In light of the rise in fuel prices, German Finance Minister Lars Klingbeil, in cooperation with five of his European counterparts, began a new move at the European Union level.
In a letter, the ministers called for imposing a tax on the exceptional profits made by oil companies as a result of the significant increase in their profits against the backdrop of the Iran war.
“We are witnessing one of the largest supply shocks in decades, and dissatisfaction with rising costs of living is growing around the world,” the letter addressed to the Irish Finance Minister said.
Ireland currently holds the rotating presidency of the Council of the European Union.
The finance ministers of Portugal, Spain, Austria, Italy, Poland and Germany wrote in the letter, according to the German news agency, that government measures taken so far have not been sufficient to permanently reduce or stabilize prices for companies and citizens.
“We therefore need joint action to ensure that those who benefit from the crisis in turn contribute to alleviating the burden on the general population,” the letter said.
The ministers added: “We must address the issue of rising energy prices by discussing a framework at the European Union level to impose taxes on exceptional profits,” noting that in this context we should benefit from experiences related to how to cover the profits of oil companies in a more targeted manner. They wrote in the letter: “Moreover, it is necessary that the results of the European investigation into refinery profit margins reach us as soon as possible, to ensure that refineries do not exploit the current situation in the energy field.”
According to Der Spiegel magazine, the letter came at the initiative of Klingbeil. According to the demands contained therein, the issue of the exceptional profits tax is expected to be included on the agenda of the meeting of European Union Ministers of Economy and Finance scheduled to be held in mid-September in Dublin.
As fuel prices rose due to the Iran war, calls escalated for new government interventions. The German government agreed in the spring to tighten oversight of oil companies by the German Antimonopoly Office.
This also included the 12 o'clock rule, which stipulates that gas stations in Europe may only raise prices once a day at 12 noon, and then came the fuel discount measure.
This temporary reduction in fuel taxes ended at the end of last June. Since then, prices at gas stations have risen again, intensifying the debate about government interventions.
The German government is divided on the issue of imposing a tax on exceptional profits. The Social Democratic Party has long demanded the imposition of such a tax on the additional profits made by oil companies due to the war. On the other hand, Economy Minister Katharina Reiche refuses to impose it.
The pressures facing global energy markets do not lie solely in rising crude oil prices; As supply disruptions continued in the Middle East and Russia, an important part of it moved to refineries that convert crude oil into gasoline, diesel, and jet fuel, so that the value of these products jumped compared to the cost of the crude that entered the refineries.
These developments indicate that the refined fuel market has become more narrow than the crude market, at a time when refineries are operating at high rates to meet demand and compensate for the shortfall resulting from the failure of a number of facilities and the decline in exports of some producers.
The result is an increase in what is known as “refining margins,” which are one of the most important indicators that determine the profitability of refineries, but at the same time they help explain part of the increase that ultimately reaches the consumer at the gas station.
What are the refining margins?
Simply put, the refining margin is the difference between the value of the petroleum products a refinery produces and the cost of the crude oil it uses to produce them; If a refinery buys a barrel of crude oil for $80, and is able to sell the resulting products for the equivalent of $95, the difference of $15 simply represents a margin before operating, transportation, and other costs are taken into account.
But the process is more complicated than simply subtracting the price of oil from the price of gasoline. The refinery produces a mixture of gasoline, diesel, jet fuel, and other products, and the value of each product varies according to demand, specifications, and geographic region.
Therefore, the refining sector uses a set of indicators to measure the profitability of converting crude into products.
What does “3-2-1” mean?
One of the most famous of these indicators is the “3-2-1” crushing margin, which is a common standard in the American market. It assumes that the refinery buys 3 barrels of crude oil and converts them into two barrels of gasoline and one barrel of diesel.
Thus, the index measures the difference between the value of the three products and the cost of the three barrels of crude.
According to data reported by the Wall Street Journal, the “3-2-1” margin in the United States exceeded $70 per barrel last month, compared to usual levels in the low tens range.
This increase reflects the widening gap between the value of refined fuel and the cost of crude, and indicates that refineries that are able to secure crude and operate their units at full capacity achieve exceptional margins.
Why are margins rising now?
The main reason is that the world is losing quantities of refined products at a faster rate than it is losing crude products. The war in Iran and unrest related to the Strait of Hormuz, along with Ukrainian attacks on Russian energy facilities and China's restrictions on fuel exports, have reduced the supply of gasoline, diesel and jet fuel.
Here the paradox appears: refineries are still able in several regions to obtain crude and operate their units, but obtaining refined products has become more difficult.
Analysts say that each additional barrel of fuel has become more valuable in the market than an additional barrel of crude, which is pushing refining margins higher.
“Hormuz” redraws the map of oil trade
Disturbances in the Strait of Hormuz have rearranged flows of oil and refined products around the world; Asian refineries resorted to supplies from the Atlantic Basin and emergency stocks to compensate for part of the barrels lost from the Middle East, while some Gulf supplies continued to reach the markets through ship-to-ship transfers and bypasses around South Africa.
In Europe, refineries replaced part of Middle Eastern supplies with crude from the United States, Kazakhstan, the North Sea, West Africa and Latin America.
These changes mean that oil is still available, but it has become more expensive and complex to get to where refineries need it.
Russia adds new pressure to the diesel market
The pressure is not limited to the Middle East; The continuing Ukrainian attacks on Russian energy infrastructure have led to a decline in Russian refinery production to its lowest levels in more than two decades, according to Kpler data.
Developments in Russia are particularly important for the diesel market; Moscow was one of the largest global exporters, before it imposed temporary restrictions on diesel exports, which led to a reduction in supplies available to European markets.
Thus, the Russian supply shortage came at a time when refineries were already facing pressure from Middle East turmoil, which increased competition for available shipments.
China has energy... but it does not export it
As for China, it presents a different case. The country has significant refining capacity, but it has imposed restrictions and quotas on fuel exports with the aim of enhancing domestic energy security.
This policy limits the quantities of gasoline, diesel, and jet fuel available to foreign markets, prompting other Asian refineries to increase operating rates to compensate for the shortage.
Therefore, the market does not necessarily need a Chinese refinery to stop for prices to rise; It is enough for Chinese exports to decline so that other refineries are forced to work at greater capacity.
Who is the biggest winner?
It may seem at first glance that high refining margins mean that all oil companies are making equally huge profits, but the picture is more complex. The refinery benefits when the price of the products it produces is high compared to the cost of the raw material. Therefore, refining sector profits can rise even at a time when crude prices are not rising at the same rate.
This is why it is important to monitor gasoline, diesel and jet fuel prices along with the price of Brent and WTI; The market may witness a moderate rise in the price of crude oil, but a major jump in the prices of refined products if the supply from refineries is limited.
The consumer pays the bill
High refining margins do not remain confined to the energy sector; The higher the cost of producing gasoline, diesel, and jet fuel, the greater the pressure on fuel prices, before its effects gradually spread to the transportation, shipping, aviation, and commodity sectors.
In the United States, the average price of gasoline exceeded $7 per gallon this year, compared to about $3.16 a year ago.
Thus, the refinery crisis could turn into a broader inflationary wave, because fuel is directly or indirectly included in the cost of transporting most goods and services.
Refineries are operating near their capacity limits
The pressure is increasing because refineries in the United States and Europe do not have much space to raise production; After years of closing a number of refineries as a result of high operating costs and the shift towards low-carbon energy, available refining capacity has become more limited.
Analysts say that operating refineries at more than 90 to 95 percent capacity means that the margin of operational flexibility becomes very small.
In this case, the failure of a single refinery or the cessation of a major production unit can have a much greater impact on the market, because other refineries do not have enough spare capacity to quickly compensate for the shortage.
The next danger
Pressure on refining margins may remain high in the coming months, especially with the start of seasonal refinery maintenance work, starting in September.
Maintenance work means that part of the refining capacity will be temporarily taken out of the market at a time when global supplies of refined products are still under pressure.
This puts the markets before a delicate equation: constant demand for fuel, limited refining capacity, and more volatile global supplies.
The story goes beyond the price of a barrel of oil
Therefore, monitoring crude oil prices alone is no longer sufficient to understand the trend of energy prices; At the current stage, the refinery may be the most sensitive link in the supply chain: crude can find its way to the market through alternative routes, but converting it into gasoline, diesel, and jet fuel requires efficiently operating facilities, available refining capacity, and regular supplies of crude.
With the continuing turmoil in the Middle East and Russia and restrictions on Chinese fuel exports, the question for the markets has become not only how much does a barrel of oil cost, but also how much does it cost to convert it into the fuel that the world needs.
And here precisely lies the power of refining margins in pushing fuel prices, and transforming a limited disruption in refining facilities or trade routes into a broader crisis whose effects ultimately reach the consumer.
