Europe needs more oil refineries to weather energy shocks, EU warns

Europe may need to expand its oil refining capacity to cope with potential energy shocks, according to a warning from the European Union. Energy Commissioner Dan Jørgensen cautioned that geopolitical tensions and persistent diesel supply constraints signal the need for action. The Middle East conflict and strikes on Russian refineries have exacerbated an already strained global diesel market, leading to rising energy prices.

Jørgensen emphasized the importance of enhancing and maintaining flexible refining capacity in Europe, not only for economic competitiveness but also for security reasons. The EU's largest oil refining contributors are Germany, Italy, Spain, the Netherlands, France, and Belgium, but these nations have collectively lost around a quarter of their refining capacity over the past two decades, a reduction of about 10%.

In response, Brussels initiated discussions with European refineries on Wednesday to explore methods of boosting fuel production at existing plants. Further technical talks are anticipated, with a subsequent meeting planned for early 2027 to evaluate advancements. The industry has submitted some proposals, which the Commission will review, though details on potential measures such as reopening closed facilities or constructing new ones remain undisclosed.

The EU acknowledges that securing crude oil supply is insufficient; it must also possess the industrial capability to convert it into essential fuels like diesel, jet fuel, and others. Although refineries have aided in maintaining supplies, EU officials worry the bloc may lack sufficient flexibility to address additional geopolitical disruptions.

Since diesel is crucial for road transport, agriculture, and industry, while jet fuel is vital for aviation and military operations, increasing domestic refining output could mitigate short-term supply issues and lessen Europe's vulnerability to external shocks. However, boosting refining output may not lead to lower prices if crude oil costs remain high or global supply disruptions continue.

Striking a balance between energy security and climate objectives poses a challenge as the EU seeks to decrease its reliance on imported fossil fuels while ensuring it can meet its fuel needs during the transition. European refineries face pressures from high operating costs, competition from larger foreign facilities, and the long-term outlook for decreasing demand for traditional transport fuels as electrification advances.

Restoring capacity may demand significant investment, but the Commission has not yet proposed financial incentives, regulatory adjustments, or concrete capacity goals. The Commission's current emphasis is on identifying measures to enhance production from existing European refineries, which may prove swifter than building new plants, which entail lengthy investment and permitting procedures.

Reopening dormant facilities or building new ones would be more intricate, requiring investor confidence that demand would justify the expenditure over the asset's lifespan. The task for Brussels is to determine if its talks with industry can swiftly supply additional fuel and avoid fostering investments that might prove stranded assets as Europe shifts away from fossil fuels.

Poland, Czechia, and Slovakia have been leading the push to safeguard Europe's oil refineries ahead of a meeting of EU energy ministers on October 29th. The three nations urged Brussels to devise a long-term strategy to protect the EU's refineries, warning that plant closures could deepen the EU's dependence on imported fuels. They argue that securing crude oil supply and having sufficient refined product capacity are distinct issues; crude oil cannot replace diesel or aviation fuel without adequate processing capability.

Aviation, shipping, agriculture, defense, and emergency services continue to depend on liquid fuels, making domestic refining capacity a strategic concern.