Lastly, however tight the market for crude oil, there is even more tightness in the refining sector that produces the gasoline, diesel, and jet fuel that people actually use. This sector has developed into a complex, highly interconnected worldwide system. Russia was refining products that it was shipping to Europe, while Europe was sending gasoline that it did not need to the U.S. East Coast, and so forth.
In some places, the system is going all out, with U.S. refineries already operating at about 95% capacity. But the system overall still cannot keep up with demand. Russian refineries are functioning only partly, depriving Europe of oil products; and not enough European gasoline is reaching North America. Chinese refineries are operating at less than 70% capacity. Some four million barrels per day of refining capacity have been shut down worldwide, owing to the pandemic, new regulations, and challenging economics. Add in the risk of accidents, poor policy decisions, and a hurricane knocking out refineries on the U.S. Gulf Coast, and the situation could get even worse.
That said, a few countries could still boost production. Canada—the world’s fourth-largest oil producer, after the U.S., Saudi Arabia, and Russia—could provide extra barrels in collaboration with its major market, the U.S. And U.S. shale oil production is back in gear and could add 800,000 to one million barrels per day of new production this year—far more additional production than the rest of the world combined.
Other factors that could mitigate the crisis include price changes and how consumers respond. In May, U.S. gasoline demand was 7% less than in May 2019, before the pandemic. Some of that, however, may be the result of more people working from home.
An economic slowdown could also dampen prices. S&P’s latest global purchasing managers’ index points to a weakening of economic growth, with U.S. manufacturing activity “slipping into a decline … to a degree only exceeded twice”—at the height of the pandemic lockdown and during the 2008 financial crisis. Likewise, European growth has slowed sharply to a 16-month low. Such slowdowns could reduce demand and lower energy prices. But, of course, they also will strain the Western alliance and popular unity.
The next six months will be critical, testing whether Europe can maneuver its way through the coming winter. In what Habeck called a “bitter” but “necessary” decision, Europe will need to burn more coal. In the difficult months ahead, there will need to be more informed collaboration between government and the industry that manages the energy flows on which modern economies depend.
Daniel Yergin, vice chairman of S&P Global, is the author of The New Map: Energy, Climate, and the Clash of Nations (Penguin, 2021) and The Prize (Free Press, 2008), for which he won the Pulitzer Prize. He received the first James R. Schlesinger Medal for Energy Security from the U.S. Department of Energy.