Will there be diesel for everyone? Will it be sold at the price of gold? Europeans are beginning to ask these questions. The date on the calendar to watch out for is next Sunday, February 5th. As of this day, the EU will stop buying diesel from Russia, as agreed in the sanctions plan against Moscow within the G-7 countries. But this embargo, which means, as some analysts have calculated, giving up the equivalent of 14,000 Olympic-sized swimming pools filled with diesel every year, will have consequences.
You may like it or not, but this refinery is still the lifeline of the economy. 42% of European cars are powered by this fuel (and in Spain, more than half). In maritime transport and commercial vehicles the percentage skyrockets. 91% of vans and 96% of all trucks run on diesel in Europe.
At the beginning of 2022, Europe bought almost half of all the diesel it imported from Russia, an amount equivalent to 10% of its demand. Before the ban came into force, the Europeans began hoarding this fuel to increase their reserves and did not hesitate to intensify their imports, even from Russia, before the door finally closed. Diesel imports to Europe soared to a record 8.2 million tonnes in December.
Historically, diesel has been cheaper than gasoline at the pump. But the situation has been reversed in recent months and there are no signs that it will return to the previous one anytime soon. This fuel doubled its price since the summer of 2020, reaching all-time highs.
Bottlenecks in international trade after the post-pandemic cycle with the recovery of air transport and strikes at French refineries had already triggered prices. With Russia kicked out of the European market, fuel may rise to again and surpass previous records. Experts estimate that around 600,000 barrels a day of this refined product will have to be secured to replace Russian volumes.
For Jorge León, vice president of Rystad Energy, "Europe now arrives with high reserves and the prospect of lower demand due to the risks of recession." For the most part, the Europeans have already done their homework. Because since the start of the war Russia's commercial weight has fallen. Right now it represents less than 30% of European diesel imports. As of Sunday, according to Jorge León, the Europeans have three alternatives.
Produce more diesel. But its refineries are already at maximums and do not have the capacity to process more. Or reduce demand: but in this case there is not much margin either, because consumption has already been optimized in recent months and the economy cannot afford to do so in the short term, replacing its vehicles. Therefore, the only option is to buy it from other countries.
In fact, Europe has started to import diesel from Asia and the Middle East. Its weight before the war was almost 0% and 10%, respectively. Now it is 15% and 25%. The weight of North America has also increased slightly. The United States, but above all Saudi Arabia and Kuwait, are the main candidates to occupy the place of Russia. But then this fuel will come from further away, and a transportation cost will have to be added to it.
As for Asia, China or India, they could refine diesel from the Russian crude that they buy at a 50% discount and sell it to Europe, which could seem like a way to bypass sanctions. Both countries would be doing the perfect business buying cheap oil from Russia and selling more expensive diesel to the Europeans. Even so, the Europeans cannot trust Beijing too much either, because the Chinese have already shown on other occasions that they can prioritize their own domestic market for strategic reasons and stop selling abroad.
Instead, the Al Zour refineries in Kuwait and Jazan in Saudi Arabia are the biggest candidates. “I don't think we are going to see diesel rationing. But yes, we Europeans will have to pay a premium”, points out the vice-president of Rystad Energy. At the end of October, Repsol's CEO, Josu Jon Imaz, warned that "we are running out of middle distillates in some European countries", referring to the category of petroleum products that include diesel, heating oil and jet fuel. “We may see high diesel prices in the coming months,” he stressed.
For its part, from the AOP (Spanish Association of Petroleum Product Operators) they recall that in the case of Spain, the country does have a high refining capacity (and in fact, diesel is exported abroad), thanks to investments of the last years. However, not all other countries have the necessary flexibility to process other types of crude oil, so the AOP cannot rule out a priori "the risk of an increase in prices in the reference international markets (Rotterdam and Genoa). The war rumbles in the pump.
