The refined fuel shortage, not oil prices, is what matters

American consumers do not put oil into their gas tanks. America’s truckers do not fuel their rigs with crude oil, and the nation’s commercial aircraft do not fly on oil. Consumers buy gasoline. Trucks run on diesel, and airlines depend on jet fuel.

What matters to consumers and the broader economy is the price of refined fuels, not simply the price of crude oil. Oil prices are important, but at the moment, what matters even more is the capacity of the global refining industry to convert crude oil into usable products.

Unfortunately, the global economy is experiencing a shortage of refining capacity. Because of Ukraine’s necessarily devastating attacks on Russia’s oil refineries, prices for gasoline, diesel, jet fuel, and other refined products are rising sharply. Refined fuel prices reflect an implied oil price well above $100 per barrel, even as West Texas Intermediate, the U.S. benchmark, trades near $80 per barrel. Refining companies are earning historically high margins, not because of price gouging but because of basic supply-and-demand dynamics. Simply put, the world does not have enough refining capacity. The media should devote more attention to the state of the global refining industry and less to the daily fluctuations in crude oil prices.

But the current situation means prices for refined fuels will almost certainly remain elevated for the next several months, regardless of what happens in the conflict with Iran. Two powerful forces are keeping prices at the pump under pressure: Ukraine’s campaign against Russia’s refining infrastructure and the annual risks posed by the Atlantic hurricane season.

The global shortage of refined products is pulling U.S. gasoline, diesel, and jet fuel into overseas markets. Producers sell to the highest bidder, regardless of where the fuel is ultimately consumed. At the same time, from July through October, every tropical disturbance in the Gulf of Mexico is closely monitored because nearly half of America’s refining capacity is located along the Gulf Coast. Even storms that never make landfall can temporarily disrupt offshore oil production, refinery operations, pipelines, and marine transportation.

Energy markets price risk before damage occurs. If forecasts indicate that a hurricane could threaten major refining centers in Texas or Louisiana, gasoline futures typically move higher well before the first winds arrive. Fortunately, the United States continues to produce record amounts of crude oil, and domestic refineries are operating near full capacity. Gasoline prices are likely to remain elevated, but sustained prices above $4 per gallon appear unlikely. The national average currently stands at approximately $3.87 per gallon.

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Nevertheless, geopolitical tensions and hurricane risks are likely to keep fuel prices elevated for the foreseeable future. American households will feel the financial strain, but consumer spending is unlikely to contract significantly.

For policymakers, this is another reminder that energy security depends not only on producing more crude oil but also on maintaining sufficient refining capacity to convert that oil into the gasoline, diesel, jet fuel, and other products that power the American economy.

James Rogan is a former U.S. diplomat who later worked in law and finance for over 30 years. He writes a daily note on markets, economics, politics, and social issues. He can be reached at RoganJames8202@gmail.com.