Global Struggles: From Oil to Gasoline
Since the onset of a large-scale conflict involving Iran, the world has been grappling with the most significant oil shortage in history. However, another pressing issue has surfaced as oil prices soar past $80 a barrel and trade blockades in the Strait of Hormuz resume. The primary concern now relates to gasoline and the global capacity to produce it.
While the recent influx of oil from the Persian Gulf has temporarily eased the oil shortage, oil alone isn't much use. It needs to be refined into products people use daily, such as asphalt, plastic, heating oil, jet fuel, diesel, and gasoline. But the world is finding its refining capacity severely limited.
Constraints in Refining Capacity
The war has disrupted the supply chain, contributing to the refining capacity issue. Attacks on several Middle Eastern refineries and the destruction of Russian energy facilities have compounded the problem. Add in extreme temperatures that interfere with the cool conditions required for proper distillation, and you have a significant issue. Global refineries are processing 8.4 million fewer barrels of crude each day than before the war, translating to a 10% drop in fuel production.
The challenge is not so much the return of crude barrels, but the speed at which the global refining system can process them.
Supply and the Absence of Demand
Despite recent disruptions, oil continues to flow from the Strait of Hormuz, although not at its regular pace. Unresolved conflicts, the termination of the US-Iran Memorandum of Understanding, and a US-led naval blockade have slowed down what was an upward trend in tanker traffic through this critical waterway. Middle Eastern production is also slowly recovering.
In recent weeks, 200 million barrels of oil have been released from the strait, adding a surplus of about 17 days. Crude continues to flow despite increased military activity.
The core issue remains: there is enough oil globally, provided it can be transported to where it is needed. The real question is what to do with it. Demand for oil plummeted during the war as supply decreased sharply and many people reduced their oil consumption. While this kept prices lower than expected during the war, it also complicates energy market recovery.
China's Role and the Impact on Southeast Asia
China, for instance, shut off 3 million barrels per day in refinery output as the government significantly increased its coal-firing plants and electric vehicle initiative. China used up its vast emergency reserves to compensate for lost Persian Gulf oil and drastically cut back on the amount of gasoline and diesel it had been refining and exporting to neighbouring countries. This caused widespread fuel shortages in Southeast Asia.
Before China increases its refining capacity, the government will want guarantees that crude is flowing through the strait without hindrance.
The Middle East and US Challenges
Renewed conflict in the Persian Gulf complicates the resumption of refining in the Middle East. The region has 11.7 million barrels per day of refining capacity, which will be challenging to reactivate if the fuel can't be transported. Furthermore, Iranian attacks on 30 Middle Eastern refineries during the war raise questions about how operational these facilities will be when they reopen.
As the Middle East ceased fuel exports during the war, the US stepped in as the last-resort exporter of gas and diesel. US refineries increased their output of jet fuel to meet demand in Europe and diesel for Australia and Asia. However, this limited America's ability to produce gas, jet fuel, and diesel for its own market, contributing to stagnant gas prices.
Russia's Predicament
Russia, the world's largest fuel oil and second-largest diesel exporter, is now in a tight spot. After continuous attacks on Russian refineries by Ukrainian drones, Russia banned diesel exports last week. This has led to significant fuel shortages, with vehicles queuing up at gas stations and fuel prices in some regions soaring 50% in just a few days.
Russia's lost capacity has impacted the global diesel market, accounting for a fifth of the world's reduced refinery runs. Diesel futures have surged 20% over the past three weeks, suggesting that gas and diesel prices could remain high for an extended period, even as oil starts flowing again.
Since the onset of a large-scale conflict involving Iran, the world has been grappling with the most significant oil shortage in history. However, another pressing issue has surfaced as oil prices soar past $80 a barrel and trade blockades in the Strait of Hormuz resume. The primary concern now relates to gasoline and the global capacity to produce it.
While the recent influx of oil from the Persian Gulf has temporarily eased the oil shortage, oil alone isn't much use. It needs to be refined into products people use daily, such as asphalt, plastic, heating oil, jet fuel, diesel, and gasoline. But the world is finding its refining capacity severely limited.
Constraints in Refining Capacity
The war has disrupted the supply chain, contributing to the refining capacity issue. Attacks on several Middle Eastern refineries and the destruction of Russian energy facilities have compounded the problem. Add in extreme temperatures that interfere with the cool conditions required for proper distillation, and you have a significant issue. Global refineries are processing 8.4 million fewer barrels of crude each day than before the war, translating to a 10% drop in fuel production.
The challenge is not so much the return of crude barrels, but the speed at which the global refining system can process them.
Supply and the Absence of Demand
Despite recent disruptions, oil continues to flow from the Strait of Hormuz, although not at its regular pace. Unresolved conflicts, the termination of the US-Iran Memorandum of Understanding, and a US-led naval blockade have slowed down what was an upward trend in tanker traffic through this critical waterway. Middle Eastern production is also slowly recovering.
In recent weeks, 200 million barrels of oil have been released from the strait, adding a surplus of about 17 days. Crude continues to flow despite increased military activity.
The core issue remains: there is enough oil globally, provided it can be transported to where it is needed. The real question is what to do with it. Demand for oil plummeted during the war as supply decreased sharply and many people reduced their oil consumption. While this kept prices lower than expected during the war, it also complicates energy market recovery.
China's Role and the Impact on Southeast Asia
China, for instance, shut off 3 million barrels per day in refinery output as the government significantly increased its coal-firing plants and electric vehicle initiative. China used up its vast emergency reserves to compensate for lost Persian Gulf oil and drastically cut back on the amount of gasoline and diesel it had been refining and exporting to neighbouring countries. This caused widespread fuel shortages in Southeast Asia.
Before China increases its refining capacity, the government will want guarantees that crude is flowing through the strait without hindrance.
The Middle East and US Challenges
Renewed conflict in the Persian Gulf complicates the resumption of refining in the Middle East. The region has 11.7 million barrels per day of refining capacity, which will be challenging to reactivate if the fuel can't be transported. Furthermore, Iranian attacks on 30 Middle Eastern refineries during the war raise questions about how operational these facilities will be when they reopen.
As the Middle East ceased fuel exports during the war, the US stepped in as the last-resort exporter of gas and diesel. US refineries increased their output of jet fuel to meet demand in Europe and diesel for Australia and Asia. However, this limited America's ability to produce gas, jet fuel, and diesel for its own market, contributing to stagnant gas prices.
Russia's Predicament
Russia, the world's largest fuel oil and second-largest diesel exporter, is now in a tight spot. After continuous attacks on Russian refineries by Ukrainian drones, Russia banned diesel exports last week. This has led to significant fuel shortages, with vehicles queuing up at gas stations and fuel prices in some regions soaring 50% in just a few days.
Russia's lost capacity has impacted the global diesel market, accounting for a fifth of the world's reduced refinery runs. Diesel futures have surged 20% over the past three weeks, suggesting that gas and diesel prices could remain high for an extended period, even as oil starts flowing again.