CYVIN

Oil hit an all time high this morning of over $64 per barrel.  There are two reasons given:
1. Geopolitical environment - a terrorist bombing is expected in Saudi Arabia (#1 oil producer) and Iran has decided to go against the will of the EU and US on it's nuclear plans (#2 oil producer).  Neither of these are likely to materially impact the actual production of oil.  The UN isn't going to sanction Iran in such a way that it can't sell oil anymore.
2. Refinery capacity.

I REPEATEDLY hear about lack of refinery capacity being the factor that has been driving up oil prices for the past 6 months.  It is true that we are tapped out on refinery capacity.  BUT, let's not lose sight of how economics work!  If we are tapped out on global refining capacity, that means that consumption of oil can't increase beyond what it currently is, save building reserves.  High oil prices mean that oil companies are very very motivated to increase production at existing oil wells and explore the creation of new ones.  It is true that this takes time, but man, they are surely busting their tails to increase production to get more out at these higher prices.  So, with drillers pumping more and more out of the ground, and the price per barrel continuing to rise, we must really be increasing consumption of oil, right?  Well, if we're tapped out on refining capacity, as we have heard for the past 6 months, how can consumption be increasing?  We have not really seen a similar increase in distillate prices (gas, diesel & heating oil), because if we had, refiners would be tripping over themselves to build new capacity.  And yes, that takes even longer to get online than oil wells, which reinforces the point that there shouldn't be a link between lack of refining capacity and oil prices.  It just doesn't make sense.

So, what is the real reason?  I'm no where near qualified to say for certain, but my suspicions are this:
1. speculation.  this is an irrational bubble in oil prices.  the banter about lack of refining capacity sounds an awful lot like the use of increased web site visitors to justify high stock prices back about 6 years ago.
2. we have reached a new plateau in oil prices, based on what is in the ground vs. our current consumption.  As we start to run out of oil, and as our demand for oil increases, there will be a natural upward spike in oil prices.  It probably doesn't happen all at once, so we may be seeing the natural drifting upward based on the availability of oil in the ground.

So, I have the answer of the relationship between refineries and crude oil prices. 

The crude price that is most often referred to the light, sweet crude.  There is also heavy, sour crude.  A lot of the middle east actually produces heavy, sour crude.

Light, sweet is the easiest to refine, so when refinery capacity is low, demand for light, sweet is higher than for heavy, sour.  Heavy sour is plentiful, but it takes multiple passes through a refinery or a special refinery to use it.  So, when refinery capacity is restricted, the crude demand swings much more to light, sweet away from heavy, sour.  The price for light, sweet goes up while heavy, sour goes down.
It's crazy, but it finally makes sense.