Diesel squeeze deepens as global refining crisis escalates

Global refinery capacity constraints are at the heart of the refined petroleum shortage, with refinery runs estimated to be 7.5 million barrels per day below July 2025 levels and many facilities operating at or near multidecade highs, leaving minimal spare capacity. This chronic underinvestment is underscored by the fact that no significant new refineries have been built in the US, Europe, or Japan for over 50 years, forcing existing refineries to run close to technical limits—96% capacity utilization in the US alone—thereby restricting the ability to meet rising demand for diesel, gasoline, and jet fuel.

Geopolitical disruptions have dramatically tightened refined product supplies, with drone attacks emerging as a new and destabilizing threat to refinery infrastructure globally. Recent strikes on refineries in Russia, Saudi Arabia, and Libya have knocked out significant refining capacity—Russia alone lost about 25 to 30% of its refining capacity due to Ukrainian drone strikes—forcing it to transition from a major exporter to an importer of refined products. Meanwhile, conflicts in the Strait of Hormuz and missile attacks on Gulf refineries have shuttered 6 to 6.5 million barrels per day of refining capacity, further exacerbating global supply constraints and driving the crack spread—the profit margin for refining crude into products—to nearly quadruple from $15-$20 to $60-$65 per barrel.

Structural shifts in energy demand, particularly the rapid adoption of electric vehicles and expansion of renewable energy in key markets like China, are reshaping refined petroleum consumption patterns and contributing to refinery closures in the West. China’s crude runs are nearly 2.9 million barrels per day below year-ago levels as it prioritizes domestic consumption and limits exports, while Europe and North America face projected refinery capacity declines of 20% and 7% respectively over the next decade. This transition, coupled with competition from newer, more efficient refineries in regions such as Nigeria and the Middle East, is intensifying concerns over long-term fuel supply security amid rising demand for diesel and jet fuel.

The combined impact of systemic refinery capacity constraints, escalating geopolitical conflicts, and shifting energy demand has created a persistent, structural shortage of refined petroleum products. Despite ample crude oil availability, the inability to convert it efficiently into gasoline, diesel, and aviation fuel has led to sustained high prices and a 'new normal' in global energy markets. As Michael Bernstam warns, consumers worldwide face indefinitely higher energy and food prices, underscoring how refinery disruptions—from Ukraine’s hybrid warfare tactics to Middle East tensions—are now central to energy security and market stability.

The diesel market is experiencing an unprecedented supply crunch marked by record-high crack spreads exceeding $100 per barrel, a historic margin that signals severe refining bottlenecks rather than crude oil scarcity. This extreme price differential, with diesel futures soaring well above crude oil prices—as high as $170 per barrel in European trading compared to Brent crude at $87—reflects the intense pressure on refining capacity globally, particularly as U.S. and European refineries operate at full throttle but cannot increase output.

Geopolitical disruptions have critically exacerbated the diesel shortage, with Ukrainian drone strikes knocking out roughly 40% of Russia's refining capacity and prompting Russia to ban diesel exports through at least January. Simultaneously, Middle Eastern export volumes have plummeted due to ongoing blockades, and China has curtailed refined product exports to safeguard its domestic market, collectively removing an estimated 5 to 6 million barrels per day of diesel and other refined products from global circulation. These factors, combined with export bans by India and Russia and full-capacity operations in major refining nations, have tightened supply chains and intensified market stress.

Distillate inventories, including diesel and jet fuel, have plummeted to critically low levels not seen since the late 1990s, with U.S. stocks at their lowest for early August in three decades, leaving only one to two months of supply before shortages could worsen. This inventory squeeze is compounded by structural shifts such as the transition to electric vehicles and improved fuel efficiency, which have stalled new refinery investments in the U.S. and Europe for over 50 years, limiting the ability to expand refining capacity despite ample crude oil availability. Consequently, diesel prices remain stubbornly high—above $5 per gallon in the U.S. and $8 to $9 per gallon in Europe—even as gasoline prices show less volatility.

Diesel faces unique market pressures distinct from gasoline, partly because of its structural similarity to heating oil, which increases demand during colder months and diverts distillate supplies. Moreover, the U.S. has become the primary global exporter of diesel and gasoline, rapidly depleting domestic inventories and intensifying market tightness. While European diesel demand has begun to slow due to high prices and refinery constraints, this 'second wave' of distillate supply challenges will not be resolved simply by reopening key shipping routes like the Strait of Hormuz, underscoring the deep-rooted nature of the refining crisis and its broader implications for sectors like agriculture and food security in developing nations.

The rise of drone attacks on refinery infrastructure in Russia, Saudi Arabia, and Libya has introduced a new dimension to hybrid warfare, severely constraining global refining capacity and tightening diesel supplies. These relatively low-cost drones, capable of inflicting billions in damage, have disrupted key refining hubs, with Ukraine alone destroying about 30% of Russia’s refining capacity, forcing Russia to export crude oil while grappling with domestic fuel shortages and repurchasing refined products at premium prices from countries like India. This tactic not only elevates refined fuel prices worldwide but also destabilizes traditional fuel flows, especially in regions like Latin America that heavily depend on US diesel exports.

Geopolitical tensions in the Middle East, including the closure of the Strait of Hormuz and persistent Houthi attacks on Saudi Arabian oil infrastructure, have compounded global refined petroleum shortages by blocking critical supply routes and pipelines. This disruption has forced Western refineries to operate near maximum capacity amid structural declines in refining in Europe and North America, raising strategic concerns about securing fuel supplies for both civilian and military needs. As Nik Burns of Jarden highlights, these developments signify a structural shift in global energy markets rather than a transient spike, with long-term implications for fuel availability and market stability.

The strategic targeting of refinery infrastructure has amplified global fuel market volatility, as reflected in the tripling of crack spreads to $60-$65 per barrel, signaling severe shortages in gasoline, diesel, and aviation fuels. While gasoline prices have remained relatively stable, diesel prices have surged sharply due to constrained supplies and seasonal heating demand pressures, underscoring the tightness in distillate markets. This heightened market tension is further exacerbated by the intertwined nature of diesel and heating oil demand, which could strain supplies during colder months, intensifying the impact of ongoing geopolitical disruptions.

Russia’s hybrid warfare campaign, characterized by cyberattacks and sabotage aimed at undermining NATO and fragmenting alliances, has extended to energy infrastructure, making refineries prime targets and exposing the strategic vulnerability of refining capacity globally. This campaign has backfired economically on Russia itself, as its inability to convert crude into refined products threatens its oil sales and forces costly imports, while raising significant uncertainty for both short- and long-term contracts with Russian suppliers. As German General Kirsten Breuer notes, this multifaceted assault on critical infrastructure represents a concerted effort to destabilize energy markets and geopolitical alliances alike.

The complexity of diesel market dynamics and the U.S.'s role as a net diesel exporter obscure the crisis from public view, making it a challenging narrative for national media to convey. While import figures show minimal direct impact from countries like Russia, the global diesel market operates as an interconnected system, diluting the visibility of specific geopolitical disruptions. Additionally, government messaging has framed fuel supply issues as short-lived and easily resolved, likening them to brief events such as the Venezuela disruptions, which has further dampened public urgency and media focus on the persistent refining capacity constraints and diesel shortages.

Public attention remains heavily skewed toward gasoline and Middle East oil, leaving diesel shortages and the nuanced effects of the Russia-Ukraine conflict largely underreported. This perception gap means that while gasoline price spikes and supply concerns dominate headlines, the critical role of diesel—essential for freight, agriculture, and industry—receives scant coverage despite its significant market and energy security implications. The prevailing narrative simplifies energy issues to familiar themes, sidelining the complex and regionally distinct challenges that diesel refining faces in the current geopolitical landscape.