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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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how do scientists carry out super complex matrix operations when different dimension operations are n't allowed ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication .
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if a and b are both matrices of the same size sal said that a + b = b + a my question is : does a - b = b - a ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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`` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix .
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at the end , where it says that adding different dimensions is undefined- how about let 's say 2x3 + 3x2 ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five .
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does any body know how can we check two matrices are equivalent ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero .
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that matrix represents these two equations [ 0x = 1 ] first line and [ 3x = 2 ] [ 0x = 1 ] nonsense in a way ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries .
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ie [ 1 , 2 , 3 ] + [ 1 , 2 ; 3 , 4 ] could be changed to look like [ 1 , 2 , 3 ; 0 , 0 , 0 ] + [ 1 , 2 , 0 ; 3 , 4 , 0 ] is there just no good reason to add two matrices of different lengths ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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why exactly are addition and subtraction of pairs of matrices with different dimensions undefined ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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is it then because with pairs of matrices with different dimensions each , there 's no logically/mathematically rigorous way of determining which place in one matrix corresponds to which place in the other matrix ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix .
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for the subtraction and the addition of matrices , what does the order have to be , column into rows is equal to column into rows ; i.e c*r=c*r. does the rows of the 1st matrix has to be equal to the 2nd column of the matrix or do the columns and rows of both matrices have to be equal ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition .
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can someone indicate the difference to me ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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`` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix .
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is n't multipling whole numbers ( scalars ) and matrices considered multiplying matrices of different dimensions ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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`` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix .
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so , adding and subtracting matrices with different dimensions is simply just undefined ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions .
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is there a process flow chart on how to work with matrices ?
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let 's think about how we can define `` matrix addition . '' and mathematicians could have chosen any of an arbitrary number of ways to define addition . but they 've picked a way to define addition that seems – one – to make sense , and it also has nice properties that allow us to do interesting things with matrices later on . so if you were one of these mathematicians who were first defining how matrices should be added , how would you define adding this first matrix over here to the second one ? well , the most common-sense thing that might have jumped out at you – especially because these two matrices have the same dimensions – ( this is a 2-by-3 matrix . it has 2 rows and 3 columns . this is also a 2-by-3 matrix . it also has 2 rows and 3 columns . ) – is to just add the corresponding entries . and if that was your intuition , then you had the same intuition as the mathematical mainstream . that the addition of matrices should literally just be adding the corresponding entries . so in this situation , we would add 1 + 5 to get the corresponding entry in the sum – which is 6 . you can add negative seven plus zero to get negative seven . you can add five plus three to get eight . you can add -and i 'm running out of colours here- you could add zero plus eleven to get eleven . you can add three to negative one to get two . and you could add -and you could add negative ten plus seven to get negative three . and if you see this definition of matrix addition you see that it actually does not matter in what order that we actually add these matrices . i could 've done this the other way around , if i did this the other way around -so let me copy and paste this- so if i were to add this matrix -so let me copy , let me paste it- if i were to add that matrix to -let me copy and paste the other one- this matrix , copy and paste , you 'll see that the order in which i 'm adding the matrices does not matter so this is just like adding numbers . a plus b is just the same thing as b plus a . what we 'll see is this wo n't be true for every matrix operation that we study and in particular this will not be true for matrix multiplication . but if you add these two things , using the definition we just came up with , adding corresponding terms , you 'll get the exact same result . up here we added one plus five and we got six her we 'll add five plus one and we 'll get six . we get the same result because one plus five is the same thing as five plus one . here we have zero plus negative seven you get negative seven . so you 're going to get the exact same thing as we got up here . so when you 're adding matrices , if you were to call -if you were to call this matrix right over here matrix a which we normally denote with a capital , bolder letter , and you call this matrix right over here matrix b then when we take the sum of a plus b which is this thing right over here , and we see it 's the exact same thing as b , as matrix b plus matrix a . now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions . so let 's say i 'm gon na do then two two-by-two matrices . so let 's say it 's zero , one , three , two , and from that i want to subtract negative one , three , zero , and five . so you might say well maybe we just subtract corresponding entries . and that indeed is how you can define matrix subtraction . in fact you do n't even have to define matrix subtraction , you can let this fall out of what we did with scalar multiplication and matrix addition . we can view as the exact same thing -this as the exact same thing- as taking zero , one , three , two and to that we add negative one , negative one times negative one , three , zero , five . and if you work out the math you 're going to get the exact same result as just subtracting the corresponding terms . so this is going to be -what is this going to be ? zero minus negative one is positive one , one minus three is negative two , three minus zero is three , two minus five is negative three . and you 'll see that you get the exact same thing here . when you multiply negative one times negative one you get positive one , positive one plus zero is one . negative one times three plus one is negative two . fair enough . there might be a question that is lingering in your brain right now . `` okay sal , i understand when i 'm adding or subtracting matrices with the same dimensions i just add or subtract the corresponding terms . but what happens when i have matrices with different dimensions ? '' so , for example , what about the scenario where i want to add the matrix one , zero , three , five , zero , one to the matrix -so this a three-by-two matrix- and i wan na add it to , let 's say , a two-by-two matrix . five , seven , negative one , zero . what would we define this as ? well it turns out that the mathematical mainstream does not define this . this is undefined . this is undefined . so we do not define matrix addition , or matrix subtraction , when the matrices have different dimensions . there did n't seem to be any reasonable way to do this , that would actually be useful and logically consistent in some nice way .
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now let me ask you an interesting question . what if i wanted to subtract matrices ? so let 's once again think about matrices that have the same dimensions .
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what are the purpose of matrices if we have tables and other ways to display data ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number .
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does anyone know if diesel is part of the same distillation process and why is diesel so much more then gas when it is a cruder process ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step .
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why do petrol prices keep increasing ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees .
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how do the ceos pay the workers ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline .
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do you have information on what goes into the refinery agreeing to pay a specific price , in this case $ 3.25/gal ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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for the oil/gas prices graph , would n't the axes be switched because of the weird economics standard ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery .
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what is so important about the price of gas in this world ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery .
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does the other oil get used , or does it just get disposed ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon .
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does the gas station make more or less from those ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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it 's stuff like motor oil . it could be jet fuel . it could be natural gas .
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could someone explain the concept of the crack spread ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig .
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where does most of our oil come from in the world ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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i mean what is the importance of breakdown of gas prices in the laws of supply , demand and market equilibrium ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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how does oil and gas relate to microeconomics ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig .
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how come the company has to pay for the crude if they own the rig ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline .
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wait ... at around 7 , how do gas stations get any money ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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$ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees .
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why do credit card companies get a share of money paid ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do .
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does crack spread mean the marginal profit made on buying the gasoline ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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do we need to know this breakdown of gas prices in reading microeconomics ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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what is the government 's incentive to put high taxes on gas prices ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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question : i heard they political elections will affect gas prices ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel .
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i do n't know much about economics but it sounds like the economy can be thrown off balance easily ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees .
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how does the crack spread relate to the price of gasoline you pay at the pump ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline .
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why is it that gas prices do not fall as fast as they rise in relation to the price per barrel of crude oil ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline .
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why are oil prices dropping dramatically ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 .
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also , does he imply to say that the 0.25 $ is the refinery 's profit margin per gallon ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel .
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what is the bp situation that sal tries to refer to ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york .
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is the retailer only making 10cents per gallon ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline .
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i do n't see how oil prices relate to economics ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig .
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so basically , no matter the economic environment , fluctuations , or quantity of oil available , the oil rig is at all times making a profit ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts .
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wait , can someone explain the crack spread to me in more detail ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating .
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if the oil refinery has to pay the employees how are they going to make any sort of profit ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players .
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what do you mean by chains , are you referring to the molecular structure of crude oil ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig .
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does shorter chain produces inferior quality oil ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries .
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why is oil heavily taxed even though it is a everyday necessity ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts .
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what is the importances of the `` crack spread '' ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts .
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what 's a crack spread ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery .
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so natural gas is a byproduct of refining oil ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel .
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is it ever found in nature ( in a gas state ) like in underground vents near oil deposits or from being caused by geological activity ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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does the graph of oil and gas prices show the cost for producers for making oil and gasoline , or the amount of money the consumer pays for when buying gas ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons .
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is it fair to say that this example does n't account for the amount of money the refinery needed to spend to process the $ 90 of crude oil before they could sell it for $ 100 and that they would probably make less than $ 10 when you account for processing costs ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players .
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what is gasoline and crude oil , and what is it used for ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts .
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does anyone can explain that term crack spread ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step .
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the blue line in the given graph denotes new york state 's oil prices ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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$ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees .
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what is the credit card procces ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery .
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can anyone explain how the hedging-mechanics involved drive the gas price up and down thus defying the law of supply and demand ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig .
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how many barrels of oil are there worldwide and how many years of oil are there left ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station .
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so tax is applied before the 0.15 cents extra ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline .
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per barrel , what are the approximate operating costs of the oil rigs ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees .
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would you want to pay or use your credit card ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread .
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how much does the extraction process cost ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts .
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what is the crack spread ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend .
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why are the gas prices going high now ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy .
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why would the gas stations give customers a discount when paying with cash ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy .
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it is because they want to give them an incentive to keep paying with cash so that the credit card companies do n't benefit from the transaction ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts .
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can someone explain throughly what the crack spread is ?
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what i hope to do in this video is explore the relationship between oil and gas prices . and you do see that there is a very strong correlation between how they trend . this right over here is oil prices , quoted at a specific point on the planet . it is dependent on where you are . as you can see , this is in us dollars per barrel . in early 2008 around $ 100 went up to $ 140 then came back down . and then it 's been trending up ever since . now it 's about $ 100 per barrel . this is where we see the oil prices are per barrel basis . and then related to that you see the price of gasoline . and this is even more geographically specific . because not only do have transportation costs , but you also have very region-specific taxation for oil and sometimes regulation . but taxation is the big part of it . but you do see it trends up when oil prices trend up and then it goes down . and this is on a per gallon basis . and these are the prices right over here in new york . but they do n't move completely lock step . if anything you see that the oil price on a per barrel basis is much more volatile than the gasoline price right over here . but there is the same general trend . when the oil prices moves up this tends to move up . but it 's not always in the same percentage . but there 's definitely a relationship . now , before trying to figure out when you pay , say , $ 4 at the pump how much of that is oil , and how much is refining , and how much is transportation let 's at least kind of build up to that to think about just how does the oil even end up in your car . and then we can build up that price of the oil , or the price of the gasoline , i should say . so this right over here , you are probably familiar with these . these are oil rigs , two very different types . this is an offshore oil rig . this is a land based oil rig . but they 're both doing the same fundamental thing . they 're drilling into the ground until they get to a pocket of oil . and then they will pump that oil out and try to transport it to the market somehow , first going through a refinery . offshore is really fascinating . it really is an engineering marvel how they do it . it might be sitting out here in the ocean . and it will literally go to the bottom of the ocean , go to the sea floor , and then drill from there to actually get to the oil pockets . so it 's really an engineering marvel . and you have to be very careful . it can be very dangerous working on an oil rig . and obviously , if there 's an accident on them it could be an environmental nightmare , like what we saw what the bp situation . but it is undoubtedly an engineering marvel . now once you have that oil you need to get it to a refinery so that oil can be broken up into it useful parts . and the way that is typically transported to a refinery is some combination of a pipeline or an oil tanker . this right over here is actually the alaskan pipeline . and it takes oil from the very northern part of alaska to the southern part . so that it can then be put on oil tankers , which can then transported anywhere in the world to refineries . it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther . and then from there , it gets to a refinery . and so we could start to think about how the price of oil is built up before we even think about what a refinery even does . so let 's say that the current price of oil -- and i kind of rigged the numbers , not to be too punny -- to work out fairly well . but let 's say that the current price of oil is $ 90 per barrel . so , and this is just a units thing , a barrel is equal to 42 gallons . so if i say i have a barrel of water i 'm really saying that i have 42 gallons of water . and now all 42 gallons of crude oil do not turn into 42 gallons of gasoline . out of 42 gallons of crude oil you can get about 19 or 20 gallons of gasoline . for the sake of to make the numbers easy i 'll just go with 20 , 20 gallons of gasoline . and then the rest will be other stuff . so 22 gallons of other stuff . it might not even be 22 gallons . in fact it wo n't be . some of it is just waste . some of it is byproduct . some of this is actually used to fuel the refining process . so let me not write that number . so the rest is other stuff . so this refinery is paying $ 90 per barrel when it gets it . so that incorporates what the oil producers are getting . it also takes care of the transportation costs to the refinery . and let 's say just for the sake of argument that the refinery can sell -- let 's say it 's does n't even take care of the transportation network . let 's say there 's people who are willing to buy directly from the refinery at the refinery . they 're willing to buy gasoline at $ 3.25 per gallon . so the gas at refinery people are willing to spend , or the transporter is willing to pay them , $ 3.25 per gallon . and so from this barrel they 're going to get 20 gallons of gasoline . they can sell that at $ 3.25 per gallon . so you 're going to have 20 times $ 3.25 , which is let 's see 20 times 3 is 60 . and then 20 times $ 0.25 is $ 5 . so they 're going to get $ 65 for the gasoline . and then let 's just say for the sake of argument they get $ 35 for the other stuff . and some of this other stuff is quite useful . it 's stuff like motor oil . it could be jet fuel . it could be natural gas . and it could be obviously fuel to actually fuel the refinery . and so let 's actually start building this up right over here . so one way to think about it -- so let me draw it this way . we 're up to $ 3.25 per gallon , is what the price is exiting the refinery , what the refineries getting for it . so let me draw it down here . so let 's say that this is $ 1 . this is $ 2 . and this is $ 3 . and then they 're getting $ 3.25 would be like that . that is what the refinery is getting . and one way to think about it , it 's not completely because all of their profit is n't coming from the gasoline . but one way to think about it is the refinery , after refining this barrel of crude oil that they paid $ 90 for , they 're going to get $ 65 for the gasoline . and then they 're going to get $ 35 for the other stuff . so they made a combination of , what is it , they made $ 100 . they 're able to buy this crude oil at $ 90 , do what they had to do . and then they 're able to sell it for $ 100 . so one way to think about it is that , at least in this situation , 90 % of what they 're getting for it was their cost . but it breaks down between the other stuff in the gasoline . so it 's not super easy to break down . but you can say , in this example , a good chunk of this was the cost of gasoline . and it obviously depends how you account for it . but a good chunk of it , not the cost of gasoline , a good chunk of it is the cost the crude . and this right over here , you could say is how much the refinery actually makes . and the amount that the refinery gets versus what it costs -- so the amount they get for all of the product they produce versus the crude oil that they have to pay for , this margin , this is often called the crack spread . and just to understand what a refinery is doing , it 's breaking up that crude oil into its various parts . and it 's actually a fairly simple -- well , i do n't want to say simple process . obviously when you look at a refinery it does not look like a simple thing . but the idea for the process is fairly straightforward . it takes the crude oil and it heats it up through a boiler . so right over here the crude is getting really hot . this is the boiler . and the boiler is fueled , often fueled or usually fueled , by some of the outputs of that oil . so this is fire , just to symbolize that it 's getting hot . and then it goes into a distillation column . and the distillation column , that 's why you see all of these towers right over here in an oil refinery . those are the distillation columns . and so in a distillation column the different parts of the oil have different boiling temperatures . so the very long carbon chains in the oil have very high boiling temperatures . so as hot as they are they 're not going to boil . they 're going to stay in their liquid form down here . and then the slightly shorter chains they 're going to boil and evaporate a little bit . but then as they rise they 're going to cool down . and then they might condense right over here . then they can be pulled away in pipes and then things that are even slightly shorter chains than that will go a little bit higher before cooling to even lower temperatures before going back into a liquid state . and then they can be collected over here . all the way until you get to the very shortest chains , like the natural gas , that would be collected out at the top . and the gasoline that you put in your car it might be collected right over here from this . so you 're essentially breaking up that oil into its different parts . and on some of the other parts this might be motor oil right over here , the thing that you used to lubricate your engine , not fuel your engine . you might have jet fuel up here . and you have a whole ton of other different -- kerosene , all sorts of things , you are able to take out of that crude oil . but anyway , let 's get back to the gasoline . so the refinery got $ 3.25 . now we have to transport that gasoline . so let 's say $ 0.10 for transportation . so this is at $ 3.25 right over here . so now we 're going to have $ 0.10 for transportation . so that right over here is $ 0.10 for transportation . i 'll just write transportation for short . and then it goes to the gas station . and as i mentioned , gas is heavily , heavily taxed . and depends on what jurisdiction , what country , and even states within countries . but for the sake of simplicity , let 's just say it 's taxed at $ 0.50 a gallon , which is not that different from what it 's taxed at in many states . so now we 're at $ 0.50 a gallon . so that would be right around , so let 's say -- actually , let me do a new color . i keep using the same colors over and over again . so let 's say this is $ 0.50 a gallon tax . so that is tax right over there going to the state and federal government . and so let 's see $ 3.25 is what the refinery got , $ 0.10 for transportation , gets us to $ 3.35 , $ 0.50 tax , so this is $ 0.50 tax , gets us to $ 3.85 . and then now we 're at the gas station . there essentially it 's going to cost $ 3.85 a gallon for that fuel . the gas station needs to make some money to pay their costs . the gas station sales you that fuel at $ 4 a gallon . and so you might say , ok , the gas station , that already seems surprisingly low . and that is actually on the order of how much gas stations actually make on a per gallon basis . you might say , hey , the gas station made $ 0.15 . $ 4 minus the $ 3.85 that takes in all of these other costs . but actually a huge amount of that $ 0.15 actually goes to the credit card processors . because most people pay the pump with a credit card . and that 's why some gas stations like it , will give you a discount if you pay in cash , because of that $ 0.15 as much as , and or in general around $ 0.05 of that will go to the credit cards , will go to the credit card processors , credit card fees . i know this is getting messy . so the retailer will be left with about $ 0.10 of margin . so anyway , hopefully that gives you a sense of how crude oil turns into gasoline . and when you pay at the pump what is the breakdown for the different players . and how much of the money is going to those different players .
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it could go straight to a tanker . actually even some offshore places you could use a tanker . or sometimes even if they 're close enough to land they actually might have a pipeline that will take it to land where it can go to a refinery or go to an oil tanker so it can be transported even farther .
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why can 's cars use diesel ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning .
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how would you solve for the velocity of the observer if the observer first goes towards the source then away from the source ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning .
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is the period affected too if the observer is going to the source or away from the source ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ?
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what would the formula be if the two objects are moving 1 ) towards each other ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch .
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what will be the frequency heard by a stationary observer if source is moving towards the observer with speed of sound ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch .
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will observer hear any sound ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ?
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what formula would be using when the source move toward to the observer and the observer move toward to the source at the same time ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency .
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how does the speaker strike your location ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing .
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at about why is time taken by the wave to reach the observer tobs ?
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the frequency that you 'll observe when standing next to a speaker is determined by the rate at which wave crests strike your location . if the speaker moves toward you , you 'll hear a higher frequency . if the speaker moves away from you , you 'll hear a lower frequency . but what will happen if you run toward the speaker ? you 'll hear a higher frequency because more wave crests will strike you per second . if you run away from the speaker , you 'll hear a lower frequency because less wave crests will strike you per second . how do we figure out exactly what frequency you 'll hear ? to find out , let 's zoom in on what 's going on . say a wave crest has just made it to your location . the time it takes until another wave crest hits you will be the period that you 'll observe since that will be the time you observed between wave crests . if you 're at rest , you 'll just have to wait until another wave crest gets to your location . the period you 'd observe would be the actual period of the wave emitted by the speaker . if you 're running towards the speaker , or wave source , you do n't have to wait as long since you 'll meet the next wave crest somewhere in between . if you can figure out how long it takes for the next crest to hit you , that would be the period that you 'd observe and experience . let 's say you 're moving at a constant speed that we 'll call vobs , for the speed of the observer . the distance you 'll travel in order to reach the next crest will be your speed times the time required for you to get there . this time is just going to be the period you observe since it 'll be the time you experience between wave crests . we 'll write the time as tobs for period of the observer . similarly , the distance the next wave crest will travel in meeting you , will be the speed of the wave vw times that same amount of time , which is the period you are observing . now what do we do ? we know that the distance between crests is the actual wavelength of the wave , not the observed wavelength but the actual source wavelength emitted by the speaker at rest . if we add up the distance that we ran plus the distance that the next wave crest traveled to meet us , they have to equal one wave length in this case . we can now pull out a common factor of tobs . if we solve this for the period of the observer , we find that it will be equal to the wavelength of the source , divided by the speed of the wave , plus the speed of the observer . this is a perfectly fine equation for the period experienced by a moving observer but one side 's in terms of period and the other side 's in terms of wavelength . if we want to compare apples to apples we can put this wavelength in terms of period by using this formula . the velocity of the wave must equal the wavelength of the source divided by the period of the source . since this wavelength was the actual wavelength emitted by the source or the speaker , we have to also use the actual period emitted by the source not the observed period . if we solve for the wavelength , we 'd get that the speed of the wave times the period of the source has to be equal to the wavelength of the source . we can plug in this expression for wavelength and we get a new equation that says that the observed period will be equal to the speed of the wave times the period of the source divided by the speed of the wave plus the speed of the observer . this is a perfectly fine equation to find the observed period , but physicists and other people actually prefer talking about frequency more than period . we can turn this statement that relates periods into a statement that related frequencies by just inverting both sides , or taking one over both sides . we 'll get one over the observed period equals the speed of the wave plus the speed of the observer divided by the speed of the wave times the period of the source . but look , one over the observed period is just the frequency experienced by the observer . on the right hand side i 'm going to pull out a factor of one over the period of the source , which leaves the velocity of the wave plus the velocity of the observer divided by the velocity of the wave . for the final step , we can put this entirely in terms of frequencies by noting that one over the period of the source is just the frequency of the source . phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch . this formula only works for the case of an observer moving toward a source . what do we do if the observer is moving away from the source ? let 's start all over from the very beginning . just kidding . since you 're running away from the speaker instead of toward it , you can just stick in a negative sign in front of the speed of the observer . so here we have it , a single equation that describes the doppler shift experienced for an observer moving toward or away from a stationary source of sound . use the plus sign if you 're moving toward the source of the sound and use the negative sound if you 're moving away from the source of the sound .
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phew , there it is . this is the formula to find the frequency experienced by an observer moving toward a source of sound . note that the faster the observer moves , the higher the note or pitch .
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will the frequency stay the same if an object making a sound is moving towards you , than when it is stationary ?
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- let 's now see if we can tackle the questions . the passage most strongly suggests that researchers at the martin prosperity institute share which assumption ? we saw the writer , he works for the martin prosperity institute . and he 's trying to quantify how much cost there is involved when people having to commute every minute of cost . employees who work from home are are more valuable to their employers than employees that commute . no , he 's not saying that . he 's just saying , when you commute , regardless how valuable you are to employer , you 're just wasting time , having stress , etcetera . employees whose commutes are shortened , will use the time saved to do additional , productive work for their employers . ah , maybe . arguably , they could have used that time to take a vacation , have a break , de-stress . they do n't say this directly . i mean this is interesting . let 's read the other choices . employees can conduct business activities such as composing memos or joining conference calls while commutting . i did n't get any sense that they want people to work while they 're driving . employees who have lengthy commutes tend to make more money than employees that have shorter commutes . so they never made that argument . so out of all these , this one seems to be the best , employees whose commutes are shortened will use their time saved to do additional , productive work for their employers . and i 'm a little bit on the fence of this because they quantified the number of hours and they said if people work those hours , that would be the value to the economy . but they 're not saying that that would convert directly to additional productive work . it could be time for the person to recharge , etcetera it did n't into a lot of detail with what the person would do with that time , it just quantified that time in terms of lost work time . but out of all of them , i 'll go with this one . as used in line 51 , intense most nearly means , let 's read line 51 . the coming decades will likely see more intense clustering of jobs , innovations and productivity , and a smaller number of bigger city and city regions . the clustering of jobs , they 're talking about a higher concentration of things happening . so , this is not talking about an emotional clustering of jobs , it 's talking about a concentrated clustering of jobs . they 're not saying a brilliant or determined clustering of jobs either . for these you can literally just replace the word and see how it sounds . and see if it changes the meaning of what they were trying to talk about . alright . the next one . which claim about traffic congestion is supported by the graph ? a . new york city commuters spend less time annually delayed by traffic congestions than the average for very large cities . no , that 's not true , new york spends more than the average for very large ciites . los angeles commuters are delayed more hours annually than traffic congestion , than are commuters in washington d.c. no , they are not , d.c. is the top right over here . commuters in washington d.c. face greater delays annually due to traffic congestion than do commuters in new york city . yep , we see that in washington d.c. has the most delays annually . so i would go with that . commuters in detroit spend more time delayed annually by traffic congestion than do commuters in houston , altanta , chicago . detroit 's near the bottom of at least this list . it actually has less delay than atlanta , chicago and houston .
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but they 're not saying that that would convert directly to additional productive work . it could be time for the person to recharge , etcetera it did n't into a lot of detail with what the person would do with that time , it just quantified that time in terms of lost work time . but out of all of them , i 'll go with this one .
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what is a tip to be a fast reader while understanding it at the same time ?
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- let 's now see if we can tackle the questions . the passage most strongly suggests that researchers at the martin prosperity institute share which assumption ? we saw the writer , he works for the martin prosperity institute . and he 's trying to quantify how much cost there is involved when people having to commute every minute of cost . employees who work from home are are more valuable to their employers than employees that commute . no , he 's not saying that . he 's just saying , when you commute , regardless how valuable you are to employer , you 're just wasting time , having stress , etcetera . employees whose commutes are shortened , will use the time saved to do additional , productive work for their employers . ah , maybe . arguably , they could have used that time to take a vacation , have a break , de-stress . they do n't say this directly . i mean this is interesting . let 's read the other choices . employees can conduct business activities such as composing memos or joining conference calls while commutting . i did n't get any sense that they want people to work while they 're driving . employees who have lengthy commutes tend to make more money than employees that have shorter commutes . so they never made that argument . so out of all these , this one seems to be the best , employees whose commutes are shortened will use their time saved to do additional , productive work for their employers . and i 'm a little bit on the fence of this because they quantified the number of hours and they said if people work those hours , that would be the value to the economy . but they 're not saying that that would convert directly to additional productive work . it could be time for the person to recharge , etcetera it did n't into a lot of detail with what the person would do with that time , it just quantified that time in terms of lost work time . but out of all of them , i 'll go with this one . as used in line 51 , intense most nearly means , let 's read line 51 . the coming decades will likely see more intense clustering of jobs , innovations and productivity , and a smaller number of bigger city and city regions . the clustering of jobs , they 're talking about a higher concentration of things happening . so , this is not talking about an emotional clustering of jobs , it 's talking about a concentrated clustering of jobs . they 're not saying a brilliant or determined clustering of jobs either . for these you can literally just replace the word and see how it sounds . and see if it changes the meaning of what they were trying to talk about . alright . the next one . which claim about traffic congestion is supported by the graph ? a . new york city commuters spend less time annually delayed by traffic congestions than the average for very large cities . no , that 's not true , new york spends more than the average for very large ciites . los angeles commuters are delayed more hours annually than traffic congestion , than are commuters in washington d.c. no , they are not , d.c. is the top right over here . commuters in washington d.c. face greater delays annually due to traffic congestion than do commuters in new york city . yep , we see that in washington d.c. has the most delays annually . so i would go with that . commuters in detroit spend more time delayed annually by traffic congestion than do commuters in houston , altanta , chicago . detroit 's near the bottom of at least this list . it actually has less delay than atlanta , chicago and houston .
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i mean this is interesting . let 's read the other choices . employees can conduct business activities such as composing memos or joining conference calls while commutting .
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how many minutes do you recommand to read a single passage during the act ?
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- let 's now see if we can tackle the questions . the passage most strongly suggests that researchers at the martin prosperity institute share which assumption ? we saw the writer , he works for the martin prosperity institute . and he 's trying to quantify how much cost there is involved when people having to commute every minute of cost . employees who work from home are are more valuable to their employers than employees that commute . no , he 's not saying that . he 's just saying , when you commute , regardless how valuable you are to employer , you 're just wasting time , having stress , etcetera . employees whose commutes are shortened , will use the time saved to do additional , productive work for their employers . ah , maybe . arguably , they could have used that time to take a vacation , have a break , de-stress . they do n't say this directly . i mean this is interesting . let 's read the other choices . employees can conduct business activities such as composing memos or joining conference calls while commutting . i did n't get any sense that they want people to work while they 're driving . employees who have lengthy commutes tend to make more money than employees that have shorter commutes . so they never made that argument . so out of all these , this one seems to be the best , employees whose commutes are shortened will use their time saved to do additional , productive work for their employers . and i 'm a little bit on the fence of this because they quantified the number of hours and they said if people work those hours , that would be the value to the economy . but they 're not saying that that would convert directly to additional productive work . it could be time for the person to recharge , etcetera it did n't into a lot of detail with what the person would do with that time , it just quantified that time in terms of lost work time . but out of all of them , i 'll go with this one . as used in line 51 , intense most nearly means , let 's read line 51 . the coming decades will likely see more intense clustering of jobs , innovations and productivity , and a smaller number of bigger city and city regions . the clustering of jobs , they 're talking about a higher concentration of things happening . so , this is not talking about an emotional clustering of jobs , it 's talking about a concentrated clustering of jobs . they 're not saying a brilliant or determined clustering of jobs either . for these you can literally just replace the word and see how it sounds . and see if it changes the meaning of what they were trying to talk about . alright . the next one . which claim about traffic congestion is supported by the graph ? a . new york city commuters spend less time annually delayed by traffic congestions than the average for very large cities . no , that 's not true , new york spends more than the average for very large ciites . los angeles commuters are delayed more hours annually than traffic congestion , than are commuters in washington d.c. no , they are not , d.c. is the top right over here . commuters in washington d.c. face greater delays annually due to traffic congestion than do commuters in new york city . yep , we see that in washington d.c. has the most delays annually . so i would go with that . commuters in detroit spend more time delayed annually by traffic congestion than do commuters in houston , altanta , chicago . detroit 's near the bottom of at least this list . it actually has less delay than atlanta , chicago and houston .
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- let 's now see if we can tackle the questions . the passage most strongly suggests that researchers at the martin prosperity institute share which assumption ?
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who won the nobel prize winning economist ?
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- let 's now see if we can tackle the questions . the passage most strongly suggests that researchers at the martin prosperity institute share which assumption ? we saw the writer , he works for the martin prosperity institute . and he 's trying to quantify how much cost there is involved when people having to commute every minute of cost . employees who work from home are are more valuable to their employers than employees that commute . no , he 's not saying that . he 's just saying , when you commute , regardless how valuable you are to employer , you 're just wasting time , having stress , etcetera . employees whose commutes are shortened , will use the time saved to do additional , productive work for their employers . ah , maybe . arguably , they could have used that time to take a vacation , have a break , de-stress . they do n't say this directly . i mean this is interesting . let 's read the other choices . employees can conduct business activities such as composing memos or joining conference calls while commutting . i did n't get any sense that they want people to work while they 're driving . employees who have lengthy commutes tend to make more money than employees that have shorter commutes . so they never made that argument . so out of all these , this one seems to be the best , employees whose commutes are shortened will use their time saved to do additional , productive work for their employers . and i 'm a little bit on the fence of this because they quantified the number of hours and they said if people work those hours , that would be the value to the economy . but they 're not saying that that would convert directly to additional productive work . it could be time for the person to recharge , etcetera it did n't into a lot of detail with what the person would do with that time , it just quantified that time in terms of lost work time . but out of all of them , i 'll go with this one . as used in line 51 , intense most nearly means , let 's read line 51 . the coming decades will likely see more intense clustering of jobs , innovations and productivity , and a smaller number of bigger city and city regions . the clustering of jobs , they 're talking about a higher concentration of things happening . so , this is not talking about an emotional clustering of jobs , it 's talking about a concentrated clustering of jobs . they 're not saying a brilliant or determined clustering of jobs either . for these you can literally just replace the word and see how it sounds . and see if it changes the meaning of what they were trying to talk about . alright . the next one . which claim about traffic congestion is supported by the graph ? a . new york city commuters spend less time annually delayed by traffic congestions than the average for very large cities . no , that 's not true , new york spends more than the average for very large ciites . los angeles commuters are delayed more hours annually than traffic congestion , than are commuters in washington d.c. no , they are not , d.c. is the top right over here . commuters in washington d.c. face greater delays annually due to traffic congestion than do commuters in new york city . yep , we see that in washington d.c. has the most delays annually . so i would go with that . commuters in detroit spend more time delayed annually by traffic congestion than do commuters in houston , altanta , chicago . detroit 's near the bottom of at least this list . it actually has less delay than atlanta , chicago and houston .
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- let 's now see if we can tackle the questions . the passage most strongly suggests that researchers at the martin prosperity institute share which assumption ?
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sometimes in passages there are phrases that in the questions following they may ask you `` the author uses the phrase `` ... `` mainly to .. `` ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared .
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how do i know what degree something is ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form .
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why not use long division ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here .
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how are you getting 7xto the 6th power to 7x to the 4th power ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it .
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is n't the remainder of the division supposed to be 2x-1 instead of 2x+1 ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form .
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how do you even divide them ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there .
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why does n't 2x/ ( x^2 ) just simplify to 2/x ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x .
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what is useful about writing in that particular form ?
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the quotient of two polynomials -- a of x and b of x -- can be written in the form a of x over b of x is equal to q of x plus r of x over b of x -- where q of x and r of x are polynomials and the degree of r of x is less than the degree of b of x . write the quotient 7x to the sixth plus x to the third plus 2x plus 1 over x squared in this form . well , this one is pretty straightforward because we 're dividing by x squared . so you could literally view this as 7x to the sixth divided by x squared plus x to the third divided by x squared plus 2x divided by x squared plus 1 divided by x squared . so we could just do this term by term . what 's 7x to the sixth divided by x squared ? well , x to the sixth divided by x squared is x to the fourth . so it 's going to be 7x to the fourth power . and then , same thing right over here . plus x to the third divided by x squared . well , that 's just going to be x . so plus x . and then , we 're going to have 2x divided by x squared . but remember , we want to write it in a form of r of x over b of x -- where r of x has a lower degree than b of x . well , 2x has a lower degree than x squared . here this is degree 1 . this is degree 2 . so you could write it as plus 2x over x squared . like that . and then , you could write plus 1 over x squared . so you could do this -- plus 1 over x squared . so you could write it like that . but that 's not exactly the form that they want . they want us to write it q of x -- and you could view that as 7x to the fourth plus x . and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it . so let me just put some parentheses here so that it interprets my typing correctly . so notice , this part of the polynomial , these terms have an equal or higher degree than x squared . so i just divided those . 7x to the sixth divided by x squared is 7x to the fourth . x to the third divided by x squared is x . and then , once i got two terms that had a lower degree than x squared , i just left on there . i just said plus whatever 2x plus 1 divided by x squared is . and that 's the form that they wanted us to write it in . we 'll check our answer . and we got it right .
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and then , they want plus r of x over b of x so plus some polynomial over x squared in this case . so instead of writing it as 2x over x squared plus 1 over x squared , we could just write it as 2x plus 1 over x squared . so one way to think about it .
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are n't we supposed to get a negative exponent ( ^-1 ) when 2x/x^2 , the putting it on the bottom as a possitive exponent ?
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- [ sal ] we 've already had several videos where we give an overview of the crusades . and just as a review , they happen over roughly 200 years during the high middle ages . the first crusade at very end of the 11th century and actually the most successful of the crusades , allowing the western european powers to take control of jerusalem and much of the holy land . and you could see that here on this diagram where jerusalem , at least , goes from green to red , controlled by the western european , the latin christians . and they 're able to maintain control through these crusader kingdoms all the way until 1187 , when salah ad-din is able to retake control of jerusalem . then a few decades later , as we go into the sixth crusade and the barons ' crusade , which is n't depicted here , the western europeans are able to take more control but eventually , the muslims take control of jerusalem and as we enter into the 14th century , they have control of the entire holy land . now while that is happening , constantinople gets sacked at the end of the fourth crusade by the crusaders themselves and even though it 's retaken , this is really the beginning of the end for the byzantine empire . so let 's think a little bit about how the crusades changed europe and the entire world . well , one of the obvious impacts of the crusades was just the amount of death it caused . it 's estimated that the death toll from the crusades is two to six million people just from western europe . and just to put that into perspective , the european population at the time was about 60 to 70 million folks . so we 're talking about four to 10 percent of the population dying in the crusades . and this is n't fully accounting for all of the death and destruction that happened on the way to the crusades or that happened in the middle east as well . if you look at this map of what the region looks like as we get into the 14th century , right over here , you can see that although the middle east is still in control of the muslims , muslims have for the most part been pushed out of the iberian peninsula , and they have a little bit of a foothold right here in grenada . and this reconquista is going to continue all the way until 1492 when what will be the spanish are able to push out all of the muslims from the iberian peninsula and as they do that , they also expel the jews . you also have territorial gains in the north of europe that 's a little bit harder to see on this map over here . as i mentioned in previous video , part of this crusader mentality was not just about taking land back for the byzantines or taking land from the muslims , but also trying to take land or convert what were perceived as pagans in the north , german tribes that had not as yet converted to christianity . and so that helped for territorial expansion in the north of europe . now a big theme in the crusades was the power of the pope . remember , the crusades were started by a pope working people up , saying , `` hey , let 's go help the byzantines . `` let 's go take back land from the muslims . '' pope urban ii . and over the course of this 200 years , you have this religious fervor where the pope is organizing these crusades . people are feeling this religious spirit . many people are , before going on their crusade , they 're bequeathing their land to the church . if they die , and many of these lords do end up dying , they 're giving their property to the church , headed by the pope . kings also gained power during the crusades . in other videos , we talk about the feudal system and many times the vassals to the kings , the dukes , the counts , the barons , often had more control over their territory than the kings might have had . and they were constantly squabbling with each other but as people started to focus their energies on this external adventure known as the crusades , first of all , many of these lords died , their property went back to the state , went back to the kings . you start having less internal dissension . in a way , this idea that pope urban ii thought of at the end of the 11th century . hey , why do n't i point people externally so they stop worrying about what 's going on internally ? it kind of worked . another trend is the importance of cities . in the feudal system , it 's all about these manors and all about these estates . but in order to finance the crusades , centers of trade and commerce became more important and also , as there was more interaction between west and east and more people traveling , you can imagine that it fostered trade which centered at these cities . and that goes into the next point , commerce and trade itself was fostered by the crusades . it was n't all fighting . the venetians and other trader city-states , they helped facilitate the movement of arms and people from west to east , but on the way back , they also brought goods to trade . and so they became much , much more powerful . in fact , by the end of the crusades , as we get into the 14th century , venice , which is right over here on our map , was considered the richest and most powerful city in europe . venice has all of this trader wealth and it 's not just from trade . as you might remember from previous videos , when constantinople was sacked , it was sacked in part by these venetian traders and after that , they built an empire . they broke up the byzantine empire and took some of it for themselves . and so it 's not a coincidence that as we get into the 14th and 15th century , places like venice and florence , famously sponsored by the medici family , a famous banking family . so once again , these are centers of trade , centers of commerce became the places where the renaissance would first flourish . and last but not least , as in some ways bloody and dark a time as the crusades were , they were also associated with learning because you had all of these people go from western europe to the middle east and the holy land and at that time , remember , we have videos on the golden age of islam . in a lot of ways , they were shepherding the knowledge of the ancient greeks and the romans and they were merging that with knowledge from the indians and the chinese and also coming up with innovations on their own . and a lot of the western europeans brought that back to europe .
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- [ sal ] we 've already had several videos where we give an overview of the crusades . and just as a review , they happen over roughly 200 years during the high middle ages .
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how heavy was medieval armor ?
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- [ sal ] we 've already had several videos where we give an overview of the crusades . and just as a review , they happen over roughly 200 years during the high middle ages . the first crusade at very end of the 11th century and actually the most successful of the crusades , allowing the western european powers to take control of jerusalem and much of the holy land . and you could see that here on this diagram where jerusalem , at least , goes from green to red , controlled by the western european , the latin christians . and they 're able to maintain control through these crusader kingdoms all the way until 1187 , when salah ad-din is able to retake control of jerusalem . then a few decades later , as we go into the sixth crusade and the barons ' crusade , which is n't depicted here , the western europeans are able to take more control but eventually , the muslims take control of jerusalem and as we enter into the 14th century , they have control of the entire holy land . now while that is happening , constantinople gets sacked at the end of the fourth crusade by the crusaders themselves and even though it 's retaken , this is really the beginning of the end for the byzantine empire . so let 's think a little bit about how the crusades changed europe and the entire world . well , one of the obvious impacts of the crusades was just the amount of death it caused . it 's estimated that the death toll from the crusades is two to six million people just from western europe . and just to put that into perspective , the european population at the time was about 60 to 70 million folks . so we 're talking about four to 10 percent of the population dying in the crusades . and this is n't fully accounting for all of the death and destruction that happened on the way to the crusades or that happened in the middle east as well . if you look at this map of what the region looks like as we get into the 14th century , right over here , you can see that although the middle east is still in control of the muslims , muslims have for the most part been pushed out of the iberian peninsula , and they have a little bit of a foothold right here in grenada . and this reconquista is going to continue all the way until 1492 when what will be the spanish are able to push out all of the muslims from the iberian peninsula and as they do that , they also expel the jews . you also have territorial gains in the north of europe that 's a little bit harder to see on this map over here . as i mentioned in previous video , part of this crusader mentality was not just about taking land back for the byzantines or taking land from the muslims , but also trying to take land or convert what were perceived as pagans in the north , german tribes that had not as yet converted to christianity . and so that helped for territorial expansion in the north of europe . now a big theme in the crusades was the power of the pope . remember , the crusades were started by a pope working people up , saying , `` hey , let 's go help the byzantines . `` let 's go take back land from the muslims . '' pope urban ii . and over the course of this 200 years , you have this religious fervor where the pope is organizing these crusades . people are feeling this religious spirit . many people are , before going on their crusade , they 're bequeathing their land to the church . if they die , and many of these lords do end up dying , they 're giving their property to the church , headed by the pope . kings also gained power during the crusades . in other videos , we talk about the feudal system and many times the vassals to the kings , the dukes , the counts , the barons , often had more control over their territory than the kings might have had . and they were constantly squabbling with each other but as people started to focus their energies on this external adventure known as the crusades , first of all , many of these lords died , their property went back to the state , went back to the kings . you start having less internal dissension . in a way , this idea that pope urban ii thought of at the end of the 11th century . hey , why do n't i point people externally so they stop worrying about what 's going on internally ? it kind of worked . another trend is the importance of cities . in the feudal system , it 's all about these manors and all about these estates . but in order to finance the crusades , centers of trade and commerce became more important and also , as there was more interaction between west and east and more people traveling , you can imagine that it fostered trade which centered at these cities . and that goes into the next point , commerce and trade itself was fostered by the crusades . it was n't all fighting . the venetians and other trader city-states , they helped facilitate the movement of arms and people from west to east , but on the way back , they also brought goods to trade . and so they became much , much more powerful . in fact , by the end of the crusades , as we get into the 14th century , venice , which is right over here on our map , was considered the richest and most powerful city in europe . venice has all of this trader wealth and it 's not just from trade . as you might remember from previous videos , when constantinople was sacked , it was sacked in part by these venetian traders and after that , they built an empire . they broke up the byzantine empire and took some of it for themselves . and so it 's not a coincidence that as we get into the 14th and 15th century , places like venice and florence , famously sponsored by the medici family , a famous banking family . so once again , these are centers of trade , centers of commerce became the places where the renaissance would first flourish . and last but not least , as in some ways bloody and dark a time as the crusades were , they were also associated with learning because you had all of these people go from western europe to the middle east and the holy land and at that time , remember , we have videos on the golden age of islam . in a lot of ways , they were shepherding the knowledge of the ancient greeks and the romans and they were merging that with knowledge from the indians and the chinese and also coming up with innovations on their own . and a lot of the western europeans brought that back to europe .
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if they die , and many of these lords do end up dying , they 're giving their property to the church , headed by the pope . kings also gained power during the crusades . in other videos , we talk about the feudal system and many times the vassals to the kings , the dukes , the counts , the barons , often had more control over their territory than the kings might have had .
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did the crusades have an impact upon religion at the time and how many believers were lost or gained in both islam and christianity ?
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- [ sal ] we 've already had several videos where we give an overview of the crusades . and just as a review , they happen over roughly 200 years during the high middle ages . the first crusade at very end of the 11th century and actually the most successful of the crusades , allowing the western european powers to take control of jerusalem and much of the holy land . and you could see that here on this diagram where jerusalem , at least , goes from green to red , controlled by the western european , the latin christians . and they 're able to maintain control through these crusader kingdoms all the way until 1187 , when salah ad-din is able to retake control of jerusalem . then a few decades later , as we go into the sixth crusade and the barons ' crusade , which is n't depicted here , the western europeans are able to take more control but eventually , the muslims take control of jerusalem and as we enter into the 14th century , they have control of the entire holy land . now while that is happening , constantinople gets sacked at the end of the fourth crusade by the crusaders themselves and even though it 's retaken , this is really the beginning of the end for the byzantine empire . so let 's think a little bit about how the crusades changed europe and the entire world . well , one of the obvious impacts of the crusades was just the amount of death it caused . it 's estimated that the death toll from the crusades is two to six million people just from western europe . and just to put that into perspective , the european population at the time was about 60 to 70 million folks . so we 're talking about four to 10 percent of the population dying in the crusades . and this is n't fully accounting for all of the death and destruction that happened on the way to the crusades or that happened in the middle east as well . if you look at this map of what the region looks like as we get into the 14th century , right over here , you can see that although the middle east is still in control of the muslims , muslims have for the most part been pushed out of the iberian peninsula , and they have a little bit of a foothold right here in grenada . and this reconquista is going to continue all the way until 1492 when what will be the spanish are able to push out all of the muslims from the iberian peninsula and as they do that , they also expel the jews . you also have territorial gains in the north of europe that 's a little bit harder to see on this map over here . as i mentioned in previous video , part of this crusader mentality was not just about taking land back for the byzantines or taking land from the muslims , but also trying to take land or convert what were perceived as pagans in the north , german tribes that had not as yet converted to christianity . and so that helped for territorial expansion in the north of europe . now a big theme in the crusades was the power of the pope . remember , the crusades were started by a pope working people up , saying , `` hey , let 's go help the byzantines . `` let 's go take back land from the muslims . '' pope urban ii . and over the course of this 200 years , you have this religious fervor where the pope is organizing these crusades . people are feeling this religious spirit . many people are , before going on their crusade , they 're bequeathing their land to the church . if they die , and many of these lords do end up dying , they 're giving their property to the church , headed by the pope . kings also gained power during the crusades . in other videos , we talk about the feudal system and many times the vassals to the kings , the dukes , the counts , the barons , often had more control over their territory than the kings might have had . and they were constantly squabbling with each other but as people started to focus their energies on this external adventure known as the crusades , first of all , many of these lords died , their property went back to the state , went back to the kings . you start having less internal dissension . in a way , this idea that pope urban ii thought of at the end of the 11th century . hey , why do n't i point people externally so they stop worrying about what 's going on internally ? it kind of worked . another trend is the importance of cities . in the feudal system , it 's all about these manors and all about these estates . but in order to finance the crusades , centers of trade and commerce became more important and also , as there was more interaction between west and east and more people traveling , you can imagine that it fostered trade which centered at these cities . and that goes into the next point , commerce and trade itself was fostered by the crusades . it was n't all fighting . the venetians and other trader city-states , they helped facilitate the movement of arms and people from west to east , but on the way back , they also brought goods to trade . and so they became much , much more powerful . in fact , by the end of the crusades , as we get into the 14th century , venice , which is right over here on our map , was considered the richest and most powerful city in europe . venice has all of this trader wealth and it 's not just from trade . as you might remember from previous videos , when constantinople was sacked , it was sacked in part by these venetian traders and after that , they built an empire . they broke up the byzantine empire and took some of it for themselves . and so it 's not a coincidence that as we get into the 14th and 15th century , places like venice and florence , famously sponsored by the medici family , a famous banking family . so once again , these are centers of trade , centers of commerce became the places where the renaissance would first flourish . and last but not least , as in some ways bloody and dark a time as the crusades were , they were also associated with learning because you had all of these people go from western europe to the middle east and the holy land and at that time , remember , we have videos on the golden age of islam . in a lot of ways , they were shepherding the knowledge of the ancient greeks and the romans and they were merging that with knowledge from the indians and the chinese and also coming up with innovations on their own . and a lot of the western europeans brought that back to europe .
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in a lot of ways , they were shepherding the knowledge of the ancient greeks and the romans and they were merging that with knowledge from the indians and the chinese and also coming up with innovations on their own . and a lot of the western europeans brought that back to europe .
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what difference did the crusdaes make to the europeans ?
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- [ sal ] we 've already had several videos where we give an overview of the crusades . and just as a review , they happen over roughly 200 years during the high middle ages . the first crusade at very end of the 11th century and actually the most successful of the crusades , allowing the western european powers to take control of jerusalem and much of the holy land . and you could see that here on this diagram where jerusalem , at least , goes from green to red , controlled by the western european , the latin christians . and they 're able to maintain control through these crusader kingdoms all the way until 1187 , when salah ad-din is able to retake control of jerusalem . then a few decades later , as we go into the sixth crusade and the barons ' crusade , which is n't depicted here , the western europeans are able to take more control but eventually , the muslims take control of jerusalem and as we enter into the 14th century , they have control of the entire holy land . now while that is happening , constantinople gets sacked at the end of the fourth crusade by the crusaders themselves and even though it 's retaken , this is really the beginning of the end for the byzantine empire . so let 's think a little bit about how the crusades changed europe and the entire world . well , one of the obvious impacts of the crusades was just the amount of death it caused . it 's estimated that the death toll from the crusades is two to six million people just from western europe . and just to put that into perspective , the european population at the time was about 60 to 70 million folks . so we 're talking about four to 10 percent of the population dying in the crusades . and this is n't fully accounting for all of the death and destruction that happened on the way to the crusades or that happened in the middle east as well . if you look at this map of what the region looks like as we get into the 14th century , right over here , you can see that although the middle east is still in control of the muslims , muslims have for the most part been pushed out of the iberian peninsula , and they have a little bit of a foothold right here in grenada . and this reconquista is going to continue all the way until 1492 when what will be the spanish are able to push out all of the muslims from the iberian peninsula and as they do that , they also expel the jews . you also have territorial gains in the north of europe that 's a little bit harder to see on this map over here . as i mentioned in previous video , part of this crusader mentality was not just about taking land back for the byzantines or taking land from the muslims , but also trying to take land or convert what were perceived as pagans in the north , german tribes that had not as yet converted to christianity . and so that helped for territorial expansion in the north of europe . now a big theme in the crusades was the power of the pope . remember , the crusades were started by a pope working people up , saying , `` hey , let 's go help the byzantines . `` let 's go take back land from the muslims . '' pope urban ii . and over the course of this 200 years , you have this religious fervor where the pope is organizing these crusades . people are feeling this religious spirit . many people are , before going on their crusade , they 're bequeathing their land to the church . if they die , and many of these lords do end up dying , they 're giving their property to the church , headed by the pope . kings also gained power during the crusades . in other videos , we talk about the feudal system and many times the vassals to the kings , the dukes , the counts , the barons , often had more control over their territory than the kings might have had . and they were constantly squabbling with each other but as people started to focus their energies on this external adventure known as the crusades , first of all , many of these lords died , their property went back to the state , went back to the kings . you start having less internal dissension . in a way , this idea that pope urban ii thought of at the end of the 11th century . hey , why do n't i point people externally so they stop worrying about what 's going on internally ? it kind of worked . another trend is the importance of cities . in the feudal system , it 's all about these manors and all about these estates . but in order to finance the crusades , centers of trade and commerce became more important and also , as there was more interaction between west and east and more people traveling , you can imagine that it fostered trade which centered at these cities . and that goes into the next point , commerce and trade itself was fostered by the crusades . it was n't all fighting . the venetians and other trader city-states , they helped facilitate the movement of arms and people from west to east , but on the way back , they also brought goods to trade . and so they became much , much more powerful . in fact , by the end of the crusades , as we get into the 14th century , venice , which is right over here on our map , was considered the richest and most powerful city in europe . venice has all of this trader wealth and it 's not just from trade . as you might remember from previous videos , when constantinople was sacked , it was sacked in part by these venetian traders and after that , they built an empire . they broke up the byzantine empire and took some of it for themselves . and so it 's not a coincidence that as we get into the 14th and 15th century , places like venice and florence , famously sponsored by the medici family , a famous banking family . so once again , these are centers of trade , centers of commerce became the places where the renaissance would first flourish . and last but not least , as in some ways bloody and dark a time as the crusades were , they were also associated with learning because you had all of these people go from western europe to the middle east and the holy land and at that time , remember , we have videos on the golden age of islam . in a lot of ways , they were shepherding the knowledge of the ancient greeks and the romans and they were merging that with knowledge from the indians and the chinese and also coming up with innovations on their own . and a lot of the western europeans brought that back to europe .
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if they die , and many of these lords do end up dying , they 're giving their property to the church , headed by the pope . kings also gained power during the crusades . in other videos , we talk about the feudal system and many times the vassals to the kings , the dukes , the counts , the barons , often had more control over their territory than the kings might have had .
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what difference did the crusades make to the islamic ?
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- [ sal ] we 've already had several videos where we give an overview of the crusades . and just as a review , they happen over roughly 200 years during the high middle ages . the first crusade at very end of the 11th century and actually the most successful of the crusades , allowing the western european powers to take control of jerusalem and much of the holy land . and you could see that here on this diagram where jerusalem , at least , goes from green to red , controlled by the western european , the latin christians . and they 're able to maintain control through these crusader kingdoms all the way until 1187 , when salah ad-din is able to retake control of jerusalem . then a few decades later , as we go into the sixth crusade and the barons ' crusade , which is n't depicted here , the western europeans are able to take more control but eventually , the muslims take control of jerusalem and as we enter into the 14th century , they have control of the entire holy land . now while that is happening , constantinople gets sacked at the end of the fourth crusade by the crusaders themselves and even though it 's retaken , this is really the beginning of the end for the byzantine empire . so let 's think a little bit about how the crusades changed europe and the entire world . well , one of the obvious impacts of the crusades was just the amount of death it caused . it 's estimated that the death toll from the crusades is two to six million people just from western europe . and just to put that into perspective , the european population at the time was about 60 to 70 million folks . so we 're talking about four to 10 percent of the population dying in the crusades . and this is n't fully accounting for all of the death and destruction that happened on the way to the crusades or that happened in the middle east as well . if you look at this map of what the region looks like as we get into the 14th century , right over here , you can see that although the middle east is still in control of the muslims , muslims have for the most part been pushed out of the iberian peninsula , and they have a little bit of a foothold right here in grenada . and this reconquista is going to continue all the way until 1492 when what will be the spanish are able to push out all of the muslims from the iberian peninsula and as they do that , they also expel the jews . you also have territorial gains in the north of europe that 's a little bit harder to see on this map over here . as i mentioned in previous video , part of this crusader mentality was not just about taking land back for the byzantines or taking land from the muslims , but also trying to take land or convert what were perceived as pagans in the north , german tribes that had not as yet converted to christianity . and so that helped for territorial expansion in the north of europe . now a big theme in the crusades was the power of the pope . remember , the crusades were started by a pope working people up , saying , `` hey , let 's go help the byzantines . `` let 's go take back land from the muslims . '' pope urban ii . and over the course of this 200 years , you have this religious fervor where the pope is organizing these crusades . people are feeling this religious spirit . many people are , before going on their crusade , they 're bequeathing their land to the church . if they die , and many of these lords do end up dying , they 're giving their property to the church , headed by the pope . kings also gained power during the crusades . in other videos , we talk about the feudal system and many times the vassals to the kings , the dukes , the counts , the barons , often had more control over their territory than the kings might have had . and they were constantly squabbling with each other but as people started to focus their energies on this external adventure known as the crusades , first of all , many of these lords died , their property went back to the state , went back to the kings . you start having less internal dissension . in a way , this idea that pope urban ii thought of at the end of the 11th century . hey , why do n't i point people externally so they stop worrying about what 's going on internally ? it kind of worked . another trend is the importance of cities . in the feudal system , it 's all about these manors and all about these estates . but in order to finance the crusades , centers of trade and commerce became more important and also , as there was more interaction between west and east and more people traveling , you can imagine that it fostered trade which centered at these cities . and that goes into the next point , commerce and trade itself was fostered by the crusades . it was n't all fighting . the venetians and other trader city-states , they helped facilitate the movement of arms and people from west to east , but on the way back , they also brought goods to trade . and so they became much , much more powerful . in fact , by the end of the crusades , as we get into the 14th century , venice , which is right over here on our map , was considered the richest and most powerful city in europe . venice has all of this trader wealth and it 's not just from trade . as you might remember from previous videos , when constantinople was sacked , it was sacked in part by these venetian traders and after that , they built an empire . they broke up the byzantine empire and took some of it for themselves . and so it 's not a coincidence that as we get into the 14th and 15th century , places like venice and florence , famously sponsored by the medici family , a famous banking family . so once again , these are centers of trade , centers of commerce became the places where the renaissance would first flourish . and last but not least , as in some ways bloody and dark a time as the crusades were , they were also associated with learning because you had all of these people go from western europe to the middle east and the holy land and at that time , remember , we have videos on the golden age of islam . in a lot of ways , they were shepherding the knowledge of the ancient greeks and the romans and they were merging that with knowledge from the indians and the chinese and also coming up with innovations on their own . and a lot of the western europeans brought that back to europe .
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well , one of the obvious impacts of the crusades was just the amount of death it caused . it 's estimated that the death toll from the crusades is two to six million people just from western europe . and just to put that into perspective , the european population at the time was about 60 to 70 million folks .
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when speaking of the death toll were the deaths mainly soldiers and people who tried to stop the crusades and war , or civilians too ?
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- andrei has a glass tank . first , he wants to put some marbles in it , all of the same volume . then , he wants to fill the tank with water until it 's completely full . this is the formula for the volume of water andrei should use w , measured in liters , as a function of the number of marbles used n. and we see that the amount of water he needs to put in as a function of the marbles used , n , is equal to 32 minus 0.05n . that 's interesting . complete the following sentences with the appropriate missing values . the glass tank 's volume is blank liters . the volume of each marble is blank liters . so , one thing that we could do to think about the glass tank 's volume is , is well , let 's use this function to figure out how much water would we need if we had no marbles in it , because that amount of water would be the volume of the entire tank . remember , we 're gon na fill up the entire tank with water based on how many marbles are in it , but if we figure out what w of zero is , this is the amount of water we need if we had no marbles . this would be the volume of the entire tank and what is this going to be ? well w of zero , when n is equal to zero , this term goes away and we 're left with 32 . so , w of zero would be volume of entire tank . volume of tank , which is equal to 32 liters and so , we could write 32 right over there . and then they ask us , the volume of each marble is blank liters . well , what 's going on here in this function definition ? so , the highest that this could be is 32 , 'cause that 's the most water you would put in . if you had no marbles , you would just fill up the tank and put in 32 liters . then , every marble that you put in , you 're going to have to put in 0.05 less liters . you see that , you have minus 0.05 times n. so , every time n grows by one , you have to put in 0.05 less fewer liters of water , which implies that the marble is 0.05 liters . that 's it 's volume , so let 's write that down , 0.05 liters . and , you could test this assumption . if you said , look , if you had one marble , if you had one marble , then you would have to put 0.05 less than 32 liters in and why would that be the case ? well , that would mean because that one marble is taking up 0.05 liters , that 's how much space it 's taking up .
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- andrei has a glass tank . first , he wants to put some marbles in it , all of the same volume .
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what is the point of math ?
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- andrei has a glass tank . first , he wants to put some marbles in it , all of the same volume . then , he wants to fill the tank with water until it 's completely full . this is the formula for the volume of water andrei should use w , measured in liters , as a function of the number of marbles used n. and we see that the amount of water he needs to put in as a function of the marbles used , n , is equal to 32 minus 0.05n . that 's interesting . complete the following sentences with the appropriate missing values . the glass tank 's volume is blank liters . the volume of each marble is blank liters . so , one thing that we could do to think about the glass tank 's volume is , is well , let 's use this function to figure out how much water would we need if we had no marbles in it , because that amount of water would be the volume of the entire tank . remember , we 're gon na fill up the entire tank with water based on how many marbles are in it , but if we figure out what w of zero is , this is the amount of water we need if we had no marbles . this would be the volume of the entire tank and what is this going to be ? well w of zero , when n is equal to zero , this term goes away and we 're left with 32 . so , w of zero would be volume of entire tank . volume of tank , which is equal to 32 liters and so , we could write 32 right over there . and then they ask us , the volume of each marble is blank liters . well , what 's going on here in this function definition ? so , the highest that this could be is 32 , 'cause that 's the most water you would put in . if you had no marbles , you would just fill up the tank and put in 32 liters . then , every marble that you put in , you 're going to have to put in 0.05 less liters . you see that , you have minus 0.05 times n. so , every time n grows by one , you have to put in 0.05 less fewer liters of water , which implies that the marble is 0.05 liters . that 's it 's volume , so let 's write that down , 0.05 liters . and , you could test this assumption . if you said , look , if you had one marble , if you had one marble , then you would have to put 0.05 less than 32 liters in and why would that be the case ? well , that would mean because that one marble is taking up 0.05 liters , that 's how much space it 's taking up .
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so , the highest that this could be is 32 , 'cause that 's the most water you would put in . if you had no marbles , you would just fill up the tank and put in 32 liters . then , every marble that you put in , you 're going to have to put in 0.05 less liters . you see that , you have minus 0.05 times n. so , every time n grows by one , you have to put in 0.05 less fewer liters of water , which implies that the marble is 0.05 liters . that 's it 's volume , so let 's write that down , 0.05 liters .
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why would i put `` n '' as 0 ca n't i just put 1 or 3 ?
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we 've already looked at several ways of writing linear equations . you could write it in slope-intercept form , where it would be of the form of y is equal to mx plus b , where m and b are constants . m is the coefficient on this mx term right over here and m would represent the slope . and then from b you 're able to figure out the y-intercept . the y , you 're able to figure out the y-intercept from this . literally the graph that represents the xy pairs that satisfy this equation , it would intersect the y-axis at the point x equals zero , y is equal to b . and it 's slope would be m. we 've already seen that multiple times . we 've also seen that you can also express things in point-slope form . so let me make it clear . this is slope-intercept . slope- intercept . and these are just different ways of writing the same equations . you can algebraically manipulate from one to the other . another way is point-slope . point-slope form . and in point-slope form , if you know that some , if you know that there 's an equation where the line that represents the solutions of that equation has a slope m. slope is equal to m. and if you know that x equals , x equals a , y equals b , satisfies that equation , then in point-slope form you can express the equation as y minus b is equal to m times x minus a . this is point-slope form and we do videos on that . but what i really want to get into in this video is another form . and it 's a form that you might have already seen . and that is standard form . standard . standard form . and standard form takes the shape of ax plus by is equal to c , where a , b , and c are integers . and what i want to do in this video , like we 've done in the ones on point-slope and slope-intercept is get an appreciation for what is standard form good at and what is standard form less good at ? so let 's give a tangible example here . so let 's say i have the linear equation , it 's in standard form , 9x plus 16y is equal to 72 . and we wanted to graph this . so the thing that standard form is really good for is figuring out , not just the y-intercept , y-intercept is pretty good if you 're using slope-intercept form , but we can find out the y-intercept pretty clearly from standard form and the x-intercept . the x-intercept is n't so easy to figure out from these other forms right over here . so how do we do that ? well to figure out the x and y-intercepts , let 's just set up a little table here , x comma y , and so the x-intercept is going to happen when y is equal to zero . and the y-intercept is going to happen when x is equal to zero . so when y is zero , what is x ? so when y is zero , 16 times zero is zero , that term disappears , and you 're left with 9x is equal to 72 . so if nine times x is 72 , 72 divided by nine is eight . so x would be equal to eight . so once again , that was pretty easy to figure out . this term goes away and you just have to say hey , nine times x is 72 , x would be eight . when y is equal to zero , x is eight . so the point , let 's see , y is zero , x is one , two , three , four , five , six , seven , eight . that 's this point , that right over here . this point right over here is the x-intercept . when we talk about x-intercepts we 're referring to the point where the line actually intersects the x-axis . now what about the y-intercept ? well , we said x equals zero , this disappears . and we 're left with 16y is equal to 72 . and so we could solve , we could solve that . so we could say , alright 16y is equal to 72 . and then divide both sides by 16 . we get y is equal to 72 over 16 . and let 's see , what is that equal to ? that is equal to , let 's see , they 're both divisible by eight , so that 's nine over two . or we could say it 's 4.5 . so when x is zero , y is 4.5 . and so , we could plot that point as well . x is zero , y is one , two , three , 4.5 . and just with these two points , two points are enough to graph a line , we can now graph it . so let 's do that . so let me , oops , though i was using the tool that would draw a straight line . let me see if i can ... so the line will look something like that . there you have it . i 've just graphed , i 've just graphed , this is the line that represents all the x and y pairs that satisfy the equation 9x plus 16y is equal to 72 . now , i mentioned standard form 's good at certain things and the good thing that standard form is , where it 's maybe somewhat unique relative to the other forms we looked at , is it 's very easy to figure out the x-intercept . it was very easy to figure out the x-intercept from standard form . and it was n't too hard to figure out the y-intercept either . if we looked at slope-intercept form , the y-intercept just kinda jumps out at you . at point-slope form , neither the x nor the y-intercept kind of jump out at you . the place where slope-intercept or point-slope form are frankly better is that it 's pretty easy to pick out the slope here , while in standard form you would have to do a little bit of work . you could use these two points , you could use the x and y-intercepts as two points and figure out the slope from there . so you can literally say , `` okay , if i 'm going from `` this point to this point , my change in x `` to go from eight to zero is negative eight . `` and to go from zero to 4.5 , '' i wrote that little delta there unnecessarily . let me . so when you go from eight to zero , your change in x is equal to negative eight . and to go from zero to 4.5 , your change in y is going to be 4.5 . so your slope , once you 've figured this out , you could say , `` okay , this is going to be `` change in y , 4.5 , over change in x , `` over negative 8 . '' and since i , at least i do n't like a decimal up here , let 's multiply the numerator and the denominator by two . you get negative nine over 16 . now once again , we had to do a little bit of work here . we either use these two points , it did n't just jump immediately out of this , although you might see a little bit of a pattern of what 's going on here . but you still have to think about is it negative ? is it positive ? you have to do a little bit of algebraic manipulation . or , what i typically do if i 'm looking for the slope , i actually might put this into , into one of the other forms . especially slope-intercept form . but standard form by itself , great for figuring out both the x and y-intercepts and it 's frankly not that hard to convert it to slope-intercept form . let 's do that just to make it clear . so if you start with 9x , let me do that in yellow . if we start with 9x plus 16y is equal to 72 and we want to put it in slope-intercept form , we can subtract 9x from both sides . you get 16y is equal to negative 9x , plus 72 . and then divide both sides by 16 . so divide everthing by 16 . and you 'll be left with y is equal to negative 9/16x , that 's the slope , you see it right there , plus 72 over 16 , we already figured out that 's 9/2 or 4.5 . so i could write , oh i 'll just write that as 4.5 . and this form over here , much easier to figure out the slope and , actually , the y-intercept jumps out at you . but the x-intercept is n't as obvious .
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standard . standard form . and standard form takes the shape of ax plus by is equal to c , where a , b , and c are integers .
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why do the a , b , and c values of a standard form equation have to be whole numbers ( and not fractions ) ?
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we 've already looked at several ways of writing linear equations . you could write it in slope-intercept form , where it would be of the form of y is equal to mx plus b , where m and b are constants . m is the coefficient on this mx term right over here and m would represent the slope . and then from b you 're able to figure out the y-intercept . the y , you 're able to figure out the y-intercept from this . literally the graph that represents the xy pairs that satisfy this equation , it would intersect the y-axis at the point x equals zero , y is equal to b . and it 's slope would be m. we 've already seen that multiple times . we 've also seen that you can also express things in point-slope form . so let me make it clear . this is slope-intercept . slope- intercept . and these are just different ways of writing the same equations . you can algebraically manipulate from one to the other . another way is point-slope . point-slope form . and in point-slope form , if you know that some , if you know that there 's an equation where the line that represents the solutions of that equation has a slope m. slope is equal to m. and if you know that x equals , x equals a , y equals b , satisfies that equation , then in point-slope form you can express the equation as y minus b is equal to m times x minus a . this is point-slope form and we do videos on that . but what i really want to get into in this video is another form . and it 's a form that you might have already seen . and that is standard form . standard . standard form . and standard form takes the shape of ax plus by is equal to c , where a , b , and c are integers . and what i want to do in this video , like we 've done in the ones on point-slope and slope-intercept is get an appreciation for what is standard form good at and what is standard form less good at ? so let 's give a tangible example here . so let 's say i have the linear equation , it 's in standard form , 9x plus 16y is equal to 72 . and we wanted to graph this . so the thing that standard form is really good for is figuring out , not just the y-intercept , y-intercept is pretty good if you 're using slope-intercept form , but we can find out the y-intercept pretty clearly from standard form and the x-intercept . the x-intercept is n't so easy to figure out from these other forms right over here . so how do we do that ? well to figure out the x and y-intercepts , let 's just set up a little table here , x comma y , and so the x-intercept is going to happen when y is equal to zero . and the y-intercept is going to happen when x is equal to zero . so when y is zero , what is x ? so when y is zero , 16 times zero is zero , that term disappears , and you 're left with 9x is equal to 72 . so if nine times x is 72 , 72 divided by nine is eight . so x would be equal to eight . so once again , that was pretty easy to figure out . this term goes away and you just have to say hey , nine times x is 72 , x would be eight . when y is equal to zero , x is eight . so the point , let 's see , y is zero , x is one , two , three , four , five , six , seven , eight . that 's this point , that right over here . this point right over here is the x-intercept . when we talk about x-intercepts we 're referring to the point where the line actually intersects the x-axis . now what about the y-intercept ? well , we said x equals zero , this disappears . and we 're left with 16y is equal to 72 . and so we could solve , we could solve that . so we could say , alright 16y is equal to 72 . and then divide both sides by 16 . we get y is equal to 72 over 16 . and let 's see , what is that equal to ? that is equal to , let 's see , they 're both divisible by eight , so that 's nine over two . or we could say it 's 4.5 . so when x is zero , y is 4.5 . and so , we could plot that point as well . x is zero , y is one , two , three , 4.5 . and just with these two points , two points are enough to graph a line , we can now graph it . so let 's do that . so let me , oops , though i was using the tool that would draw a straight line . let me see if i can ... so the line will look something like that . there you have it . i 've just graphed , i 've just graphed , this is the line that represents all the x and y pairs that satisfy the equation 9x plus 16y is equal to 72 . now , i mentioned standard form 's good at certain things and the good thing that standard form is , where it 's maybe somewhat unique relative to the other forms we looked at , is it 's very easy to figure out the x-intercept . it was very easy to figure out the x-intercept from standard form . and it was n't too hard to figure out the y-intercept either . if we looked at slope-intercept form , the y-intercept just kinda jumps out at you . at point-slope form , neither the x nor the y-intercept kind of jump out at you . the place where slope-intercept or point-slope form are frankly better is that it 's pretty easy to pick out the slope here , while in standard form you would have to do a little bit of work . you could use these two points , you could use the x and y-intercepts as two points and figure out the slope from there . so you can literally say , `` okay , if i 'm going from `` this point to this point , my change in x `` to go from eight to zero is negative eight . `` and to go from zero to 4.5 , '' i wrote that little delta there unnecessarily . let me . so when you go from eight to zero , your change in x is equal to negative eight . and to go from zero to 4.5 , your change in y is going to be 4.5 . so your slope , once you 've figured this out , you could say , `` okay , this is going to be `` change in y , 4.5 , over change in x , `` over negative 8 . '' and since i , at least i do n't like a decimal up here , let 's multiply the numerator and the denominator by two . you get negative nine over 16 . now once again , we had to do a little bit of work here . we either use these two points , it did n't just jump immediately out of this , although you might see a little bit of a pattern of what 's going on here . but you still have to think about is it negative ? is it positive ? you have to do a little bit of algebraic manipulation . or , what i typically do if i 'm looking for the slope , i actually might put this into , into one of the other forms . especially slope-intercept form . but standard form by itself , great for figuring out both the x and y-intercepts and it 's frankly not that hard to convert it to slope-intercept form . let 's do that just to make it clear . so if you start with 9x , let me do that in yellow . if we start with 9x plus 16y is equal to 72 and we want to put it in slope-intercept form , we can subtract 9x from both sides . you get 16y is equal to negative 9x , plus 72 . and then divide both sides by 16 . so divide everthing by 16 . and you 'll be left with y is equal to negative 9/16x , that 's the slope , you see it right there , plus 72 over 16 , we already figured out that 's 9/2 or 4.5 . so i could write , oh i 'll just write that as 4.5 . and this form over here , much easier to figure out the slope and , actually , the y-intercept jumps out at you . but the x-intercept is n't as obvious .
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another way is point-slope . point-slope form . and in point-slope form , if you know that some , if you know that there 's an equation where the line that represents the solutions of that equation has a slope m. slope is equal to m. and if you know that x equals , x equals a , y equals b , satisfies that equation , then in point-slope form you can express the equation as y minus b is equal to m times x minus a .
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i thought that in slope interecept form , the m & b ca n't be less than zero ... so how are those numbers negative ?
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we 've already looked at several ways of writing linear equations . you could write it in slope-intercept form , where it would be of the form of y is equal to mx plus b , where m and b are constants . m is the coefficient on this mx term right over here and m would represent the slope . and then from b you 're able to figure out the y-intercept . the y , you 're able to figure out the y-intercept from this . literally the graph that represents the xy pairs that satisfy this equation , it would intersect the y-axis at the point x equals zero , y is equal to b . and it 's slope would be m. we 've already seen that multiple times . we 've also seen that you can also express things in point-slope form . so let me make it clear . this is slope-intercept . slope- intercept . and these are just different ways of writing the same equations . you can algebraically manipulate from one to the other . another way is point-slope . point-slope form . and in point-slope form , if you know that some , if you know that there 's an equation where the line that represents the solutions of that equation has a slope m. slope is equal to m. and if you know that x equals , x equals a , y equals b , satisfies that equation , then in point-slope form you can express the equation as y minus b is equal to m times x minus a . this is point-slope form and we do videos on that . but what i really want to get into in this video is another form . and it 's a form that you might have already seen . and that is standard form . standard . standard form . and standard form takes the shape of ax plus by is equal to c , where a , b , and c are integers . and what i want to do in this video , like we 've done in the ones on point-slope and slope-intercept is get an appreciation for what is standard form good at and what is standard form less good at ? so let 's give a tangible example here . so let 's say i have the linear equation , it 's in standard form , 9x plus 16y is equal to 72 . and we wanted to graph this . so the thing that standard form is really good for is figuring out , not just the y-intercept , y-intercept is pretty good if you 're using slope-intercept form , but we can find out the y-intercept pretty clearly from standard form and the x-intercept . the x-intercept is n't so easy to figure out from these other forms right over here . so how do we do that ? well to figure out the x and y-intercepts , let 's just set up a little table here , x comma y , and so the x-intercept is going to happen when y is equal to zero . and the y-intercept is going to happen when x is equal to zero . so when y is zero , what is x ? so when y is zero , 16 times zero is zero , that term disappears , and you 're left with 9x is equal to 72 . so if nine times x is 72 , 72 divided by nine is eight . so x would be equal to eight . so once again , that was pretty easy to figure out . this term goes away and you just have to say hey , nine times x is 72 , x would be eight . when y is equal to zero , x is eight . so the point , let 's see , y is zero , x is one , two , three , four , five , six , seven , eight . that 's this point , that right over here . this point right over here is the x-intercept . when we talk about x-intercepts we 're referring to the point where the line actually intersects the x-axis . now what about the y-intercept ? well , we said x equals zero , this disappears . and we 're left with 16y is equal to 72 . and so we could solve , we could solve that . so we could say , alright 16y is equal to 72 . and then divide both sides by 16 . we get y is equal to 72 over 16 . and let 's see , what is that equal to ? that is equal to , let 's see , they 're both divisible by eight , so that 's nine over two . or we could say it 's 4.5 . so when x is zero , y is 4.5 . and so , we could plot that point as well . x is zero , y is one , two , three , 4.5 . and just with these two points , two points are enough to graph a line , we can now graph it . so let 's do that . so let me , oops , though i was using the tool that would draw a straight line . let me see if i can ... so the line will look something like that . there you have it . i 've just graphed , i 've just graphed , this is the line that represents all the x and y pairs that satisfy the equation 9x plus 16y is equal to 72 . now , i mentioned standard form 's good at certain things and the good thing that standard form is , where it 's maybe somewhat unique relative to the other forms we looked at , is it 's very easy to figure out the x-intercept . it was very easy to figure out the x-intercept from standard form . and it was n't too hard to figure out the y-intercept either . if we looked at slope-intercept form , the y-intercept just kinda jumps out at you . at point-slope form , neither the x nor the y-intercept kind of jump out at you . the place where slope-intercept or point-slope form are frankly better is that it 's pretty easy to pick out the slope here , while in standard form you would have to do a little bit of work . you could use these two points , you could use the x and y-intercepts as two points and figure out the slope from there . so you can literally say , `` okay , if i 'm going from `` this point to this point , my change in x `` to go from eight to zero is negative eight . `` and to go from zero to 4.5 , '' i wrote that little delta there unnecessarily . let me . so when you go from eight to zero , your change in x is equal to negative eight . and to go from zero to 4.5 , your change in y is going to be 4.5 . so your slope , once you 've figured this out , you could say , `` okay , this is going to be `` change in y , 4.5 , over change in x , `` over negative 8 . '' and since i , at least i do n't like a decimal up here , let 's multiply the numerator and the denominator by two . you get negative nine over 16 . now once again , we had to do a little bit of work here . we either use these two points , it did n't just jump immediately out of this , although you might see a little bit of a pattern of what 's going on here . but you still have to think about is it negative ? is it positive ? you have to do a little bit of algebraic manipulation . or , what i typically do if i 'm looking for the slope , i actually might put this into , into one of the other forms . especially slope-intercept form . but standard form by itself , great for figuring out both the x and y-intercepts and it 's frankly not that hard to convert it to slope-intercept form . let 's do that just to make it clear . so if you start with 9x , let me do that in yellow . if we start with 9x plus 16y is equal to 72 and we want to put it in slope-intercept form , we can subtract 9x from both sides . you get 16y is equal to negative 9x , plus 72 . and then divide both sides by 16 . so divide everthing by 16 . and you 'll be left with y is equal to negative 9/16x , that 's the slope , you see it right there , plus 72 over 16 , we already figured out that 's 9/2 or 4.5 . so i could write , oh i 'll just write that as 4.5 . and this form over here , much easier to figure out the slope and , actually , the y-intercept jumps out at you . but the x-intercept is n't as obvious .
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standard . standard form . and standard form takes the shape of ax plus by is equal to c , where a , b , and c are integers .
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is the standard form is ax+by=c ?
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