The season of cars on the road and most in demand for fuel officially started us United States. despite the inflation and the lingering threat of the pandemic, drivers hit the highways with enthusiasm over the recent long weekend due to the memorial day, on the last Monday of May. Some 40 million Americans traveled by car, up 8.3% from the same weekend in 2021. This strong desire to travel came even as prices at the pump were about 50% higher than last year, high driven by an intense limitation in refineries around the world.
In normal times, refining is a low-margin, low-drama adjunct to upstream oil production operations. Petroleum, geopolitically accused, and for downstream operations, politically accused. Refineries often have profit margins of $5 to $10 a barrel and often go through painful periods without profits. This time, however, refining is playing a leading role – despite the machinations of oil-producing countries, war in ukraine and sanctions on Russian oil exports. Margins for many refineries have soared and bottlenecks in the sector are driving gasoline price increases across the world.
reasons for arrest
Three factors explain why refining is in the spotlight. The first is a long-term decline in investment in advanced economies. With oil demand predicted to decline in the rich world over the next two decades, investors are wary of spending many billions of dollars on facilities that could become stranded assets. Adding to this is the environmental pressure on refining, which is seen as particularly polluting, and legislation in California and Europe that favors greener fuels. Outside China and the Middle East, where capacity is expanding, refining capacity has declined by about 3 million barrels a day since the start of the pandemic, he calculates. Alan Gelderfrom the energy consultancy Wood Mackenzie.
The second factor that has shaken refining activity is Chinese policymaking. China has historically been a country that exports more than it imports refined products, selling large volumes to other Asian countries. However, in an attempt to combat local pollution and help meet climate goals, officials have cut export quotas for major refineries on gasoline, jet fuel and other products by more than 50% this year. In official plans, China must stop exporting most carbon-intensive refined products by 2025. The perverse result of this is that the country holds about 7% of global idle capacity, even while the rest of the world is hungry for transport fuels.
the weight of war
The third major disruptive force is undoubtedly the war between Russia and Ukraine and the resulting sanctions imposed on Moscow’s hydrocarbon exports. The US and UK have banned the purchase of Russian oil; the EU announced a partial ban on crude oil imports, including one for refined products later this year. The effect of all this is not evident. According to widespread reports (including from experts in tracking oil tankers), Russia is currently exporting more crude oil than it did before the war. The country is selling a lot of crude oil at reduced prices, especially to India, which is importing more than 700,000 barrels a day more than before the Russian invasion.
However, when it comes to refined products, both official sanctions and voluntary sanctions adopted on their own by Western companies appear to be having an effect. According to Natasha Kanevafrom the bank JPMorgan Chase, Russia is selling approximately 500,000 barrels less refined products a day than it did before the war, and perhaps this forced it to stop producing up to 1.4 million barrels a day of refining capacity in May. The consequence is an unprecedented shift, argues Richard Joswick of research firm S&P Global: “the world has enough refining capacity, but idle capacity is shifting to Russia and China.” As a result, he calculates that utilization rates by refineries in the rest of the world will be much higher than previously anticipated.
The refinery crisis may continue for a while yet. The upcoming Atlantic hurricane season, predicted to be more intense than usual, may bring refineries in the Gulf of Mexico to a halt. Another factor is the exact timing and intensity of Europe’s latest round of sanctions on Russian oil exports. If implemented aggressively, they can further squeeze the industry.
The laws of the market could still save the country. The painful price spikes seen at gas stations will sooner or later cool demand a bit and could lead to improvements in energy efficiency, both of which would help balance markets.
A change in trade flows could also help Europe. India’s world-renowned refineries, for example, are turning global crisis into local opportunity. O RBC Capital Markets, an investment bank, assesses that the country “is becoming, in practice, the refining center for Europe”. New major refineries are slated to enter the market soon in Kuwait and Saudi Arabia, which should help ease the shortage as well. As Joswick notes, “With profit margins this high, everyone has an incentive to run the refineries at full throttle.” / TRANSLATION OF ROMINA CACIA