Putin’s War Makes The West More Dependent On Fuel From Asia More Than Ever

The conflict in Ukraine is enhancing the importance of Asia and the Middle East as the primary producers of fuels like gasoline and diesel, which are vital to the international economy. Europe and the US are struggling with a shortfall of supply at home as they work to reduce their reliance on Russian petroleum products. Mega-refineries in nations like China and Kuwait will now have more opportunities to oversupply the market with fuel.

Increasing their reliance on long-haul barrels from the Middle East and Asia, Europe and the US are turning away from Russian oil products, according to Eugene Lindell, head of refined goods at London-based industry consultant FGE.

Because Western countries have drastically reduced their capacity for refining in recent years, while the other side of the world has been developing, the difference between the two regions is growing as a result of Russia’s invasion.

According to FGE, the Middle East and Asia added 2.5 million barrels of refining capacity over the last three years, whereas Western markets, including the Americas and Europe, lost a net 2.4 million barrels a day.

We anticipate that disparity to grow. According to Rystad Energy’s projections, new refining capacity will increase by about 8 million barrels per day over the next three years, with Asia adding the most and Europe adding the least.

The world’s fuel sources will increasingly come from Asia and the Middle East, according to Mukesh Sahdev, head of Rystad’s downstream business. Refinery product flows from east to west “will become more structural,” he continued. Older plants were shut down during the epidemic as global lockdowns wiped out oil demand, hastening the industry’s seismic transition. Since then, China has built larger and more advanced refineries to fulfill the country’s expanding oil needs, while the US and Europe have concentrated on moving away from fossil fuels.

According to Victor Shum, vice president of energy consultancy for S&P Global Commodity Insights based in Singapore, consumption of fuels like gasoline and diesel will mature before that of Asia in the US and Europe. A large number of new refinery projects have also been built in Asia due to the region’s expanding petrochemical demand, he added.

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The invasion of Ukraine by Russia and the following sanctions imposed by Western countries on its gasoline exports caught the world’s energy markets off guard, and countries lacking enough refining capacity are now particularly concerned about fuel security. Any refinery disruptions brought on by worker strikes or unforeseen closures will be felt considerably more sharply throughout markets in this environment.

“European governments and their citizens are now prioritizing the next few years rather than 2040–2050,” said FGE’s Lindell. “They are afflicted with large utility bills and increasing inflation.”

The lack of refineries is putting a burden on the West. According to a prediction by Wood Mackenzie Ltd., diesel supplies in northwest Europe would be at their lowest at the beginning of spring as the European Union plans to stop importing Russian fuel by sea in February.

Meanwhile, President Joe Biden is considering a rule requiring oil corporations to store more fuel domestically in light of the growing diesel and gasoline shortages on the US East Coast. According to Rystad’s Sahdev, the gasoline shortage is likely to get worse as summer driving season approaches its height.

According to John Auers, managing director at RBN Energy, Latin America has become more dependent on imports as a result of the closure of many refineries in the Caribbean and the ongoing major outages and poor run rates at facilities in Venezuela and Mexico.

Mexico is importing gasoline from China, where refiners are working harder and exporting out more in order to take advantage of the country’s increased export limits.

Shipping prices are dramatically rising as more petroleum products are being transported west over greater distances, which is fueling a surge in tanker earnings. According to data from Vortexa Ltd., the amount of fuel transported by water is 3% more than the average over the previous five years. According to Serena Huang, lead Asia analyst for Vortexa, that is primarily driven by diesel from Asia and the Middle East to Europe, and quantities may increase as the latter restricts Russian shipments.

READ: Veteran Says Europe’s Diesel Crisis Is a Lesson in Energy Security

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Even though the US continues to be a significant exporter of diesel and measures to improve energy security may help ease the shortages, analysts do not anticipate a reduction in the capacity gap any time soon.

The plans for a fossil fuel exit are still in place, but moving ahead, “we should see a more realistic energy policy,” said Lindell of FGE. Just that the short- to medium-term is currently being prioritized over the extremely long term.