Covid restrictions have already done a lot of damage to the world’s largest economies, but now politics is killing the industry. In many regions of the world, there is a shortage of diesel fuel.
Over the next few months, almost every region on the planet will face the danger of a shortage of diesel fuel, according to Oleh Girko, senior vice president for energy at the British branch of RJ O’Brien Limited in London.
The impact can be huge, from the price of a Thanksgiving turkey to consumers’ home heating bills this winter. According to Mark Finley, an energy fellow at Rice University’s Baker Institute for Public Policy, in the U.S. alone, rising diesel prices will hit the economy by $100 billion. ‘In our economy, everything that moves has diesel,’ Finley says. – Moving goods is one thing. People potentially freezing to death is another.’
In the United States, inventories of diesel fuel and fuel oil have reached the lowest level for this time of the year in data for four decades. Northwest Europe is also facing low supplies, with stocks forecast to hit a low this month and then fall further by March, soon after sanctions that will cut off the region from Russian seaborne supplies take effect. ‘This is by far the biggest diesel crisis I’ve ever seen,’ said Dario Scaffardi, the former CEO of Italian oil refiner Saras SpA, who has worked in the industry for nearly 40 years.
Diesel in the New York Harbor spot market, a key indicator, is up about 50% this year. In early November, the price reached $4.90/gallon, roughly double the year-ago level.
The expected shortfall is partly the result of panic created around the pandemic, after lockdowns killed demand and forced refiners to shut down some of their least profitable plants. But the looming shift away from fossil fuels has also dampened investment in the sector. Since 2020, US refining capacity has been reduced by more than 1 million barrels per day. Meanwhile, in Europe, shipping disruptions and labor strikes against continued quarantine measures also affected oil production.
The situation may become much more dramatic due to the fact that the European Union is approaching withdrawal from Russian supplies. Europe relies on diesel more than any other fuel in the world. According to data from Vortexa Ltd, about 500 million barrels a year are shipped by ship, with about half of that typically loaded at Russian ports. The US also stopped imports from Russia, which was a major supplier to the East Coast last winter.
From the beginning of February, EU sanctions will prohibit Russian maritime supplies. These Russian barrels need to be replaced somehow if the region’s economy is to continue operating as it is now. How and whether this will happen is still unknown. Winter cold will also exacerbate problems in Europe. Stockpiles in the Northwest will fall to 211.9 million barrels in March, a month after EU sanctions came into force, according to data from consultancy Wood Mackenzie Ltd. This would be the lowest level since 2011.
Global fuel shortages have made it more profitable for exporters such as China and India to ship to European countries, which can pay large premiums. China’s total fuel exports are expected to rise by 500,000 barrels a day to nearly 1.2 million barrels by the end of the year, according to industry consultancy FGE. It remains to be seen whether this will be enough to close the global production shortfall.
