Explained: Why The Oil refining Capacity Of the World Has Decreased

The world's daily capacity of oil refining has decreased by a massive degree. The cost of heating buildings, generating electricity, and industrial output are all growing, which is impacting drivers throughout the world at the gas pumps.

Before Russia invaded Ukraine on February 24, prices were already high. But since the middle of March, fuel prices have skyrocketed while oil prices have barely slightly increased. Lack of sufficient refining capacity to convert oil into gasoline and diesel to fulfil growing worldwide demand is a major contributing factor.

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Losses incurred by the refineries

In general, there is enough capacity to refine about 100 million barrels of oil per day (bpd), according to the International Energy Agency, but about 20% of that capacity is not usable. Much of that unusable capacity is in Latin America and other places where investment is lacking. That leaves about 82-83 million bpd in projected capacity.

The world's daily refining capacity has decreased by 3.3 million barrels, according to the refining industry, since the year 2020. These losses were split roughly evenly between the United States, Russia, China, and Europe. Early in the epidemic, when lockdowns and remote work were common, fuel demand fell. Before that, there had been at least three decades where refining capacity had increased.

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Daily processing of 78 million barrels in April was significantly lower than the pre-pandemic average of 82.1 million bpd. As Chinese refineries restart, the IEA anticipates that refining will increase this summer to 81.9 million bpd.

However, global refining capacity is set to expand by 1 million bpd per day in 2022 and 1.6 million bpd in 2023.

Where Is Most Refining Capacity Offline, And Why?

Refineries in the United States, China, Russia, and Europe are all running at lesser capacity than they were prior to the pandemic. Since 2019, almost one million bpd of capacity at U.S. refineries has been shut down for various reasons.

In May, sources told Reuters that about 30% of Russia's refining capacity was not being used. Russian fuel is being rejected by many Western countries.

Refined product exports are only permitted under official quotas, which are mostly provided to large state-owned refining enterprises and not to smaller independent companies that hold the majority of China's spare capacity. China has the highest spare refining capacity.

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Run rates at China's state-backed refineries as of last week averaged about 71.3 per cent, while those at independent refineries were about 65.5 per cent. Though lower than average historically, that was up from earlier in the year.

What is the current situation?

In the current scenario, due to increased global demand and sanctions against Russian boats, the cost of shipping goods overseas has increased. The high cost of natural gas, which fuels refineries' operations, limits their ability to operate throughout Europe.

Vacuum gas oil is another intermediate fuel used by some refiners. The inability to restart some gasoline-producing facilities due to the loss of Russian vacuum gas oil.

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The situation is not gloomy for everyone alike. There are industries who are milking profits from the same. These are refiners, especially those that export a lot of fuel to other countries, such as U.S. refiners. Due to the widespread fuel shortages, refining margins have reached all-time highs, with the crucial 3-2-1 crack spread approaching $60 per barrel. Large gains have resulted from this for Reliance Industries in India and Valero in the United States.

According to the IEA, India refines more than 5 million bpd and has been buying inexpensive Russian crude for both internal use and export. By year's end, the IEA predicts a 450,000 increase in output. To accommodate the rising demand, more refining capacity is expected to go online in the Middle East and Asia.

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