Is oil refining becoming a global energy bottleneck, and is the United States not far from imposing an export ban?

The wars in Russia and Ukraine, as well as the wars in the Middle East, are simultaneously impacting the global oil refining system, causing diesel supply shortages and soaring prices. The United States is facing pressure to become the "last resort," while calls are growing across the US political community for a ban on exports to stabilize domestic oil prices.

According to Wall Street News , the retail price of diesel in the United States broke through $6 per gallon for the first time last week, and further climbed to $6.45 on Friday, setting a new record high.

Gas station shortages have emerged in rural Brazil, Libya, and parts of Africa, posing a severe challenge to this critical fuel that powers global industry, transportation, and agriculture.

Against this backdrop, legislative movements to restrict exports are emerging within the U.S. Congress. Representative Tim Burchett introduced a diesel export ban bill this week, and Senate Majority Leader John Thune has expressed openness to the proposal.

Analysts warn that once the U.S. implements an export ban, it will drive up prices in other parts of the world and could trigger a chain reaction of similar actions from major exporting countries in Asia.

The Middle East and Russia, after a decade of expansion, have been devastated by war.

Over the past decade, Persian Gulf oil-producing countries and Russia have invested heavily in expanding their refining capacity, significantly seizing a share of the global diesel export market. However, the outbreak of two wars has abruptly reversed this supply pattern.

Kuwait National Oil Company built one of the world’s largest refineries in Al-Zour, the UAE expanded its Ruwais refinery, Iraq opened a new refinery in Karbala, and Saudi Aramco built two refineries on the Red Sea coast.

This series of investments will more than double Middle Eastern diesel exports between 2017 and 2025, making the region the world's largest diesel exporter with a 19% share, surpassing North America. During the same period, Russia will increase its exports by one-third by upgrading existing refineries.

However, after the US and Israel launched a joint attack on Iran in February this year, the Strait of Hormuz was blocked, and Kuwait, the UAE and Iraq were forced to drastically reduce their exports.

The escalating Houthi attacks have also hampered exports from Saudi Aramco's Red Sea refineries, a major alternative route around the Strait of Hormuz.

Meanwhile, Ukraine's drone strikes against Russian refineries continued to be effective, nearly bringing Russian exports to a standstill. David Martin, senior oil market analyst at the IEA, stated:

We are witnessing what may be the most intense diesel market landscape in history.

Western refining capacity is insufficient to make up for the supply gap.

Large-scale refining investments in the Middle East and Russia have long suppressed the profit margins of Western refiners, leading to a continuous decline in their capital investment, making them ill-equipped to shoulder the responsibility during this crisis.

Alan Gelder, senior vice president of refining, chemicals and oil markets at consulting firm Wood Mackenzie, pointed out that when national oil companies build refineries, return on investment is often not the primary consideration; the government is more concerned with providing jobs and ensuring energy security.

Western oil giants have not built any new refineries in nearly 30 years, and more than ten refineries in the US and Europe have closed since 2015. Gelder said:

We are seeing major oil companies actually reducing their exposure to the industry because the actual return on capital has been poor.

Gelder further cited industry rumors:

How do you turn a large sum of money into a small one? Build a refinery.

Currently, although Western refineries are operating at near full capacity and shifting their production capacity towards diesel production while reducing the proportion of gasoline and jet fuel, they are still unable to effectively fill the supply gap left by the Middle East and Russia.

The export ban dispute: a domestic solution or a global disaster?

Amid soaring domestic oil prices, calls for export bans from the US political establishment are exacerbating the uncertainty surrounding this global supply game.

This week, Trump attributed the surge in diesel prices primarily to the Russia-Ukraine war, stating that "the global diesel price increase is mainly caused by the Russia-Ukraine war, not Iran." However, IEA data shows that the amount of diesel blocked in the Persian Gulf is approximately three times the amount shortfall from Russia, indicating a significant discrepancy between the two assessments.

Analysts warn that if the United States imposes a ban on diesel exports, prices in other parts of the world will rise sharply, potentially prompting major exporting countries to follow suit and exacerbating the already tight global diesel market.

The American Petroleum Institute (API) clearly stated in a 2022 letter to then-Energy Secretary Jennifer Granholm that export restrictions would drive up domestic oil prices. A report released earlier this year by the Center for Strategic and International Studies (CSIS), as well as research on crude oil export restrictions by the Dallas Federal Reserve and Columbia University's Center for Global Energy Policy, all reached the same conclusion.

Structural issues are the core obstacle. U.S. refining capacity is highly concentrated along the Gulf Coast, and its infrastructure was designed for export markets. Pipelines that transport products from the region to the rest of the country are currently operating at or near full capacity, and global tanker capacity constraints also limit the flexibility of domestic allocation within the United States.

The Center for Strategic and International Studies (CSIS) stated in its report:

Faced with an unprofitable (or even loss-making) operating environment, refiners along the Gulf Coast will inevitably drastically reduce refining activities, processing less crude oil and exporting less refined products.

This will result in "domestic gasoline supply falling below levels not seen before the ban, partially or even completely offsetting initial inventory buildup and putting upward pressure on prices that the ban was intended to suppress."

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