Explainer – Why is there a global refining crisis?Reuters

© Reuters. FILE PHOTO: Smoke billows from a fire at a refinery owned by Russian oil producer Gazprom Neft in Moscow, Russia November 17, 2018. REUTERS/Tatyana Makeyeva

Laura Sanikola

(Reuters) – Drivers around the world are suffering from soaring fuel prices, as are the costs of heating buildings, generating electricity and industrial production.

Prices had risen before Russia invaded Ukraine on February 24. But since mid-March, fuel costs have soared, while crude oil prices have risen only marginally. Much of the reason is a lack of sufficient refining capacity to process crude oil into gasoline and diesel to meet high global demand.

How much can the world’s oil refineries produce per day?

Overall, there is enough capacity to refine about 100 million barrels of oil per day, but about 20 percent of that capacity is unusable, according to the International Energy Agency. Much of the unusable capacity is located in Latin America and other places where investment is lacking. This brings the estimated production capacity to around 820-83 million barrels per day.

How many refineries have closed?

The refining industry estimates that the world has lost a total of 3.3 million barrels of refining capacity per day since the beginning of 2020. About a third of these occurred in the United States, with the rest in Russia, China and Europe. In the early days of the pandemic, when lockdowns and remote work prevailed, fuel demand plummeted. Prior to this, refining capacity had not declined for at least three years.

Will refining recover?

Global refining capacity will increase by 1 million barrels per day in 2022 and 1.6 million barrels per day in 2023.

How much has refining volumes fallen since before the pandemic?

In April, processing was 78 million bpd, well below the pre-pandemic average of 82.1 million bpd. The IEA expects refining volumes to rebound to 81.9 million bpd in the summer as Chinese refineries come back online.

Where is the most offline refining capacity and why?

Refinery capacity in the U.S., China, Russia and Europe is lower than before the pandemic. Since 2019, U.S. refineries have shut down nearly 1 million bpd of capacity for a variety of reasons.

Nearly 30% of Russia’s refining capacity was idled in May, sources told Reuters. Many Western countries refuse to use Russian fuel.

China has the most spare refining capacity, and exports of refined products are only allowed under official quotas, mostly awarded to large state-owned refining companies rather than small independent companies that hold most of the country’s spare capacity.

As of last week, China’s state-owned refineries were operating at an average of about 71.3%, and independent refineries were operating at about 65.5%. That’s up from earlier this year, but lower by historical standards.

What else causes high prices?

The cost of shipping products on overseas ships has risen due to strong global demand and sanctions on Russian ships. In Europe, refineries are constrained by high prices, which fuels their operations.

Some refineries also rely on vacuum gas oil as an intermediate fuel. The loss of Russian vacuum diesel prevented the restart of some gasoline production units.

Who benefits from the current situation?

Oil refineries, especially those that export large quantities of fuel to other countries, such as those in the United States. Global fuel shortages have pushed refining margins to record highs, with key 3-2-1 crack spreads approaching $60 a barrel.This has resulted in huge profits for Valero in the US and Reliance Industries in India

India, which refines more than 5 million bpd, has been importing cheap Russian crude for domestic use and export, according to the IEA. The IEA said it expects to increase production by 450,000 units by the end of the year.

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

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