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Explainer: Why is there a global shortage of oil refineries?

Image: Reuters Berita 24 English - Fuel prices are skyrocketing, and costs are rising for industrial production , power generation, and buil...


Image: Reuters

Berita 24 English - Fuel prices are skyrocketing, and costs are rising for industrial production, power generation, and building heating, which is hurting drivers everywhere.

Before Russia invaded Ukraine on February 24, prices were already high. While crude prices have barely slightly increased since mid-March, fuel prices have skyrocketed. Lack of sufficient refining capacity to convert oil into gasoline and diesel to fulfil growing worldwide demand is a major contributing factor.

WHAT AMOUNT CAN THE WORLD'S RUBBER WORKS PRODUCE DAILY?

According to the International Energy Agency, there is adequate capacity to process around 100 million barrels of oil per day, but only about 20% of that capacity is being put to use. In Latin America and other regions where there is a dearth of investment, a large portion of that unusable capacity is located. The remaining anticipated capacity is somewhere between 82 and 83 million bpd.

HOW MANY REFINERIES HAVE BROUGHT TO A STOP?

The world's daily refining capacity has decreased by 3.3 million barrels, according to the refining industry, since the year 2020. These losses were split roughly evenly between the United States, Russia, China, and Europe. Early in the epidemic, when lockdowns and remote work were common, fuel demand fell. For at least three decades, refining capacity has not decreased in any year.

SHALL REFINING INCREASE?

There will be a daily increase in global refining capacity of 1 million bpd in 2022 and 1.6 million bpd in 2023.

HOW MUCH SINCE BEFORE THE PANDEMIC HAS REFINING DECLINED?

Daily processing of 78 million barrels in April was significantly lower than the pre-pandemic average of 82.1 million bpd. As Chinese refineries restart, the IEA anticipates that refining will increase this summer to 81.9 million bpd.

WHERE AND WHY IS THE MOST REFINING CAPACITY OFFLINE?

Refineries in the United States, China, Russia, and Europe are all running at lesser capacity than they were prior to the pandemic. Since 2019, almost one million bpd of capacity at U.S. refineries has been shut down for various reasons.

In May, sources told Reuters that about 30% of Russia's refining capacity was not being used. Russian fuel is being rejected by many Western countries.

Refined product exports are only permitted under official quotas, which are mostly provided to large state-owned refining enterprises and not to smaller independent companies that hold the majority of China's spare capacity. China has the highest spare refining capacity.

Run rates at China's state-backed refineries as of last week averaged about 71.3 percent, while those at independent refineries were about 65.5 percent. Though lower than average historically, that was up from earlier in the year.

WHAT ELSE HELPS TO DETERMINE HIGH PRICES?

Due to increased global demand and sanctions against Russian boats, the cost of shipping goods overseas has increased. The high cost of natural gas, which fuels refineries' operations, limits their ability to operate throughout Europe.

Vacuum gasoil is another intermediate fuel used by some refiners. The inability to restart some gasoline-producing facilities due to the loss of Russian vacuum gasoil.

WHO IS ADVANTAGED BY THE PRESENT SITUATION?

Refiners, particularly those who ship a lot of petroleum abroad, like those in the United States. Due to the widespread fuel shortages, refining margins have reached all-time highs, with the crucial 3-2-1 crack spread approaching $60 per barrel. That has led to significant earnings for Reliance Industries and Valero, both of which are based in India.

According to the IEA, India refines more than 5 million bpd and has been buying inexpensive Russian crude for both internal use and export. By year's end, the IEA predicts a 450,000 increase in output.

To accommodate the rising demand, more refining capacity is expected to go online in the Middle East and Asia.


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