Fuel Prices: The Refining Bottleneck That Won’t Budge

The oil industry’s warnings about high fuel prices have become a familiar refrain in recent months. However, this time it’s not just about market dynamics or speculation driving up costs. ExxonMobil and Chevron are warning that the global refining capacity is severely strained, leaving consumers with little respite from record-high fuel prices.

The problem lies in processing crude oil into usable fuels like gasoline and diesel. With nearly 10% of the world’s refining capacity offline due to various factors such as the closure of the Strait of Hormuz, Ukrainian attacks on Russian refineries, and China’s export ban, the remaining facilities are running at full capacity. This has led to record-high fuel-making margins that benefit refinery owners but drive up costs for consumers.

In the US, gasoline prices have crept above $4 a gallon, frustrating drivers and politicians alike. Despite West Texas Intermediate being down 26% from its peak, retail gasoline prices are just 10% below their highs this year in May. This disconnect between oil prices and fuel prices is not new but has become more pronounced recently.

Refining capacity is the bottleneck in the petroleum system right now, with margins exceptionally high, said Neil Mehta, an analyst at Goldman Sachs Group Inc. The real pain point is middle distillates – diesel, jet fuel, and heating oil. Retail diesel prices are just 6% below their highs this year even though the drop in WTI has been four times as much.

The refining bottleneck is not a temporary issue but one that is likely to persist for the foreseeable future. ExxonMobil operates the world’s biggest refinery network outside of China, and its CEO Darren Woods noted that about 5 million barrels a day of refining capacity is unable to reach the global market. “I’ve never seen the available capacity relative to demand as low as it is today,” he said. “It will take time for the industry to recover from this.”

This problem has been brewing for months, with oil industry participants warning about the dangers to the energy system. Some analysts even predicted that oil could hit $200 a barrel if the Strait of Hormuz remained shut for an extended period. While those levels were not reached, the current situation is more dire than in the past.

The implications are far-reaching. With consumers already feeling the pinch, policymakers will be under pressure to address the issue. However, any solutions must take into account the complex web of geopolitical factors and market dynamics at play. The refining bottleneck has exposed the fragility of the global energy system and its vulnerability to disruptions in key regions.

As we head into the third quarter, consumers can expect fuel prices to remain high, with some analysts predicting upward pressure on product pricing. Refined product inventories are approaching historical lows, meaning that fuel prices will continue to be influenced by storage levels rather than oil prices. This trend is a worrying sign for an economy still reeling from the effects of the pandemic and ongoing global conflicts.

The refining bottleneck has highlighted the need for a more resilient energy system that can withstand disruptions. Policymakers and industry leaders must work together to address this issue, investing in new infrastructure and technologies that can help mitigate the impact of future crises. The current situation is a stark reminder of the importance of reliable supply chains and the need for governments and companies to prioritize energy security.

The tensions in key regions are driving up costs and creating uncertainty in global markets. In the coming months, the world will be watching closely as policymakers and industry leaders work to address this crisis. Will they be able to find solutions that benefit both consumers and producers? Only time will tell.

But for now, the refining bottleneck remains a stubborn obstacle to economic recovery, a reminder of the fragility of our energy system, and a warning sign that the global economy is still far from stable.