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.
This is precisely the power of refining margins to push fuel prices, and transform a limited disruption in refining facilities or trade routes into a broader crisis whose effects ultimately reach the consumer.
Trade relations between the United States and Canada have entered a new phase of tension, after last-minute negotiations between the two countries failed to reach an agreement that would spare Canada new American duties. A 50 percent tariff will come into effect, starting today (Saturday), on Canadian imports worth about $20 billion.
Canada responded quickly by announcing its willingness to match US tariffs “dollar for dollar,” in a move that heralds a new escalation between two historical allies whose economies are connected to a huge trade network, and increases pressure on the North American Free Trade Agreement, known as the USMCA.
Negotiations until the last minute
The imposition of duties came after 3 days of intense negotiations in Washington between Canadian Minister of Commerce with the United States Dominique LeBlanc and US Trade Representative Jamieson Greer, in an attempt to narrow differences and reach a formula acceptable to both parties.
US President Donald Trump had postponed the date for the tariffs to take effect by three days, after indicating that significant progress had been made in the talks, which raised hopes that an agreement could be reached before the deadline expired.
But those hopes were dashed on Friday evening.
Greer said that Canada “refused to complete the agreement” according to the conditions reached earlier in the week, noting that the US administration had offered Ottawa significant reductions in duties imposed on key sectors, including steel, aluminium, cars and timber.
On the other hand, Canadian Prime Minister Mark Carney held Washington responsible for the collapse of the negotiations, stressing that “the changes made at the last minute” to the American conditions were “unfair and uneconomic,” and raised questions about the reliability of any agreement reached.
Carney announced the suspension of negotiations and directed his country's negotiating team to return to Ottawa.
$20 billion under the guillotine of fees
The new US tariffs affect about $20 billion in Canadian goods. That is approximately 5 per cent, or 5.5 per cent, of Canada's exports to the United States, and includes a wide range of products; From hockey sticks to cement and some consumer and medical products.
Although this percentage seems limited compared to the total trade between the two countries, its impact may exceed its direct value, especially since it comes on top of fees already in place on major Canadian sectors. Among them are cars, steel, aluminum and wood.
The new procedures also apply to Canadian goods that are eligible to benefit from preferential treatment under the USMCA, which increases the uncertainty facing companies and investors on both sides of the border.
Canada pledges to respond
Ottawa did not wait long to respond to the American move. Carney said that Canada would match US tariffs “dollar for dollar” to protect Canadian workers and companies, opening the door to a new round of retaliatory measures that could expand the scope of the conflict.
Canada has already maintained a set of retaliatory measures against American goods and services, which Washington considers one of the main reasons for the continuing dispute.
The US administration says that Canada imposes discriminatory treatment on some American products, including alcohol, cars, and dairy products. The Canadian states had previously removed some American alcoholic beverages and wines from liquor stores, in a move that angered Washington.
Analysts believe that the entry into force of the Canadian response will make de-escalation more difficult, after both parties have become publicly committed to tough positions.
Trump wants to redraw the relationship with Canada
The current escalation represents a striking shift in the relationship between the United States and Canada, which for decades have maintained one of the most stable trade and political relationships in the world. The volume of trade between the two countries in goods and services reached about $880 billion last year, while about 70 percent of Canada's exports go to the American market.
But Trump's policy towards Canada fundamentally changed the nature of the relationship, after he used tariffs as a tool to pressure Ottawa, in conjunction with his repeated statements about the possibility of Canada joining the United States as the "fifty-first state."
Carney said that Canada realized that “America has changed,” and that relations between the two countries will not return to what they were before, regardless of the outcome of any single trade agreement.
For this reason, the Canadian government began pushing to diversify its trade and reduce its dependence on the American market, at a time when Canada relies heavily on the United States as its main destination for exports.
Why did the deal collapse?
According to the American narrative, Washington made an offer that included significant reductions in tariffs on the steel, aluminum, automobile, and timber sectors, in exchange for Canadian concessions on other files.
But a senior American official said that Canada had requested additional concessions that the United States was not prepared to make, while Greer accused Ottawa of reneging on some of the commitments that had previously been agreed upon.
As for the Canadian side, it believes that the problem was the recent American changes to the terms of the agreement, which Carney considered unfair and weakening confidence in any future agreement.
Between the two stories, the negotiations ended without an agreement, and a new round of talks has not yet been scheduled.
Ryan Majoros, a former official in the US Department of Commerce, believes that the two sides will face great pressure in the coming days to find a way out of the escalation, but he warned that the Canadian response to the US tariffs will make the process of reducing the escalation more difficult.
A “huge blow” to competitiveness in North America
Companies warn that the continuation of the tariffs will not only affect Canada, but may also affect the US economy, given the deep intertwining of supply chains in the two countries.
Candice Laing, president of the Canadian Chamber of Commerce, said the tariffs represent a "huge blow to competitiveness in North America," warning that they will raise costs for American consumers, while putting pressure on Canadian companies, investors and workers.
Importing American companies initially bear the duties, before often seeking to pass part of their costs on to consumers by raising prices, which adds new pressures on inflation and the cost of living in the United States.
The sensitivity of this issue increases at a time when Americans are already facing rising costs of living, while the United States prepares for the midterm congressional elections in November.
Trump returns to a Depression-era law
The importance of the new fees is not limited to their value, but extends to the legal basis on which the US administration relied. After the US Supreme Court last February invalidated the broad fees imposed by Trump under emergency powers, the administration began searching for alternative legal tools.
In the case of Canada, Trump resorted to Section 338 of the Tariff Act of 1930, a provision dating back to the era that witnessed the Great Depression.
The article gives the US President the authority to impose fees of up to 50 percent on imports from countries that the United States considers discriminating against American companies, without requiring a prior investigation, and it does not specify a clear time limit for the continuation of the fees.
The use of this article brings to the fore the legacy of the fees associated with the Smoot-Hawley Act in the 1930s, which economists and historians believe contributed to limiting global trade and exacerbating the repercussions of the Great Depression.
The Big Battle: The Future of the USMCA
Behind the current tariffs is a broader trade battle over the future of the United States-Mexico-Canada Agreement (USMCA). The United States, Canada and Mexico are preparing to review the agreement that Trump negotiated during his first term, but talks between Washington and Ottawa have not yet begun, while the United States has already begun formal negotiations with Mexico regarding updating the agreement.
The current escalation raises questions about the possibility of reaching a tripartite understanding that maintains trade flows between the largest North American economies.
The importance of the agreement lies in the fact that industries in the three countries depend on common supply chains, especially in cars, design, manufacturing and raw materials, which makes any large-scale trade barriers have a cost that exceeds the borders of the country targeted by the tariffs.
A business relationship is at a crossroads
The current standoff comes after decades of close economic and security cooperation between Washington and Ottawa. The border between the two countries, which extends for about 5,525 miles, is one of the most active borders in the world, and is crossed daily by hundreds of thousands of people and huge quantities of goods.
But the new fees indicate that the dispute is no longer just a limited dispute over steel, timber or dairy, but rather has become part of a broader reformulation of the economic relationship between the two countries.
While Washington seeks to use tariffs to press for trade and industrial concessions, Ottawa is trying to reduce its dependence on the American market and build new trade alternatives.
Thus, negotiations aimed at avoiding tariffs turned into a new confrontation whose effects could extend to inflation, supply chains, investment, and the future of the North American trade agreement.
In the absence of a new date for negotiations, it seems that the question is no longer whether Washington and Ottawa will reach a deal; Rather, when will the two sides be able to find a way out that prevents retaliatory tariffs from turning into a broader trade war?
