New York (CNN) — Oil prices are once again uncomfortably high, but the bigger problem is lurking just beneath the surface.
What initially began as an oil supply shock caused by the Strait of Hormuz blockage is morphing into a fuel supply crisis.
Refineries face a perfect combination of war and export restrictions, which is limiting how much crude oil they can turn into the gasoline, jet fuel and diesel that powers the global economy.
A key measure of refining profitability, known as the diesel crack spread, skyrocketed to $102 a barrel on Monday for the first time ever, nearly tripling pre-war levels. Diesel crack spread measures how much refiners can earn on each barrel of crude they turn into diesel.
“This is man-bites-dog news. The market is screaming that we’re short,” Bob McNally, founder and president of Rapidan Energy Group, told CNN.
Supplies of fuel remain historically tight because three of the four global refining hubs are in severe distress.
Refineries in the Middle East have been attacked during the Iran war. And the refineries that are unscathed have had trouble shipping because of the standoff in the Strait of Hormuz, where Iran and the United States are battling for control.
Perfect storm hits refiners
But this isn’t just about the Iran war.
Refineries in Russia, a major exporter of fuel, have been crippled by drone attacks from Ukraine. Approximately 40% of Russia’s refining capacity is offline, translating to around 3% of global refining capacity, according to research firm Capital Economics.
Facing fuel shortages at home, Moscow has banned gas and diesel exports through the end of January 2027.
Then there’s China, another major fuel exporter. Beijing has helped prevent oil prices from spiking to $150 a barrel by slashing its oil imports beyond what many thought possible. But Beijing has also sought to avoid domestic fuel shortages by limiting its own fuel exports.
That leaves the US Gulf Coast as the only game in town, and American refineries are running all-out to capture the historic profit margins.
“The result is a market that is about to enter its strongest seasonal demand period with very little margin for error,” analysts at Bank of America wrote in a report last week.
Record-high margins means refineries that haven’t been derailed by war are printing money these days.
“Refiners are going all-out. This is Christmas come early and come big,” said McNally, a former energy adviser to President George W. Bush.
Shares of American-based Marathon Petroleum and Valero Energy have more than doubled so far this year, while Phillips 66 shares are up almost 90%.
The confluence of events has also driven booming profits at major oil companies like Chevron and ExxonMobil. Exxon alone made $160 million per day last quarter.
But it’s not clear how long US refineries can go all-out. The height of hurricane season looms, and Gulf Coast refineries have in the past been derailed by major hurricanes hitting the Gulf Coast. And normally, refineries take advantage of softer demand in the fall by slowing down for repairs.
Gas, diesel & jet fuel spike
Fuel prices are sharply higher than this point last summer, though still not as high as many feared when the Iran war started. The national average for regular gas hit $4.07 a gallon on Tuesday, up 30% year-over-year.
Diesel, a crucial fuel for the world economy, is 48% more expensive than this time last year.
The diesel price hike is a stealth cost for consumers because it powers tractors on farms, as well as trains and trucks hauling goods around the country. Businesses often pass along at least some of those higher fuel prices to consumers in the form of elevated prices.
Higher diesel prices have cost US consumers nearly $40 billion since the war started, according to research from Brown University’s Climate Solutions Lab.
Jet fuel, meanwhile, has surged by more than 70% over the past year. Airlines, supported by resilient travel demand and the shutdown of budget carrier Spirit in May, have hiked airfare and baggage fees and cut less profitable flights.
“The consumer-facing impact is showing up at the pump and at the airport, and that is where the pressure is going to build from here,” Rystad Energy analysts wrote in a report last week.
Something has to give
As Big Oil cashes in on the supply disruptions, Main Street is increasingly frustrated by high prices.
The risk is that the refinery troubles keep gasoline, diesel and jet fuel elevated for longer, keeping inflation elevated.
“Unless Middle East, China and/or Russia supply issues are resolved, diesel prices are likely to remain near cycle highs, with further upside risk if inventories continue to draw into the winter,” Bank of America said.
Prices are so high that it’s starting to curb consumption, a phenomenon known in the industry as “demand destruction.” But BofA said demand has not been destroyed enough to rebalance the market, at least not yet.
McNally, the Rapidan president, said he expects that either crude oil will catch up to the pressure in the fuel market, or the war with Iran reaches a breakthrough.
“Either Iran taps out or the president taps out,” said McNally. “I couldn’t tell you which will come first.”
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