Let me share a story (based on a real event) that you are watching on multiple monitors.
On the first screen, management of the company’s largest oil refinery are planning a major capital project to build a new processing unit. One of the refinery’s existing units produces not only highly valuable jet fuel, diesel, and gasoline, but also a variety of medium and low value byproducts (“midstream”). The new unit will reprocess the low value midstream products and convert them to medium value midstream or even gasoline and diesel.
You can see the refinery’s risk officer consulting with the management team. He is helping them with safety, compliance, and a variety of other sources of risk to the project.
The second screen shows the trading floor, where management is monitoring both the prices they will have to pay for the crude oil that is the raw material for the refinery, and the prices that the different products of the refinery can obtain in the market. You can see the trading floor risk officer, monitoring futures and derivative trading and other risks.
In response to a question from refinery management, the traders share the projected prices for the range of products that the new unit will produce.
Using that information, refinery management designs the new unit to generate the optimal mix of…
