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The world has a fuel problem

Capacity issues are exacerbated by the certainty that there will be continued closures of existing refineries and reduced investment in new capacity as, particularly in the West, environmental pressures and the electrification of vehicle fleets are seen as a growing threat to the facility economy. .

The shadows of climate change and electrification hanging over the refining sector are weakening what would traditionally be incentives to invest and extending the lifespan of refineries through near-record margins.

In the short term, as plants in the United States and Europe are affected by fires and refineries in both regions (and Russia) enter the seasonal period of intensive maintenance, other immediate influences on the capacity of refining occurs.

Diesel is the workhorse of the global economy. And this resource is increasingly rare. Credit: Gabriele Charotte

The imbalances between supply and demand for diesel could be even greater without the weakening of the Chinese economy and therefore its demand.

After gorging itself on cheap Russian oil, thanks to G7 (plus Australia) sanctions on exports of Russian oil and distillates which excluded it from other major markets, China transformed and exported part of its excess stocks.


Sanctions include a $100 per barrel cap on Russian products that sell for more than crude oil, the most important of which is diesel. International prices are around $125 per barrel and, unusually, higher than the price of crude.

Sanctions would have some effect on Russian exports but, in an attempt to mitigate rising domestic fuel costs and fuel its war efforts, diesel that might otherwise have been exported was redirected to the domestic market, increasing thus the pressure on global supply.

Globally, stocks of diesel and other refined products have fallen to their lowest levels since the start of the year and the supply-demand equation is likely to deteriorate in the near term and could get even worse more if all of China’s small measures to boost its faltering economy succeed.

Diesel is the benchmark fuel for the global economy, not only for powering trucks and cars, but also for agricultural industries, construction, manufacturing, non-electrified rail and shipping.

If current high prices continue, they will have an even more insidious and broader impact on industry and consumer costs and prices than the surge in gasoline prices.

Unless the Saudis and Russians change their minds and strategy and begin to scale back their production cuts, there will be no obvious solution other than the slowdown in demand that would result from a global recession. important.

Last month, while oil prices were nearly $3 a barrel lower than Monday, rising gasoline prices contributed more than half of the 0.6 percent rise in the rate. American inflation.

Although it may take longer for the high price of diesel to show up in inflation data, it will contribute to inflation rates that are higher than they otherwise would have been. In turn, this would create pressure on central banks to raise interest rates or, at least, keep them at higher levels than they otherwise might have done.


The global economy is fragile. China is in major trouble, Europe is struggling, and while it has shown surprising resilience, the U.S. economy is showing signs that 18 months of rising interest rates is finally taking its toll. .

The Federal Reserve Board meets this week and is expected to keep U.S. rates unchanged, although there is the possibility of another 25 basis point hike.

Although it tends to focus on “core” inflation rates, or rates that exclude food and energy costs, any commentary on the inflation outlook, particularly on energy costs, will be in depth and will have implications for the stock and bond markets.

Most who follow the oil industry believe that oil stocks will continue to deplete – demand will continue to outstrip supply – and that there is a real prospect of oil prices above $100 per barrel in the short term, which would even imply higher diesel prices.

Unless the Saudis and Russians change their minds and strategy and begin to scale back their production cuts, there will be no obvious solution other than the slowdown in demand that would result from a global recession. important.

This is not something we – or they – would want to experience. They take a tricky path.

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