Global Diesel Shortage: Why Quick Fixes Are Elusive and What Solutions Lie Ahead

The world is facing a critical shortage of diesel, a vital industrial fuel, exacerbated by two major conflicts disrupting supply chains. Despite diplomatic efforts by presidents, a clear solution remains elusive. Early this year, it was evident that diesel could become a problem. While crude oil supplies seemed ample, refinery capacity – essential for converting crude into diesel, petrol, jet fuel, and other petroleum products – was limited. Numerous refineries have shut down in recent years; approximately 30-32 in Europe since 2009 and six out of eight in Australia this century. Contrary to some narratives, these closures were not primarily due to "net-zero" carbon policies but rather high energy costs, declining domestic markets, and intense competition from large, modern refineries in the Middle East, Nigeria, China, and India. This reduction in capacity created a significant deficit.

The ongoing conflict in the Gulf has exploited this pre-existing vulnerability. In recent years, Gulf nations have established or upgraded substantial, modern refining complexes in locations such as Yanbu, Rabigh, and Jazan on Saudi Arabia's Red Sea coast, Duqm in Oman, Ruwais in Abu Dhabi, Bapco in Bahrain, and Al Zour in Kuwait. Many of these facilities are geared towards producing diesel and jet fuel that meet stringent EU quality standards. However, refining operations have faced disruptions due to attacks by Iran and its allies in Yemen and Iraq, utilizing drones and missiles. For example, while Bapco has recovered to about three-quarters of its operational capacity, Jazan remains closed. Furthermore, the free export of refined products is hampered by ongoing strikes impacting the Strait of Hormuz. The loss of medium-gravity Middle Eastern crude, which has a high diesel yield, has affected refineries globally. While US output has increased, its lighter crude is better suited for petrol and petrochemical feedstocks. Despite US escorts and shuttle schemes restoring Gulf crude flows to near pre-war levels, protecting refined oil is more challenging due to its flammability and smaller shipment sizes. More robust and sustainable methods for transporting petroleum products from the conflict zone are urgently needed. Nevertheless, French President Emmanuel Macron, facing domestic pressure, visited several Gulf countries, securing commitments for increased diesel supplies from the UAE, Saudi Arabia, and Bahrain. Refineries elsewhere have been operating at maximum capacity for months and may soon require maintenance or risk unexpected breakdowns. India has boosted diesel exports to nearly 750,000 barrels per day this month, a wartime high, but further increases are unlikely. Increased demand for diesel is also coming from lorries transporting goods out of the Gulf to circumvent the Strait of Hormuz. These combined factors have driven average US diesel prices up to $6.18 per gallon from $3.48 at the start of the year. In the UAE, diesel prices rose from Dh2.55 per litre in January to Dh4.80 per litre this month.

The focus of Washington's attention has shifted from Tehran to Kyiv. Ukraine has intensified its long-range assaults on Russian refineries, which previously exported about 1 million barrels per day of diesel. This export volume has plummeted to near zero, with Russia now relying on Belarus for diesel supplies. The White House has announced a suspension of sanctions to permit the US to import 2.25 million barrels of Russian diesel, with more volumes expected next month. The first shipment, carrying 300,000 barrels, arrived in New York on November 7, a fraction of daily US consumption. In exchange, the US has reportedly pressured Ukraine to halt its attacks. However, after a brief pause, Kyiv resumed attacks on the St Petersburg refinery. Officials from Rosneft, Russia's largest oil company, have privately acknowledged the difficulty of maintaining repairs on damaged facilities. President Vladimir Putin's apparent willingness to negotiate on diesel issues suggests the impact of Ukrainian attacks. This situation might encourage Ukraine to escalate its efforts. If Russia cannot resume refinery operations, these are not new supplies but rather diverted volumes that would have gone elsewhere, accounting for only about 7% of the global deficit.

Given that Russia is not a viable solution, the question arises: can China help? China possesses the only major refining complex unaffected by the conflict and operating below capacity. However, following a meeting between US President Donald Trump and Chinese President Xi Jinping, where increased diesel supply was requested, Beijing imposed a ban on fuel exports. On Thursday, Mr. Trump invoked the Defence Production Act, authorizing public funding and expedited approvals for refining and pipeline projects. However, these initiatives are likely to be too late or insufficient to significantly alter the situation. US refining margins are currently highly profitable, incentivizing companies to increase output or switch to diesel production. Refineries have some flexibility to shift product output, but increasing petrol or jet fuel production at the expense of diesel would negatively impact the economy and political landscapes in the US and Europe. A potential US ban on diesel exports appears unlikely for now, especially after European nations agreed to release strategic reserves. These reserves are too small to be decisive and their depletion now risks exacerbating a winter shortage. Home heating oil, chemically similar to diesel, is still used in significant quantities in Germany, France, and parts of the US.

If increasing supply is not feasible, the focus shifts to reducing demand. While these solutions are more promising, they should have been implemented earlier. China has significantly enhanced its energy resilience by developing extensive high-speed rail networks, enabling it to reduce flights and conserve jet fuel during the current crisis. China has also progressively transitioned its city buses and lorries to natural gas and subsequently to battery power. Other countries could rapidly adopt similar strategies by replacing heavy diesel vehicles with electric alternatives. In Europe, where diesel cars are popular, switching to battery-electric or hybrid models offers substantial savings. Emergency programs focused on insulation and solar heating could decrease the demand for heating oil. Diesel generators used for temporary or distributed power needs in locations such as mines, construction sites, telecom towers, and off-grid tourist areas could be replaced with solar panels and battery storage systems. These generators are common in many parts of Africa and the Middle East but are expensive, noisy, and polluting. While these are not immediate fixes, they do not require the multi-year timelines associated with new refineries or pipelines. Should the US re-engage in full-scale conflict with Iran, diesel would again become a critical issue. Instead of pursuing marginal supply-side solutions, the strategic imperative is to reduce consumption wherever and whenever possible.