Diesel/Gasoline Supply Shock Leads to Hyperinflation and GDP Fall

The global diesel and gasoline markets are crashing in the $ 50-60 per barrel (bbl) range, reflecting a clear lag in the refining system to respond effectively and decide whether to supply diesel or petrol. The precarious situation is due to the fact that stocks around the world are at historically low levels and, therefore, can not provide the necessary shock absorbers. The loss of Russian refining due to operational shutdowns and product reduction challenges has caused a diesel/gasoline hole of more than 1 million barrels per day (bpd) in Europe, which is not easy to close.

Diesel is the soul of the global economy, essential for vital sectors such as agriculture, construction and transport – its price affects almost all supply chains and goods. Governments face tough decisions. They can help consumers by reducing taxes on diesel, but this is likely to only increase demand, which may support the overall economy but exacerbate the current tight supply situation. If supply does not improve, governments will have to put in place contingency plans to limit sales to consumers to ensure that key sectors of the economy continue to function smoothly.

The loss of crude supply has hampered the capacity of the shrinking European refining sector to operate at high rates of use and has accelerated a downward trend in Europe, which has lost 2 million bpd of crude refining from its maximum capacity of 17.5 million bpd in 2005 . USA. following a similar trend, losing between 1 million and 1.5 million bpd of refining capacity in the last 3-4 years. The move towards phasing out hydrofluoric acid (HF) alkylation technology and lower availability of imported fuel oil (VGO) / residues has affected the US refinery’s ability to increase gasoline production.

Apart from the European Union and the USA, the capacity of the refineries is increasing mainly to meet the growing domestic demand. However, the pandemic has severely affected the pace of additions with many refinery projects in the Middle East, Africa and Asia reporting delays due to supply chain and resource issues. The recent news that Nigeria Dangote Refinery is unable to secure an outsourcing team is a prime example. Latin American refining was already in decline before the pandemic and has little to offer, let alone domestic supply.

Overall, the cost of refining has risen alongside expanded gas, hydrogen and utility costs. Thus, a limited refining system as demand has recovered has resulted in precariously lower supply coverage days in most countries. Many have imposed higher days of stock coverage making it difficult to resolve regional product imbalances with trade flows.

To meet growing demand, refining work will have to increase by 4.6 million bpd from June to August 2022, compared to current forecasts of 3.3 million bpd. With limited increase in overall travel, the second-class diesel-petrol optimization lever has little to offer. The aim is to maximize diesel fuel and indirectly fuel the spread of the gasoline crack.

U.S. gasoline inventory levels continue to decline, from 246 million barrels at the start of Russia’s invasion of Ukraine to 217 million barrels today.

The loss of Russian refined exports and products will not be easily covered by the rest of the world. High diesel prices will escalate global hyperinflation and lead to a possible contraction in GDP.

Destroying demand can lead to recession and upset the balance, but it will be a painful experience for consumers. Nevertheless, gasoline and diesel cracks are expected to remain strong during the northern hemisphere summer. Many will hope for a modest correction from August and September 2022 onwards, but much depends on how sanctions will be implemented in Russia by the end of the year.

Compressing one side to produce more diesel or jet fuel will worsen gasoline supply and vice versa. For the operation of refineries, it is a bonus, which produces fantastic profits.

It is no wonder, then, that US President Biden has called for refineries’ profits to be much higher than normal and for refineries to do more to facilitate supply.

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