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Read the text and name the main oil industry functions.
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
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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.
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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 and
principal cost for refiners.