Crack Spread

The term "crack" refers to the refining process: crude oil is literally "cracked" under heat and pressure to break long hydrocarbon chains into lighter, more valuable products. The crack spread captures, in dollar terms, how much a refiner theoretically earns by buying crude and selling the products it makes. It is calculated by subtracting the cost of crude from the value of the output — for example, the 3-2-1 crack spread assumes three barrels of crude produce two barrels of gasoline and one barrel of diesel (these are illustrative proportions used as an industry benchmark).

Suppose crude oil costs $80 per barrel (hypothetical) and a barrel's worth of gasoline output sells for $95. The gross crack spread on gasoline would be $15 per barrel. Refiners, energy traders, and analysts watch this figure to gauge refining sector profitability. A widening spread historically signals strong product demand relative to crude supply; a narrowing spread can indicate the opposite. You can track crude and product prices on the commodities page.

A key confusion: the crack spread is a gross margin, not a net profit. It does not account for refinery operating costs, energy consumption, or transportation. It is also distinct from the supply shock concept — a crack spread can move sharply without any physical disruption simply because demand for driving fuel surges seasonally. For deeper background on crude oil benchmarks see crude oil explained.