The litany of the energy crisis opens its umpteenth chapter. First it was natural gas, the king fuel for industry and heating on the old continent; then came the almighty oil’s turn; and now it’s diesel, the fuel par excellence on European roads. The EU, the world’s largest importer of diesel, will be faced with the umpteenth bottleneck in its energy supply chains starting this Sunday with its veto against imports of this fuel from Russia.
The goal is as laudable – to make it even harder for the Kremlin and to indirectly stop funding its military operations in Ukraine – as the challenge is daunting. Europe needs to replace almost a third of the diesel it buys abroad in record time: more than 400,000 barrels a day at this early stage of 2023. That’s less than in November and December, when the bloc put all its effort into collecting it – paradoxically with more purchases from Moscow – to anticipate the cut for losses with Russia. And above all, much less than before the war, when practically half of the diesel that the EU brought in from abroad came from the Eurasian giant. They dropped connections, yes, but dependency remains at maximum.
International Energy Agency (IEA) chief Fatih Birol last week abandoned his usual caution to warn of what could be in store for us in the coming weeks: “It is worrying; at the moment there is more uncertainty about diesel than about natural gas,” he slipped in an interview with EL PAÍS. “The diesel consumption must decrease.” Given recent improvements in economic growth forecasts, Esteban Moreno, a fossil fuel analyst at Kpler – a consultancy specializing in energy and commodities – expects European diesel demand to contract by 1.5% this year, less than previously expected. That would leave a significant deficit of 770,000 barrels per day in the first quarter of 2023, as will be said soon. “The European diesel markets will pick up significantly in the coming weeks. There is no silver bullet that will make it possible to quickly replace Russian diesel,” summarizes Moreno.
On paper, Europe has three options for dealing with the situation: reduce diesel consumption, as requested by Birol; increase in internal production; or import more from the rest of the world. However, the first two options are not enough. Firstly, because despite increasing electrification, diesel powers the engines of four out of ten cars driving in Europe and is essential for the transport of goods in particular: the vast majority of trucks run on diesel.
The second reason is that the number and overall capacity of Europe’s refineries has not stopped increasing in recent years, but has steadily decreased, leaving the continent increasingly at the mercy of Russia and the other major exporters. In the past two years, western countries’ refining capacity has shrunk by two million barrels a day. “And in the case of Europe, virtually all of the capacity reductions have been diesel, which puts even more pressure on the market,” Luisa Palacios, a professor at Columbia University (New York) and former president of Citgo, says by phone. one of the largest US refiners.
China, India and the Gulf
“The only possible way is to get more diesel from other big producers,” summarizes Jorge León, senior vice president of energy consultancy Rystad after several years in OPEC. There are several countries applying to be alternative providers, but Europe doesn’t have a huge range to choose from. Although the United States has greatly increased its diesel sales in the old continent since the beginning of the war, the idle capacity of its refineries is shrinking. The EU must therefore look a little further: to the east.
China and India, paradoxically the two largest buyers of Russian crude and with enormous refining capacity, are the most plausible option. An old-fashioned oil tanker, Kuwait has just inaugurated a gigantic refinery capable of meeting the stringent requirements of the community’s environmental regulations, which require much lower sulfur levels than other markets. And the Gulf States, too, will be ready to seize what they see as their umpteenth opportunity since the energy crisis began.
“The recent oil sanctions in December was the trailer for the movie we’re about to see: just as the crude oil market was being rebalanced, Russian exports to China went to India so other countries could break free and sell more to Europe, it will now happen,” said Palacios of Columbia University.
The result of the veto will therefore be a profound reconfiguration of global diesel flows. A shift that actually started weeks ago when the market started discounting the embargo. North African countries, led by Morocco, and the Middle East have sharply increased their purchases of Russian diesel. It was fuel that was mainly destined for the EU, which now has to find new recipients in exchange for hefty discounts. In return, all diesel they previously imported from other regions will be released for Europe to dispose of.
Something similar is starting to happen on the other side of the world: Latin America, a major buyer of US diesel, has already targeted Russia as an alternative supplier for all diesel previously purchased in the US, making US diesel acceptable to the EU – will travel to the old continent.
“The position of the chairs around the table has changed, but in the end everyone will still have a place to sit when the music stops,” says Francisco Blanch, global head of commodities and derivatives at Bank of America, and pulls a comparison with the popular children’s game. “The only thing is that some have to go further to find their chair.” In Silver: Although the excitement has grown and will grow, there will be diesel for everyone. Europe, of course, but it will have to look much further than before. And that’s why you have to pay a premium. Just like with gas. “The market expects the EU, with US help, to do the impossible to avoid problems,” adds Blanch.
Raad Alkadiri, Henning Gloystein and Ayham Kamel of risk consultancy Eurasia are less optimistic. In a recent analysis for clients, they described the embargo as “disruptive” and predicted a “bigger” impact on the markets than that experienced with the raw material. However, both and the long half-dozen specialists interviewed for this text agree on one thing: The biggest risk is the price and not so much the security of supply. “There will be no diesel rationing, as was said a few months ago, but there will be more tension on the price of diesel,” says Rystad’s León. It’s not just a matter of distance: “Vessels with larger capacity are needed,” predicts David Wech, chief economist at industry analysis firm Vortexa. Rather overpriced.
As with natural gas, Russia’s supremacy as Europe’s most important supplier of diesel was mainly due to its proximity. “In contrast to these new routes, it was a very efficient river,” says Palacios from Colombia. “The good thing is that diesel is easier to transport by ship than gas. The bad thing is that it is a complex product that cannot be processed in all refineries in the world.” Even less what Europe needs that has to be low in sulphur.
Spain, more sheltered
Spain is more of an island than a peninsula when it comes to energy issues: it has been seen with gas – the enormous traction of its regasification plants made it live quite apart from German, Austrian or Czech jitters –, with electricity – the famous Limiting gas consumption would be without the traditional Isolation from the rest of the continent and now impossible with diesel. With a refining capacity well above that of most neighboring countries – even in times of tensions like these it remains a net exporter of gasoline and diesel – it is much better protected than its competitors in the centre, north and east of the EU.
“We’ve calmed down,” confirms Inés Cardenal from the Spanish Association of Petroleum Products Operators (AOP), which brings together the main names in the sector: from Repsol to Cepsa, from BP to Galp. “Our refineries are among the most flexible and competitive in Europe: They can process crude oils of very different quality and origin.” A very important factor from the point of view of security of supply, but it does not protect Spain in terms of price. “They are international and affect all countries equally. How expensive can it be? It’s impossible to know, but there’s broad agreement that this will lead to a spike in international diesel prices,” predicts the oil entrepreneur.
many millions in battle
Whether the price at the pump ends up rising a lot or little, one thing is certain: the refineries that survived the recent shutdown process in Europe will continue to be capital in the coming months. After being the weakest link in oil company profit and loss accounts, refineries have become a powerful trap for profits in a matter of months. The veto further reinforces its position of strength: Endogenous production – although dwindling – will be more important than ever to move forward with this match point.
The companies and countries called upon to fill the gap left by Russia in the continental market will also get their share of the pie. “India, for example, faces a golden opportunity: it has a huge refinery park, it can buy Russian crude oil at a discount of almost 50%, and it will sell it to Europe at enormous profit margins.” Leon illustrates. “There are so many middlemen making real fortunes from these sanctions, especially in China, India, the Middle East and Turkey. They’re handing out the order of 250 million a day,” Trench Blanch.
On the contrary, European consumers have every chance of being the main heathen: when the price goes up, they have to pay more, both when they fill up their car – if it’s diesel – and when they go to the supermarket, because any increase in the sooner or later this fuel ends up in the already battered shopping cart. Pocket and geopolitics are closer than ever.
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