Collapsed Bridge to the Refining Crisis

The pandemic bullwhip effect saved its hardest crack for consumers at the pump

I had the opportunity to rejoin the hosts of Bloomberg’s Odd Lots podcast last week alongside my good friend Skanda Amarnath to discuss what’s going on in oil markets—including the refinery bottleneck that is the subject of this post—as well as different policy options Western government’s have at their disposal—the good, the bad, and the intriguingly novel.

• Quite simply, the world doesn’t have enough refining capacity—the crude distillation bottleneck has exploded crack spreads and further inflamed pump price pain.

• Across the West, COVID—as well as energy transition incentives and a stroke of bad luck—collapsed the bridge between refining generations whereby legacy facility retirements have accelerated and new capacity in-service dates have been pushed back.

• Available refining capacity has been further eroded by the reduction of Chinese refined product export quotas and the acute pullback in Russian refining throughput following self-sanctioning pressure from traditional product buyers.

• The refining crisis is acutely painful for markets and consumers alike, but it is also inherently transitory—the bottleneck will ease as COVID-delayed capacity comes on-stream—and fundamentally different from other more chronic challenges faced upstream in crude production.

• Unfortunately for policymakers, only time will repair the bridge between refining generations; diplomatic efforts (i.e., China/Russia/Venezuela) could move the needle more quickly but aren’t guaranteed nor will they address the structural but transitory shortfall capacity currently driving crack spreads higher.