Global fuel stocks are tighter than they have probably ever been. China just imposed a ban on all fuel exports for the month. Russia has had a diesel export ban in place for months. The United States threatened Europe with a diesel export ban unless European countries released some fuel from storage.

The current crisis is increasingly about fuels, and everyone is prioritizing their own needs.

The topic of resource nationalism is a hot one in energy. Governments of resource-rich countries are being more active in seeking to clinch the best deal with private companies willing to develop these natural resources. But when it comes to energy, it is no longer about the best deal. When it comes to energy, it is about covering local demand for fuels, and because diesel plays such a crucial part in every single economy in the world, diesel is a top priority.

Analysts were warning as early as April that the crisis prompted by the war between the United States and Israel, and Iran, would hurt fuel supply more than crude oil supply. Six months later, the impact is painfully obvious: diesel crack spreads hit an all-time high of over $100 per barrel in September, before easing below that scary threshold; there are not enough refineries to make up for the lost refined product supply from the Middle East; and Ukraine’s Volodymyr Zelensky just said his forces will double down on attacks on Russian refineries.

These developments have pushed diesel prices to record highs, notably in the United States, which prompted talk about a potential diesel fuel ban in order to keep the domestic market supplied, the way that Russia and China are banning exports to keep their own markets well supplied. Only there is a difference: when it comes to the United States, it produces more diesel fuel than it consumes, so it is not exactly short. Related: Iraq Builds 2027 Budget on $58 Oil—and a Very Large Deficit

The problem for the U.S. is the price of the fuel, which trades globally.

The U.S. eventually dropped the idea of a ban, with President Donald Trump even saying it was never really going to happen, after he pressured the EU to release 100 million barrels of crude, diesel, and gasoline from storage. Diesel crack spreads declined. Prices ticked lower, though not much lower, with the U.S. national average at $6.3151 per gallon as of Tuesday. European countries are in a much worse position, however, because most of them are highly dependent on imported fuel. In the case of Europe—specifically the European Union—diesel nationalism may turn ugly.

There are plenty of refineries in the EU, but they are a lot fewer than they were 15 years ago. Capacity is not enough to supply all local markets, hence the growing dependence on both crude oil and fuel imports. Now, supply elsewhere is limited in both crude and refined products, regardless of all those optimistic reports about Hormuz reopening and oil flowing freely out of it. Even if it is, this oil is not flowing to Europe.

The diesel release, to take place over the first 20 days of the four-month period for the 100-million-barrel total release, will provide some relief, but it seems the market has already priced it in. It might have also priced in the fact it would be hard to repeat that release at a later date, which is bound to keep prices elevated. Countries that cover their demand with local refining capacity, such as Bulgaria, may be asked to boost exports. Indeed, Bulgaria recently lifted a ban on diesel exports imposed last year, because the country’s only refinery had output to spare. Should demand from other EU members rise, however, things might change.

The Chinese fuel ban will not do heavy fuel importers any favors, either, not to mention Russia’s diesel export ban extension, which will likely be repeated for another month as Ukrainian attacks on refineries continue. Middle Eastern supply is not coming back anytime soon, it seems. Almost all reports about tanker movement in the Strait of Hormuz focus on crude oil, and some LPG cargoes. Refineries in the top refining region, then, must still be under repair after Iranian missile and drone strikes. This leaves the United States as the only major source of refined fuels—a source that is fighting to keep domestic prices under control by any means necessary.

There may be arguable aspects about the war in the Middle East, but one thing has been proven beyond the shadow of a doubt by the fighting and the energy crisis it spurred. Energy security has reclaimed its position as a number-one concern for all countries, even those European ones that have spearheaded the decarbonization drive started after 2015. They still claim decarbonization is a top priority—but it is no longer the number-one priority. The number-one priority is securing enough fuel for the local market and local drivers.

By Irina Slav for Oilprice.com

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