Why is diesel in short supply around the world?

By Dmitry Migunov

Diesel fuel prices are breaking global records, at least when compared to oil prices. A similar situation is observed in several parts of the world at once. The reasons for the fuel crisis were high demand for diesel in China, as well as a ban on the supply of this oil product from Russia to Europe introduced earlier this year. The situation was aggravated by the closure of many refineries in the United States and the instability of oil prices. In Russia, the difficulties are not with diesel production, but with logistics. What else are the causes of the fuel crisis and whether it will be possible to solve them - Izvestia figured it out.

Why diesel fuel disappeared in 2023
Oil has gained significantly in price over the past few weeks, reaching $83-86 per barrel. However, oil products, and especially diesel, have risen in price even more. The margin of producers of this type of fuel has grown sharply.

According to market logic, rising prices should lead to an increase in production and an equalization of supply and demand. However, today such a scenario is hampered by several "buts", and each region of the world has its own characteristics. Analysts believe that the diesel market will storm in the coming years as it faces fundamental difficulties.

How much will diesel prices rise in the US?
In the US, the volume of all petroleum distillates, including diesel, fell to 115 million barrels by mid-August, 18% less than the average over the past 10 years. The indicator became one of the worst in history.

At first glance, the situation is not catastrophic, and the market could be provided through the production of petroleum products. However, in reality, it is hardly possible to intensify the work of oil refineries.

U.S. refinery utilization is about 94%, well above the average in recent years and the highest since 2015. At the same time, gasoline stocks were at a historical minimum, forcing producers to use the few free capacities for the production of this particular product.

The peculiarity of the American market is that the volume of diesel stocks here follow business cycles. They contract during the growth period and recover during the “pause” in the middle of the cycle, especially strong growth is observed during the recession.

This time, the pause was not enough, and if a recession can be avoided, then the fuel shortage could become catastrophic, and a two-fold or even three-fold increase in prices is more than real. Until recently, diesel prices were within the average (adjusted for inflation), but now their rise is almost certain.

What will be the prices for diesel fuel in Europe
In Europe, the situation with diesel last year was not acute. But in January 2023, sanctions effectively banned European companies from buying oil products from Russia. In the first few months, the Europeans were buying up all the available Russian diesel and reducing their purchases of crude oil. Thanks to this, a situation similar to what is happening with natural gas temporarily developed: storage facilities were filled to capacity, and a shortage in the first winter season was avoided.

At the moment, inventories have reached their seasonal peak - 248 million barrels, but this figure is significantly lower than the usual level for the summer. Inventories will shrink rapidly in the coming months, analysts at Wood Mackenzie said. At the same time, it will not be possible to restore them at the expense of Russian supplies, although, of course, there will always be options with imports through third countries, but the volume of such purchases is limited.

In 2023, European countries that abandoned Russian oil and oil products and were forced to switch to lighter Arabic oil. The peculiarity of this fuel is that it produces significantly less diesel. Until now, China has been able to partially replace the difference. In 2023, Beijing sharply increased the export of petroleum products to 300 thousand barrels per day and earned more from this than from domestic sales. On average, Europeans overpaid by 280 yuan ($39) per 1 ton.

However, already in autumn the volume of deliveries from China may drop sharply: in the coming days, the country's government will decide on export quotas. At the same time, demand in the domestic market in China is growing against the backdrop of high spending on infrastructure and a decline in the housing sector. If China fails to increase supplies abroad, then the Europeans are in for a few unpleasant months.

Where did diesel go in Russia
Difficulties with a diesel engine have not bypassed Russia either. Against the backdrop of a harvesting campaign in several southern regions of the country, oil products were in short supply. The difficulties are caused primarily by logistical reasons: the railways are loaded due to the peak of the tourist season. In addition, the reorientation of coal supplies from the west to the east also played a role. Finally, repair work at a number of refineries did not improve the situation either.

The situation is aggravated by the reflection of problems on the world market as a whole. Although diesel exports to Europe have been minimized, there are other buyers of Russian fuel. In particular, Brazil, which previously bought diesel from the United States, today switched to the east, increasing imports from Russia by 25% to 235,000 barrels per day.

What will happen to diesel fuel in the future
Be that as it may, but the sharp rise in diesel prices causes difficulties both for farmers in the midst of the harvesting campaign and for carriers. The Gruzavtotrans Association even insists on price collusion between fuel companies and demands that prices be fixed at the level that was before the rise in price. Truckers admit that the current state of affairs in the fuel market will further put pressure on inflation.

By the way, this problem may arise in other countries. Suffice it to recall the mass strikes of drivers throughout Asia in the winter of 2021/22, associated precisely with the reduction in diesel supplies from China. This time they can ride all over the world.

What is the fundamental reason for the diesel shortage? It started in the USA in 2020-2021 . Against the backdrop of a collapse in demand during the pandemic, the Joe Biden administration has also embarked on a green agenda. Oil refineries across the country began to close. A total of five refineries were closed, resulting in a 5% reduction in total refining capacity.

In 2021, the administration demanded that the oilmen increase not only the volume of production, but also the distillation of fuel, but they only shrugged their shoulders. In the current circumstances, when the authorities support ESG initiatives, no one wants to get involved in the costly process of building new and expanding old capacities, especially given that even up to this point the oil market has been extremely volatile and high-risk for refiners. Moreover, no one wants to invest in recycling, when there are considerable chances that in 7-10 years it will not be needed or, which is much more likely, it will face an unfriendly policy of the authorities.

At the same time, the last major refinery in the country was opened in 1977. Under these conditions, the construction of a new facility may require more time and investment, as the necessary experience and competencies have become less over the past almost half a century. Similar problems are observed in the European Union, where the fight against all types of fossil fuels is even more severe. The ban on diesel imports from Russia was the final touch to this picture. Apparently, the shortage and high cost of petroleum products is a problem that will be repeated from year to year
This article originally appeared in Russian at Iz.ru