The Economist - USA (2022-06-11)

TheEconomistJune11th 2022 Finance&economics 71

Petrolprices

Squeezeinthe

middle

A

merica’sdrivingseasonhasofficially
begun.Despiterisinginflationandthe
lingeringthreatofthepandemic,motor­
istshitthehighwayswithgustooverthe
recentMemorialDaylongweekend.Some
40mAmericanstravelledbyroad,anin­
creaseof8.3%onthesameweekenda year
earlier.Thatwanderlustcameevenaspric­
esatthepumpwereabout50%abovelast
year’slevels,drivenby anintensesqueeze
onglobalrefining.
Innormaltimes,therefiningbusiness
isa low­margin,low­dramaadjuncttothe
geopoliticallychargedupstreambusiness
of oil production and the politically
charged downstream business of retail
sales.Refinerstypicallymakeprofitmar­
ginsof$5­10a barrelandoftengothrough
painfulspellsofunprofitability.Thistime,
however, refining is playing a starring
role—themachinationsoftheoil­produc­
ingcountries,warinUkraine andsanc­
tionsonRussianoilexportsnotwithstand­
ing.Marginsformanyrefinershaverock­
eted, andbottlenecksinthesectorarepro­
pellingglobalpetrolpricesupwards.
Threefactorsexplainwhyrefiningisin
thelimelight.Thefirstisa long­termde­
clineininvestment inadvancedecono­
mies.Withoildemandintherichworld
forecasttoplungeoverthenexttwode­
cades, investorsare unwillingto spend
manybillionsofdollarsonfacilitiesthat
couldbecomestrandedassets.Addingto
thisisenvironmentalpressureonrefining,
whichisseenasespeciallydirty,andregu­
lationsinCaliforniaandEuropethatfa­
vourgreenerfuels.OutsideChinaandthe
MiddleEast,wherecapacityisexpanding,
refiningcapacityhasplungedbysome3m

barrelsperday(bpd)sincethestartofthe

pandemic,reckonsAlanGelderofWood

Mackenzie,anenergyconsultancy.

Thesecondfactorthathasroiledthere­

finingbusinessisChinesepolicymaking.

Chinahashistoricallybeena netexporter

ofrefinedproducts,sendinglargevolumes

tootherAsiancountries.Inanattemptto

fightlocalpollutionandhelpmeetclimate

targets,however,officialshavecutexport

quotasforbigrefinersofgasoline,jetfuel

andotherproductsbymorethan50%this

year.Onofficialplans,Chinaissettostop

exporting mostcarbon­intensiverefined

productsaltogetherby2025.Theperverse

resultisthatitissittingonroughly7%of

globalsparecapacityevenastherestofthe

worldthirstsfortransportfuels.

The third big disruptive force is, of

course,Russia’swarinUkraineandthere­

sultingsanctionsimposedonitsexportsof

hydrocarbons.America andBritainhave

bannedpurchasesofRussianoil;theeu

hasannounceda partialembargooncrude

imports, including one on refined pro­

ductslaterthisyear.Theeffectofallthisis

notclear­cut.Bywidespreadaccounts(in­

cluding from tanker­tracking experts),

Russia isnowexportingmore crude oil

thanitdidbeforethewar.It issellinglots

of cut­ratecrude to India in particular,

whichisimportingover700,000barrelsa

daymorethanit didbeforetheinvasion.

When it comes to refined products,

though,bothofficialsanctionsandthevo­

luntary“selfsanctions”embracedbyWest­

ernfirmsseemtobebiting.Accordingto

Natasha Kaneva of JPMorgan Chase, a

bank, Russiais sellingroughly 500,000

fewerbarrelsofrefinedproducta daythan

itwasbeforethewar,andmayhavebeen

forcedtoshutdownasmuchas1.4mbpdof

refiningcapacityinMay.Theresultisan

unprecedentedshift,arguesRichardJos­

wickofs&pGlobal,a researchfirm:“The

worldhasplentyofrefiningcapacity,but

thesparecapacityismovingintoRussia

andChina.”Asaresult,hereckonsthat

utilisationratesforrefinersintherestof

theworldwillbemuchhigherthanprevi­

ouslyenvisioned.

Therefiningcrunchcouldcontinuefor

a whileyet.ThecomingAtlantichurricane

season,whichisforecast tobe stronger

thannormal,mayshutdownrefineriesin

theGulfofMexico.Anotherfactoristhe

precisetimingandintensityofEurope’s

latestroundofsanctionsonRussianoilex­

ports.Ifimplementedaggressively,these

couldfurthersqueezethesector.

Marketforcescouldyetsavetheday.

The painful price spikes seen at petrol

pumpswilleventuallycooldemanda lit­

tle,andcouldleadtoimprovementsinen­

ergyefficiency,bothofwhichwillhelpbal­

ancemarkets.

A shiftintradeflowscouldalsocometo

Europe’said.India’sworld­classrefiners,

forinstance,areturningglobalcrisisinto

localopportunity.rbcCapitalMarkets,an

investmentfirm,reckonsthatthecountry

“isbecomingthedefactorefininghubfor

Europe”.Bignewrefineriesarescheduled

tocomeonlinesooninKuwaitandSaudi

Arabia,whichshouldhelpeasetheshort­

agestoo.AsMrJoswickobserves, “With

marginsthislarge,everybodyhasanin­

centivetorunrefineriesflatout.”n

N EWYORK
Refinersprovidea freshsourceof
dramaforoilmarkets

Thesky’sthelimit

Rocket fuel

Europe, oil-refining margins, $ per barrel

Source:ArgusMedia

60

50

40

30

20

10

0

DNOSAJJMAMFJ

201-21 average

2022

Theeuroarea

Danger zone

F

or thebest part of a decade, rock­bot­

tom interest rates seemed like a fact of

life in the euro zone—as did low inflation.

Now  consumer  prices  are  rising  at  an  an­

nual  rate  exceeding  8%,  well  above  the

European  Central  Bank’s  target  of  2%.

Members  of  the  bank’s  governing  council

have  signalled  their  intent  to  raise  rates

soon, a message they were expected to re­

affirm  at  a  monetary­policy  meeting  on

June 9th, as we went to press. But the ecb

finds itself in a tricky position: of contend­

ing  not  only  with  surging  prices,  which

might  warrant  rapid  rate  rises,  but  also

gloomier  growth  prospects,  which  might

warrant patience. 

The root cause of both developments is

a severe energy­price crunch. Prices of oil

and natural gas had already been rising be­

fore  Russia’s  invasion  of  Ukraine;  the  war

sent them soaring higher still. These price

rises  have  played  a  much  bigger  role  in

pushing  up  consumer­price  inflation  in

Europe  than  in  America,  where  stimulus

B ERLIN

Europe’s economy grapples with an

acute energy shock