Iran War Fuels Global Energy Crisis as Refining Capacity Crashes

The Iran war has pushed the global oil refining industry to a breaking point, suggesting that diesel and gasoline prices may stay high for years. While crude oil markets adjusted to the loss of a fifth of global supplies from the Middle East, refiners faced greater challenges. Brent crude is around $90 a barrel, up 25% since the conflict began in February but down from a peak of $118. In contrast, European diesel prices surged over 70%, and U.S. gasoline prices climbed around 60%.

The war disrupted more than 20% of the Middle East’s refining capacity, while the closure of the Strait of Hormuz suppressed fuel exports. Attacks on Russian energy infrastructure further reduced refining throughput by nearly 30%, leading Moscow to ban diesel exports in July. Diesel refining margins in Europe, Asia, and the U.S. hit record highs, with European diesel cracks tripling to above $75 a barrel and U.S. margins reaching $100.

Global oil stocks fell by 3.5 million barrels per day between March and July, depleting pre-war fuel stockpiles. U.S. diesel inventories are at their lowest in three decades, and gasoline stocks are the weakest since 2012. The industry struggles to fill a gaping hole in fuel production, with refinery runs down 5.1 million bpd in the second quarter and demand falling by 4 million bpd, leaving a 1 million bpd shortfall.

Even if the Strait of Hormuz reopens, refining capacity damage and long lead times for crucial equipment will delay recovery. China’s reduced processing rates and potential demand destruction could worsen the crisis. The urgent need to replenish fuel inventories may sustain energy-driven inflation, with recent data showing rising consumer prices in the U.S., Euro-zone, and Japan. The fuel market’s safety buffer has been stripped away, signaling a prolonged energy crisis.