, Marx saw capitalism as an evolutionary phase in economic development. He believed that capitalism would ultimately destroy itself and be succeeded by a world without private property. An advocate of a labor theory of value, Marx believed that all production belongs to workers because they produce all value within society. He believed that the market system allows capitalists, the owners of machinery and factories, to exploit workers by denying them a fair share of what they produce. Marx predicted that capitalism would produce growing misery for workers as competition for profit led capitalists to adopt labor-saving machinery, creating a "reserve army of the unemployed" who would finally rise up and take the means of production.

Another famous economist was John Maynard Keynes. John Maynard Keynes in 1936 broke from the Classical tradition with the publication of the General Theory of Employment, Interest, and Money. The Classical view assumed that in a recession, wages and prices would decline to restore full employment. Keynes held that the opposite was true. Falling prices and wages, by depressing people's incomes, would prevent a revival of spending. He insisted that direct government intervention was necessary to increase total spending. Keynes' arguments proved the modern rationale for the use of government spending and taxing to stabilize the economy. Government spends and decreases taxes when private spending was insufficient and threatened a recession; it reduces spending and increases taxes when private spending was too great and threatened inflation. His analytic work, focusing on the factors that determine total spending, remains the core of modern macroeconomic analysis.