Worldwide oil-refining crunch

Worldwide oil-refining crunch

Subject: Economy

Section: Msc

Context:

• Prices were already elevated before Russia invaded Ukraine on Feb. 24. But since mid-March, fuel costs have surged while crude prices are up only modestly.
• Much of the reason is a lack of adequate refining capacity to process crude into gasoline and diesel to meet high global demand.

Why is there a worldwide oil-refining crunch?

• There is a lack of adequate refining capacity to process crude into gasoline and diesel to meet high global demand. 
• According to the International Energy Agency, there is enough capacity to refine about 100 million barrels of oil a day, but about 20% of that capacity is not usable. This is mostly due to lack of investment in countries like Latin America.
• Many refineries around the world have closed down due to decreased demand during the pandemic. The refining industry estimates that the world lost a total of 3.3 million barrels of daily refining capacity since the start of 2020.
• China has the most spare refining capacity as refined product exports are only allowed under official quotas, mainly granted to large state-owned refining companies and not to smaller independent companies that hold much of China’s spare capacity.
• Nearly 30% of Russia’s refining capacity was idled in May. In Europe, refineries are constrained by high prices for natural gas, which powers their operations.
• Some refiners also depend on vacuum gasoil as an intermediate fuel. Loss of Russian vacuum gasoil has prevented certain from restarting certain gasoline-producing units.

Who is gaining from the current situation?

• Refiners, especially those that export a lot of fuel to other countries, such as US refiners- US-based Valero and India-based Reliance Industries.
• India, which refines more than 5 million bpd, according to the IEA, has been importing cheap Russian crude for domestic use and export. It is expected to boost output by 450,000 by year-end, the IEA said.