Motorists around the world are feeling pain at the pump with rising fuel prices and rising costs for building heating, power generation and industrial production.
Prices had already been raised before Russia invaded Ukraine on February 24. But since mid-March, fuel costs have risen, while crude oil prices have risen only modestly. Much of the reason is a lack of sufficient refining capacity to convert crude oil into gasoline and diesel fuel to meet high global demand.
How much can the world refineries produce on a daily basis?
In total, according to the International Energy Agency, there is enough capacity to refine about 100 million barrels of oil per day, but about 20% of that capacity is unusable. Much of that unusable capacity is in Latin America and other places where there is a lack of investment. That leaves about 82-83 million bpd in projected capacity.
How many refineries are closed?
The refining industry estimates that the world has lost a total of 3.3 million barrels of daily refining capacity since early 2020. About a third of these losses occurred in the United States, the rest in Russia, China and Europe. Demand for fuel collapsed early in the pandemic when lockdowns and remote working were rife. Previously, refining capacity had not declined in any year for at least three decades.
Will refining increase?
Global refining capacity is expected to increase by 1 million barrels per day in 2022 and 1.6 million barrels per day in 2023.
How Much Has Refining Fallen Since Before the Pandemic?
In April, 78 million barrels were handled per day, a sharp drop from the pre-pandemic average of 82.1 million barrels per day. The IEA expects refining to recover to 81.9 million barrels per day over the summer when China’s refineries come back online.
Where is most refining capacity offline, and why?
The United States, China, Russia and Europe all operate refineries with lower capacity than before the pandemic. U.S. refineries have closed nearly a million bpd of capacity since 2019 for a variety of reasons.
Nearly 30% of Russia’s refining capacity was shut down in May, sources told Reuters. Many western countries refuse Russian fuel.
China has the most spare refining capacity, the export of refined products is allowed only under official quotas, which are mainly allocated to large state refiners and not to smaller independent companies that control much of China’s spare capacity.
Last week, run rates at state-backed refineries in China averaged around 71.3% and independent refineries around 65.5%. That was higher than earlier in the year, but low by historical standards.
What else contributes to high prices?
The cost of transporting products on overseas ships has risen due to high global demand, as have sanctions against Russian ships. In Europe, refineries are constrained by high prices for natural gas, which drives their operations.
Some refineries also rely on vacuum gas oil as an intermediate fuel. The loss of Russian vacuum gas oil prevented certain gasoline-producing units from restarting.
Who benefits from the current situation?
Refineries, especially those that export a lot of fuel to other countries, such as US refineries. Global fuel shortages have pushed refining margins to historic highs, with the main 3-2-1 crack spread approaching $60 a barrel. That has brought big gains to US-based Valero and India-based Reliance Industries
India, which refines more than 5 million barrels per day according to the IEA, imports cheap Russian crude for domestic use and export. Production is expected to increase by 450,000 by the end of the year, the IEA said.
More refining capacity will come online in the Middle East and Asia to meet growing demand.