Energy Transition Leaves Some Economies Vulnerable to Oil Supply Shocks

The push to move away from fossil fuels is creating an unexpected challenge: a shrinking refining capacity that leaves advanced economies vulnerable to supply shocks in oil products. Two ongoing conflicts, the U.S. tensions with Iran and the Russia-Ukraine war, have disrupted global energy markets, exposing the fragility of supply chains for gasoline, diesel, and jet fuel.

Over the past decade, global refining capacity grew by an average of 0.6% annually, while consumption of oil products rose by 1%. However, last year saw a reversal, with refining capacity falling by 0.3% even as demand increased by 1.3%. Advanced economies, particularly those in the OECD, have been reducing refining capacity as part of the energy transition, making them more susceptible to price spikes and shortages when supply is disrupted.

China and South Korea stand out as exceptions, having expanded their refining capacity. China's refining capacity grew by 2.3% annually over the past decade, allowing it to influence global markets during the U.S.-Iran conflict. South Korea, with a 1.3% annual growth in refining capacity, has also acted as a buffer, supplying critical fuels like jet fuel to Europe. These countries demonstrate how maintaining refining capacity can mitigate the impact of energy crises.

The International Energy Agency projects that global energy investment will hit a record $3.4 trillion this year, with only 35% allocated to fossil fuels. While the shift away from oil appears irreversible, the cases of China and South Korea highlight the need for an orderly transition to prevent severe supply disruptions during the energy shift.