Rising fuel prices have highlighted a shift in the geopolitics of energy, with leverage moving from countries that produce oil to those that refine it. The United States and China are among the winners; Europe is not.
Sucking diesel
When the leaders of the Group of Seven (G7) major industrialised states agreed last Friday to release 100 million barrels from their strategic oil reserves, they described the action as a “decisive, co-ordinated” measure to protect households and businesses from price shocks.
But the will of just one of the seven, the United States, was the decisive factor that forced the other six into a co-ordinated response to the recent surge in the price of refined oil products, especially diesel.
Days earlier, Donald Trump had threatened to halt the export of diesel from the US, a step that would have had calamitous consequences for his European allies. The US supplied almost half of the diesel imported into the European Union in August so when Trump demanded that they open up their strategic reserves to help lower the price of the fuel, the Europeans had to comply.
Despite the standoff between the US and Iran in the Strait of Hormuz, crude oil is moving again, if not quite at pre-war levels. The greater shortage is in refined oil products like petrol, diesel and jet fuel, and it is one that is likely to persist well into next year despite the G7’s action last week.
While petrol fuels cars, diesel is the workhorse of the economy, powering the trucks, tractors and diggers that are indispensable to production. When the price of diesel goes up, it makes everything from farming and mining to transport and construction more expensive and drives up the cost of essential goods for households, particularly food.
Iran has attacked refineries in Gulf states that host US military bases, and Ukraine and Russia have struck one another’s energy infrastructure, reducing a global refining capacity that was already under pressure. The EU had already all but halted the import of diesel from Russia and earlier this year, it extended sanctions to imports from countries such as India of refined products made from Russian oil.
About 30 refineries have closed in Europe since the start of this century and last year alone saw two refineries in Germany and two in Britain halt the processing of crude oil. The closures could affect Ireland, where the Whitegate refinery in Cork produces about a third of the country’s retail fuel, with most of the rest coming from Britain.
China has the world’s biggest refining capacity, followed by the US, with a handful of other net exporters of refined oil products including India and South Korea. In the winter of 2022, after Russia’s full-scale invasion of Ukraine, Chinese exports helped to ease the price of diesel and they played a similar role at times this year during the Iran war.
But just before its National Day last week kicked off a weeklong holiday in China, Beijing told its refineries to pause exports, according to a report from Reuters. The move was probably in the name of energy security and a legal requirement Beijing introduced last year to maintain reserves at a certain level but it highlights the leverage enjoyed by states with major refining capacity such as China and the US.
China displayed the diplomatic utility of its refining capacity during one of its export pauses earlier this year when it continued to supply diesel to the Philippines, a country with which it is engaged in an intense maritime dispute. And Trump showed last week that he is willing to use diesel exports to persuade his allies to take action that could reduce prices ahead of next month’s midterm elections.
The medium-term prospects for the EU are unpromising and the structural factors exacerbating the fuel shortage could even get in the way of the common European project of rearming the Continent. A report last month by the Lithuania-based Nato Energy Security Centre of Excellence found that even if Europe continues to spend hundreds of billions of euros on weapons, without more refining capacity it might be unable to fuel them.
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