Gasoline prices are anticipated to stay high for an extended period, even if crude oil costs decline, primarily because the world's oil refining capacity is severely constrained. This situation means that there are fewer facilities available to process crude oil into gasoline and other refined products. For instance, global refineries are currently processing 8.4 million fewer barrels of crude each day than they were before the recent conflict, resulting in 10% less fuel production according to Natasha Kaneva, head of global commodities research at JPMorgan. This limited refining capability creates a bottleneck, ensuring that refined product prices remain elevated regardless of crude oil supply.
Several factors contribute to this refining crunch. The supply chain has been disrupted by ongoing conflicts, including attacks on Middle Eastern refineries by Iran and Ukrainian drone strikes on Russian energy infrastructure, which have reduced Russia's refining capacity by 30%. Additionally, at least 10% of global refining capacity is reportedly offline, with some Gulf region refineries still operating far below normal levels. China has also restricted exports of refined products, further tightening the global market for gasoline and diesel.
This discrepancy between crude oil prices and refined product prices is highlighted by the "crack spread," which is the margin refiners earn from turning crude into products. This spread has reached record highs, incentivizing operational refiners to maximize output but also indicating the severe shortage of processing capacity. For example, the "3-2-1 crack" — estimating the margin from three barrels of crude becoming two barrels of gasoline and one barrel of distillate fuel — surpassed $60 to hit an all-time high. This makes refining highly profitable but signals continued high prices for consumers at the pump. The average US gas price, while down about $0.70 from its wartime peak, is still approximately $1.00 higher than pre-war levels and is rising.
The International Energy Agency forecasts continued tightening in the refined petroleum product market. This trend is exacerbated by strong seasonal demand for gasoline, especially during the summer vacation season, further pushing up prices. Despite any potential increase in crude oil availability, the fundamental issue remains how quickly the global refining system can process it. The combination of reduced refining capacity, geopolitical disruptions, and high demand means that relief at the gas pump is unlikely in the near future, regardless of crude oil price movements.
