Global Diesel Crunch Fuels New Wave of Energy Nationalism

Global fuel supplies are at their most constrained state in recent memory. China recently prohibited all fuel exports for the duration of the month. Russia has maintained a diesel export ban for several months. The United States has threatened Europe with a diesel export ban unless European nations release some fuel from their storage facilities.

The current crisis revolves around fuels, and each nation is focusing on meeting its own requirements. The issue of resource nationalism is gaining significant attention in the energy sector. Resource-rich countries are increasingly proactive in securing the most advantageous deals with private companies for the development of these natural resources.

However, energy discussions have shifted from securing the best deal to ensuring local fuel demand is met. Diesel, a critical component in every global economy, is now at the forefront of priorities. Analysts warned as early as April that the conflict between the United States and Israel, along with Iran, would exacerbate fuel supply issues more than crude oil supply.

Six months later, the consequences are evident, with diesel crack spreads reaching an all-time high of over $100 per barrel in September, though they have since eased below that alarming level. There simply aren't enough refineries to compensate for the lost refined product supply from the Middle East, and Ukraine's President, Volodymyr Zelensky, announced that his forces would intensify attacks on Russian refineries.

These developments have driven diesel prices to unprecedented levels, particularly in the United States, leading to discussions about a potential diesel fuel ban to ensure domestic fuel supply. However, the U.S. produces more diesel than it consumes, so it is not truly short on supply. The issue for the U.S. lies in the global pricing of fuel.

The U.S. eventually abandoned the idea of a ban, even after President Donald Trump pressured the EU to release 100 million barrels of crude, diesel, and gasoline from storage. Diesel crack spreads have since declined, and prices have slightly decreased, though not dramatically, with the U.S. national average now at $6.3151 per gallon.

European countries face a more dire situation as they are heavily reliant on imported fuel. The European Union, in particular, has fewer refineries than it did 15 years ago, resulting in insufficient capacity to supply local markets. Consequently, dependence on both crude oil and fuel imports has increased. Although there are optimistic reports about the reopening of the Hormuz Strait, allowing oil to flow freely out of it, these gains in supply will not reach Europe.

European countries may be compelled to export more diesel if supply from elsewhere remains limited. Bulgaria recently lifted a ban on diesel exports imposed last year due to its refinery's output capacity. However, the Chinese fuel ban and Russia's extension of its diesel export ban will not benefit heavy fuel importers, and the Middle Eastern supply situation is expected to remain poor, given the ongoing strikes on Iranian refineries and damaged Iranian refineries.

The Strait of Hormuz will continue to focus primarily on crude oil and some liquefied petroleum gas (LPG) cargoes. The U.S. remains the primary source of refined fuels, working to control domestic prices through any necessary measures. The ongoing war in the Middle East has unquestionably proven energy security as the top concern for all nations, even those European ones that had previously championed decarbonization efforts initiated after 2015.

They still prioritize decarbonization, but it is no longer their top priority. The top priority is now securing sufficient fuel for local markets and drivers.