Diesel fuel shortages could lead to a global economic crisis within months
Global diesel fuel shortages are rapidly emerging, and most in the western world are yet to recognise the catastrophic potential.
Asia Markets first wrote about the prospect of diesel fuel shortages in the US in November 2022.
Then, shipping monitoring services had reported a number of diesel tankers heading to Europe were involved in unscheduled diversions to the United States.
“The Thundercat, carrying a cargo of diesel from the United Arab Emirates, on Thursday changed its destination from the Dutch port of Rotterdam to the New York Harbour, according to shipping data. Proteus Jessica, currently in the Atlantic Ocean, has in recent days changed its destination to New York from the Southwald waiting area off the southeast coast of England.“
If you thought things were sounding desperate back then, wait until you see what the next few months could bring.
The International Energy Agency recently published its September Oil Market Report.
Some key takeouts:
- World oil demand remains on track to grow by 2.2 mb/d in 2023 to 101.8 mb/d, led by resurgent Chinese consumption, jet fuel and petrochemical feedstocks.
- The extension of output cuts by Saudi Arabia and Russia through year-end will lock in a substantial market deficit through 4Q23.
- Global observed oil inventories plummeted by 76.3 mb to a 13-month low in August, led by a hefty decline in oil on water. Non-OECD oil stocks fell by 20.8 mb with the largest draw seen in China, while OECD inventories eased by 3.2 mb.
So, we have a world where oil demand is surging and supply is being strangled.
What has this go to do with diesel?
Well, to fuel trucks you need to find some oil, then find a refinery that can turn the oil into diesel.
So, there are two main aggravating factors that have us on the path to catastophic diesel fuel shortages… oil markets and oil refineries.
The oil markets factor (in-part outlined above) is clear… The oil market is becoming extremely tight.
The U.S. Strategic Petroleum Reserve was pillaged ahead of the November 2022 U.S. mid term elections to keep fuel prices down (voters don’t like high fuel prices).
And as you can see below the situation remains dire.
This chart is a big worry for the U.S.
The Strategic Petroleum Reserve currently holds just over 348 million barrels of oil – to put this into perspective, if America were to rely on this reserve for consumption it would last 46 days.
The reserve hasn’t been this depleted in four decades.
What’s making the situation worse is OPEC supply cuts which were set in motion in October 2022 when OPEC+ agreed to cut production by 2 million barrels per day. At the time this was the largest cut since the COVID-19 lockdowns begun in early 2020.
In the latest OPEC move (highlighted above in the International Energy Agency key takeouts), Saudi Arabia and Russia confirmed they would extend their combined 1.3 million barrel per day cuts until the end of 2023.
The United State’s dwindling influence over OPEC kingpin Saudi Arabia is telling. Last month, the Saudi’s were announced as one of six new member states of the China-led BRICS alliance.
Watch this space. Hedge Fund manager Chris MacIntosh has suggested Saudi Arabia’s burgeoning romance with China will lead to conflict.
Refinery capacity exacerbating diesel fuel shortages
Russia accounts for close to 15% of the world’s diesel supply. The country’s enormous oil refining industry produces 6.8 million barrels of refined oil (mostly diesel and jet fuel) per day.
But Russian refineries, as of Thursday (September, 21), have been banned from exporting diesel to all countries apart from four friendly former Soviet states – Belarus, Kazakhstan, Armenia and Kyrgyzstan.
The announcement made by the Kremlin, saw global oil prices spike above $94 a barrel in the proceeding hours.
As Henning Gloystein from Eurasia Group told the Financial Times:
“Russia wants to inflict pain on Europe and the US and it looks like they’re now repeating the playbook from gas in the oil market ahead of the winter months — they’re showing that they’re not finished using their power over energy markets.”
But that’s far from the only problem.
In western countries – namely the U.S. and the U.K. – refining capacity has fallen off a cliff.
Bloomberg data shows three quarters of crude oil pumped within the United Kingdom was exported during 2022 because there wasn’t enough capacity for it to be refined within U.K. shores.
Over the past two decades, the country’s refining capacity has reduced by a whopping 50%.
Refining capacity has been crunched in the U.S. too.
The U.S. saw two years of sharp declines after dozens of refineries across the country were shuttered as the world was hit with COVID lockdowns.
Capacity in the U.S. is now around 18 million barrels a day, according to the Energy Information Administration. That’s around one million barrels below capacity during 2019.
As of January 1, 2023, there were 129 operable petroleum refineries in the United States, five fewer than 2019.
Asia Markets previously featured commentary from market analyst George Gammon on the U.S. refinery situation.
Gammon pointed to green agendas disincentivizing the addition of more refining capacity.
“If you owned a refinery, would you reinvest in more capacity when you have the Government breathing down your neck saying ‘we got to do something about climate change’, or in California they’re saying we’re not going to sell any gas cars, only electric cars by 2035… You got the Green New Deal, you’ve got Greta Thunberg.
“Isn’t it ironic that the prices of weeding ourselves off fossil fuels, or the attempt to do so too early, is actually what is causing the demise of the United States and the West as we know it. Everybody wants clean energy… but the problem is if we go from A to B too early there isn’t going to be an economy to benefit from the clean air. “
What are the implications of worsening diesel fuel shortages?
Diesel quite literally fuels the global economy. Without it, the economy comes to a standstill.
As you read this article, just about everything in front of you required a truck, which required diesel, to get there.
Diesel fuel prices are already breaking out in just about every region on earth. It’s likely this is just the beginning of an extended period of extreme diesel prices.
There are a lot of lines in these charts, but the bottom line is a high cost of diesel impacts everything.
This all could see the “soft landing” narrative destroyed. It could lead to much higher inflation, for much longer. Already treasury yields are telling us something, ticking higher in recent days.
Could it be diesel fuel shortages that fuel a global economic crisis and stock market crash as we move into 2024?