Why is there a global oil refining crisis? Here is an explanation

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The refining industry estimates that the world has lost 3.3 million barrels of daily capacity since 2020.

Drivers around the world are feeling pain at the pumps as fuel prices soar, and costs rise for building heating, power generation and industrial production.

Prices were already high before Russia invaded Ukraine on February 24. But since mid-March, fuel prices have jumped while crude prices have risen only modestly. A big part of the reason is a lack of adequate refining capacity to turn crude into gasoline and diesel to meet strong global demand.

How much can global refineries produce daily?

Overall, there is enough capacity to refine about 100 million barrels of oil per day, according to the International Energy Agency, but about 20% of that capacity is unusable. Much of this unusable capacity is in Latin America and other places where there is a lack of investment. That leaves between 82 and 83 million bpd of projected capacity.

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How many refineries have closed?

The refining industry estimates that the world has lost a total of 3.3 million barrels of daily refining capacity since the start of 2020. About a third of these losses have occurred in the United States, the rest in Russia, in China and Europe. Fuel demand crashed early in the pandemic when shutdowns and remote working became widespread. Previously, refining capacity had not declined in any year for at least three decades.

Will refining resume?

Global refining capacity is expected to increase by 1 million bpd per day in 2022 and 1.6 million bpd in 2023.

How much has refining gone down since before the pandemic?

In April, 78 million barrels were processed daily, down sharply from the pre-pandemic average of 82.1 million bpd. The IEA expects refining to rebound over the summer to 81.9 million bpd as Chinese refiners come back online.

Where is most refining capacity offline, and why?

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The United States, China, Russia and Europe are all operating refineries at lower capacity than before the pandemic. U.S. refiners have shut down nearly a million bpd of capacity since 2019 for a variety of reasons.

Nearly 30% of Russia’s refining capacity was idle in May, sources told Reuters. Many Western countries reject Russian fuel.

China has the most unused refining capacity, exports of refined products are only allowed under official quotas, mainly granted to large state-owned refiners and not small independent companies that hold much of the unused capacity from China.

Last week, operating rates for Chinese state-backed refineries averaged around 71.3% and independent refineries around 65.5%. This was up from the start of the year, but low by historical standards.

What else contributes to high prices?

The cost of transporting products on ships abroad has increased due to high global demand, as well as sanctions imposed on Russian ships. In Europe, refineries are constrained by the high prices of natural gas, which fuels their operations.

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Some refiners also depend on vacuum gas oil as an intermediate fuel. The loss of Russian vacuum diesel has prevented some from restarting some gasoline production units.

Who benefits from the current situation?

Refiners, especially those that export a lot of fuel to other countries, such as US refiners. Global fuel shortages have pushed refining margins to historic highs, with the major 3-2-1 crack spread approaching $60 a barrel. This generated big profits for US-based Valero and India-based Reliance Industries.

India, which refines more than 5 million bpd, according to the IEA, imports cheap Russian crude for domestic use and export. It is expected to increase production by 450,000 by the end of the year, the IEA said.

More refining capacity is expected to come online in the Middle East and Asia to meet growing demand.

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