Oil refining companies transform crude oil into saleable products — gasoline, diesel, jet fuel, heating oil, petrochemical feedstocks — through thermal and chemical processing. The fundamental economics are captured in the crack spread: the difference between the value of refined products and the cost of crude feedstock. When crack spreads are wide, refining is exceptionally profitable regardless of the absolute oil price; when spreads narrow, earnings compress. Refinery complexity — measured by the Nelson Complexity Index — determines which crude grades can be processed and at what efficiency, with more complex refineries generally able to upgrade cheaper heavy crude into higher-value products. Geographic location matters significantly: refineries near population centers with limited import alternatives can sustain better margins than those in export-oriented or highly competitive regions. Regulatory requirements for cleaner fuels and carbon emissions create ongoing compliance investment. For investors, refining companies offer high earnings leverage to crack spread dynamics that can produce exceptional free cash flow in strong margin environments, but require cycle-aware positioning since spreads can compress significantly during periods of weak transportation fuel demand.
