The global oil market is wildly complex, with thousands of interconnected parts all working seamlessly together to keep the world’s economy humming. Most of the time, no one notices.
Until it breaks.
It’s been two and a half months since the war with Iran ruptured the crude oil market, and the aftershocks are starting to show up in unexpected ways. Among the many quirks: A European jet fuel shortage – that Americans are paying for at the gas pump.
Between February 23 and April 27, gas prices grew faster in the United States than they did in almost every single country in the world except for Myanmar, Malaysia, Pakistan and the Philippines, according to JPMorgan analysts. The US was 5th, just ahead of Cambodia. Americans are now paying $4.48 for a gallon of regular gas — 50% more than it cost before the war began.
A different mix
Four weeks ago, the International Energy Agency warned that Europe had about six weeks of jet fuel left. If the Strait of Hormuz wasn’t reopened, airlines would need to drastically cut routes and cancel flights to compensate, it said.
Airlines didn’t wait. Lufthansa cut 20,000 flights. Turkish Airlines stopped flying to 23 cities. And US airlines started to follow suit: United axed 5% of its summer schedule.
To make up for the lack of supplies coming from the Middle East — where Europe gets the majority of its jet fuel — America’s refineries started to make a lot more of it to sell to global airlines: 26,000 more barrels per day in the last week of April than the week before, according to the US Energy Information Administration.
The problem: There just isn’t any spare refining capacity in the United States. Refineries are on a string of multi-decade monthly output highs. So, if they make more of one thing, they have to cut back on something.
So they decided to cut back on gasoline – by about 53,000 barrels per day. To compensate, America dug deep into its gas reserves, drawing down its inventory by 6.1 million barrels the last week of April. That left gasoline warehouses about 2% below their five-year average.
Diesel is even worse. Stockpiles are 11% below their five-year average.
Supply and demand kicked in: Wholesale gasoline prices are up 74 cents since the IEA warned about a jet fuel shortage in mid-April. Retail gas prices also rocketed higher, surging more than 30 cents a gallon over the past week alone – the fastest pace since the start of the war.
Meanwhile, diesel is just under 16 cents away from hitting an all-time high.
Crude differences
Of course, it all starts with crude. Oil prices have moved higher over the past couple of weeks as traders fear a negotiated end to the war with Iran remains elusive.
But not all oil is created equal. Although we tend to think of all oil as the same substance, different parts of the world produce remarkably distinct kinds of crude, each ideal for making a variety of stuff.
The oil that comes from Venezuela and the Middle East tends to be thick and sludgy. We call it heavy, sour crude. It’s great for making asphalt and products like diesel and jet fuel.
In the United States, oil is lighter and thinner in texture. It’s called light, sweet crude. It’s particularly good for making gasoline.
While somewhat heavier fuels can be made from light, sweet crude, including jet fuel and diesel, America’s refineries are built to process Venezuelan oil, in particular. Refining light, sweet crude can make them less efficient.
That’s because the last major refinery built in the United States was opened in 1977, when the United States got most of its oil from the Middle East and Latin America. Since the fracking revolution of the past couple decades, the United States has become a net exporter of oil – but it still imports about a third of its overall crude.
With the more efficient heavy, sour crude stuck in the Middle East, America’s producers have ramped up oil production to historic highs. US refineries can make do with that oil to make diesel and jet fuel – but at a lower efficiency and added cost.
All of this means that Americans are paying more at the pump, even for a problem happening thousands of miles away.
