We have that diesel: why the Russian embargo hit global markets
The embargo on diesel exports imposed by the Russian government has led to consequences not only on the domestic market, but also on the international market. Faced with shortages of fuel critical to logistics, construction, and agriculture in the height of summer, importers from developing countries and Europe turned their purchase requests to American refineries. What caused such consequences, why the market not only for oil, but also for petroleum products in the world works as a system of communicating vessels, and how the situation will develop further — in the Izvestia article.
The missing surplus
Historically, modern Russia has built its oil industry with a pronounced export bias in the diesel fuel segment. The refinery's deep modernization programs, implemented primarily in the 2010s, were aimed at maximizing the yield of light petroleum products from Urals heavy oil. The domestic Russian market consumes approximately equal amounts of gasoline and diesel (with a preponderance of diesel during the sowing and harvesting campaigns). However, the plants produce more than twice as much diesel fuel as the domestic economy needs.
Until 2022, this huge surplus — up to 35-40 million tons per year (about 1 million barrels per day) — steadily went to Europe, covering the structural shortage of diesel in the EU countries. After the introduction of Western sanctions, logistics changed, but volumes remained on the market. Russian diesel began to arrive in Turkey, Brazil, the countries of North and West Africa, as well as the Middle East. Russia has retained its status as one of the world's largest suppliers of marine shipments of this type of fuel.
However, this summer, attacks by Ukrainian UAVs on Russian oil refining led to the temporary shutdown of a significant proportion of production facilities. The decrease in output coincided with the approach of peak seasonal loads. Summer and early autumn are a period of active construction work and a large—scale harvesting campaign in the agro-industrial complex. Realizing the risk of fuel shortages for tractors and combines within the country, as well as trying to prevent consumer inflation from accelerating, the Russian government has limited supplies. The priority was to protect the domestic market by completely shutting off external sales channels.
A single global reservoir
The withdrawal of almost 1 million barrels of daily supply from the offshore market has led to a domino effect. The fuel market does not tolerate emptiness. Countries that bought Russian diesel at a discount (Brazil or Turkey) suddenly lost their usual resource. In order to provide their logistics companies and farmers with fuel, they were forced to enter the open market and compete for free volumes with European traders.
The situation was complicated many times by the fact that this shock was superimposed on the consequences of the spring crisis in the Middle East. Plants in Saudi Arabia and Kuwait capable of producing high-quality diesel fuel are limited in delivery options due to high insurance premiums and disrupted logistics around the Strait of Hormuz.
In search of free diesel shipments, global demand has focused on the United States. The American oil refining industry, concentrated on the coast of the Gulf of Mexico, has excess capacity. After seeing prohibitive prices and high premiums in foreign markets (Latin America and Europe), American refineries began to aggressively increase exports.
The result turned out to be a bit predictable. Fuel going to Rotterdam or Brazilian ports reduced domestic American stocks. Commercial storage facilities for medium distillates in the United States began to empty quickly. Wholesale prices have crept up, and retail prices have reached $5 per gallon at gas stations in some states.
The price of the embargo
If the ban on exports from Russia takes on a long-term character and lasts until the end of autumn 2026, the global economy will face serious problems. Diesel fuel is the circulatory system of commodity markets. It employs trucks delivering goods to supermarkets, freight train locomotives, mining dump trucks extracting copper and lithium, and generators providing backup power to data centers. An increase in the cost of this energy carrier means an automatic increase in transportation costs for all sectors of the economy.
The three sectors with the highest share of fuel costs in the cost price will suffer the greatest damage from the prolonged shortage of medium distillates. The agro-industrial complex becomes the first victim: the operation of heavy agricultural machinery and autonomous irrigation systems is rigidly tied to diesel, which inevitably transforms the fuel shock into an increase in wholesale food prices by the time of the autumn harvest. The second impact is borne by the transport and logistics sector, from mainline trucking to diesel freight, where the increased operating costs of companies will be immediately sewn into the final cost of consumer goods. The mining industry and large-scale construction are also becoming vulnerable.
For the central banks of developed countries, the rise in the cost of diesel is the worst possible scenario. It negates efforts to combat inflation, as transport margins are directly embedded in the final cost of food and consumer goods. In the United States, the administration will face voter discontent on the eve of the November elections, as expensive gasoline and diesel create problems for both consumers and small businesses. And the price increase is felt faster than any other economic indicators.
It is almost impossible to relieve tension from the global market without the return of Russian volumes in the current conditions, while the Strait of Hormuz is closed. India, which is a major exporter of petroleum products, will not be able to close the deficit alone. Until Russian refineries complete their repair cycles and the Russian government considers the internal balance safe for lifting the embargo, corporations will be forced to pay high fuel bills, shifting these costs to end users around the world.
Переведено сервисом «Яндекс Переводчик»
