From Texas To Tokyo, Extreme Heat Threatens Global Fuel Supply

From Texas To Tokyo, Extreme Heat Threatens Global Fuel Supply. Image/Bloomberg

Searing temperatures experienced from Texas to Tokyo this summer have brought attention to a growing concern for the energy system: extreme heat’s threat to fuel supply. Beyond causing spikes in electricity demand due to increased air conditioning use, the scorching heat has resulted in disruptions at oil refineries. These disruptions have contributed to elevated gasoline prices in the United States, with diesel costs rising even more quickly than crude oil. This past summer was particularly brutal, with July being the world’s hottest month on record, following closely after the hottest June.

Refinery Outages Impact Global Oil Processing

The extreme heat led to oil refineries globally reducing their oil processing rates by at least 2% over the summer, according to Macquarie Group. While this percentage may seem small, it has significant implications for a refining system that has suffered from years of under-investment. Additionally, oil product markets were already tight due to factors such as the conflict in Ukraine. Ben Luckock, co-head of oil trading at Trafigura Group, emphasized the significant challenges this year’s extreme weather conditions have posed for refineries in Europe and the United States, leading to more outages and difficulties in repair.

European Crude Processing Declines

In Europe, crude processing dropped by 700,000 barrels per day during the summer compared to the previous year, according to industry consultant FGE. This accounts for approximately 6% of regional throughput. More than half of this decline can be attributed to the extreme heat, highlighting the supply constraints faced by refineries.

Rising Temperatures Boost Demand for Fuel Oil

In addition to constraining supply, rising temperatures are increasing demand for fuel oil, particularly in the Middle East and South Asia, where it is used to generate electricity. The extreme heat is also affecting transport costs by causing waterways like the Rhine River and the Panama Canal to dry up, disrupting supply chains.

Impact of Climate Change on Refinery Operations

Climate change is causing not only extreme heat but also more severe winter weather in various parts of the Northern Hemisphere. These weather extremes pose challenges for refinery operations and fuel prices. The world is facing an array of challenges as it attempts to transition away from fossil fuels while simultaneously dealing with the impacts of climate change.

Uncertainty and Price Volatility in Fuel Markets

The increase in weather-related refinery disruptions highlights the vulnerability of the global energy system to unexpected supply disruptions. Low stockpiles, particularly in the United States, where middle distillate inventories, including diesel, are near a five-year seasonal low, have amplified the impact of these disruptions. As a result, diesel prices have risen significantly, with profits from producing this fuel from crude oil reaching seasonal highs in Singapore. The market’s sensitivity to supply disruptions underscores the need for effective planning and adaptation as the world grapples with energy transition and climate change.