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Europe’s diesel market is crawling toward recovery, mirroring an uncertain and uneven re-emergence of the continent’s largest economies from Covid-19.

The fuel’s premium to crude — how profitable it is for oil refineries — stands at about $6.20 a barrel, according to ICE Futures Europe data. While that’s up from a low of $2 in September, it’s still by far the weakest for the time of year in over a decade. Another gauge, reflecting tightness of supply, briefly pointed to a tighter market around the middle of February as freezing U.S. weather lifted the global market. It has since flipped back to indicating surplus.

Bad But Less Bad

European diesel margins are recovering from a low base , while the market’s pickup from late last year reflected a global freight boom as people diverted spending toward goods and away from services, the next leg of diesel’s recovery hinges on how fast the region’s economies can ease restrictions to combat the spread of Covid-19. To that end, the paths of the continent’s four largest — Germany, the U.K., France and Italy — look mixed.

“As lockdowns ease and confidence returns, we can expect to see stronger diesel demand even within the next few weeks,” said Jonathan Leitch, director of EMEARC consulting at Turner, Mason & Co. “However, mobility is still depressed so any increase is likely to be slow until we see more of Europe open up as we move through to summer.”

Mixed Messages

In Germany, Chancellor Angela Merkel has backed a relaxation of coronavirus restrictions despite a stubbornly high infection rate, acknowledging that many Germans are weary of curbs on daily life after months of lockdown. The U.K. has now given almost a third of its population at least one vaccine shot and is aiming to reopen schools on Monday as part of a wider restart program. By contrast, France is considering tighter restrictions on 20 regions while Italy is tightening measures in some areas after a surge in cases.

The four countries’ combined diesel consumption of 2.13 million barrels a day last year accounted for 17 percent of all OECD Europe’s oil demand, according to figures from the International Energy Agency, the Paris-based adviser to governments.

The fate of diesel matters beyond the confines of a narrow group of European fuel traders. The petroleum product, often viewed as an indicator of economic health, is central to the profitability of the region’s refiners, which in turn help to fire global demand for crude. The Organization of Petroleum Exporting Countries and allied nations will on Thursday meet to discuss whether or not to add oil supply to the global market.

Overall, Europe’s consumption of diesel-type fuels is expected to average about 6.5 million barrels a day during February-June, according to Energy Aspects Ltd., an industry consultant. While that’s an increase from January, it’s still down by about 5% from 2019 levels.

The views of oil company traders and analysts are mixed about what comes next. Of half a dozen spoken to for this story, two saw little sign of any imminent demand recovery, two others talked about it picking up in April, one saw high demand in OECD Europe, and another said he thought German demand was rising.

But even if demand does return, there are other headwinds for diesel. Europe’s oil refineries are currently thought to be curbing the amount of crude they process, something they could quickly change if consumption picks up. Similarly, Covid-19 saw a buildup of stockpiles of the fuel, and those need to be cleared before the market can normalize — even if that’s beginning to happen.

“The incremental month-on-month increase, for us, is going to be relatively low,” said Koen Wessels, an oil products analyst at Energy Aspects. “Even if there is a pick up in, say, ultra low-sulfur diesel demand, this will be somewhat offset by seasonally softer heating oil demand.”

Bloomberg, by Jack Wittels, March 11, 2021

Global oil demand is recovering and could return to around pre-pandemic levels next year, the chief executives of Saudi Aramco and Chevron Corp told an oil and gas conference on Tuesday.

The coronavirus pandemic last year wiped out a fifth of worldwide demand for fuel as billions of people stopped traveling and sheltered at home.

Global demand for oil has recovered to around 94 million barrels per day (bpd) and could reach 99 million barrels per day (bpd)in 2022, said Aramco CEO Amin Nasser at IHS Markit’s online CERAWeek conference.

Economies are improving in China, India and East Asia, with vaccine deployment as “cause for optimism” in the West, Nasser said. “I see demand and the market continuing to improve from here, especially from the second half of this year,” he said.

Diesel demand is at or above pre-pandemic levels due to door-to-door deliveries, though jet fuel lags as people avoid long flights, said Chevron CEO Michael Wirth, who spoke on a panel with Nasser.

Both executives are bullish on natural gas. Saudi Arabia has targeted generating half of its electricity from natural gas and half from renewables by 2030.

Emissions of methane – a potent greenhouse gas that is the main component of natural gas – should be reduced and robustly monitored, Wirth said, adding that he expects greater regulation from the Biden administration.

Reuters, by Jennifer Hiller , March 11, 2021

As the pandemic rages, so do oil prices, reaching levels not seen since January 2020, when the virus was still a gleam in the epidemiologists’ eyes.

Saudi Aramco is reportedly seeking to extend a $10-billion loan, according to Reuters, which cited unnamed sources familiar with the matter, who confirmed an initial report by a Reuters-related news outlet.

Aramco took the loan from a group of banks last year in May to finance its acquisition of Sabic, the Saudi petrochemicals major, which cost the energy company some $69 billion and wrapped up in June 2020.

The loan was supposed to be repaid from the proceeds of a bond that Aramco issued later last year. However, the company did not repay the Sabic loan. It raised $8 billion from the bond. It was the second bond Aramco issued in as many years, after placing a $12-billion bond with international buyers in 2019.

Saudi Arabia, like its fellow Gulf oil producers, has taken to raising debt to weather the effects of two oil price crises in the past ten years—the more recent one particularly devastating. For Aramco, debt is a better option than reducing its dividend, as most of this goes into the rulers of the Kingdom, who are also majority owners of the company.

The news that the world’s largest oil company by reserves wants to extend the loan suggests it has not yet recovered enough to start paying its dues even though Brent is still trading above $60 a barrel.

In addition to loans, however, Aramco has also put some assets up for sale, notably its pipeline business. The company was even reportedly ready to offer prospective buyers a loan of up to $10 billion to secure a deal.

According to the latest reports, bidders for the pipeline business, which Aramco will only sell a part of, include Apollo Global Management and Global Infrastructure Partners. Bloomberg reported last month that BlackRock, Brookfield Asset Management, and China’s Silk Road Fund Co. had also submitted non-binding bids for the assets.

Oil Price by Irina Slav, March 11, 2021

As the pandemic rages, so do oil prices, reaching levels not seen since January 2020, when the virus was still a gleam in the epidemiologists’ eyes.

A variety of reasons have been given for this trend, including recovering demand and suppressed supply, the vaccine roll-out, and falling inventories. Indeed, the futures price has returned to backwardation, with the current contract nearly $1 higher than the 4th month contract, almost the same as early 2020.

Which is a bit perverse, given that the fundamentals do not—at this point—seem to justify such prices, let alone backwardation. Backwardation, when current prices are above future prices, implies that the market is tight, which is why current contracts have a premium. (Remember that futures prices are not predictions of the price in the future but what people are willing to pay today for barrels at a future date.) The figure below shows the prompt (1st month) contract minus the fourth month contract, and for most of the past year, the market was in contango: prompt prices were discounted, reflecting the glut in the market.

Without a doubt, the market has been tightening, thanks to the efforts of OPEC+ and the recent voluntary 1 mb/d reduction by the Saudis. Low oil prices have also reduced North American production by as much as 2 mb/d, only some of which can be restored quickly. Still, it might be argued that the price is reflecting the combination of tighter inventories and an optimistic economic outlook.

But, and it is a big but (no snide remarks, please), market fundamentals have hardly recovered. It would be nice to know what global oil inventories are, but that data doesn’t really exist—most non-OECD nations do not report them in a timely way, if at all, and even OECD data is badly lagged. The mid-January Oil Market Report from the IEA shows inventories for end-November, at which point they were about 200 million barrels above normal. For them to have fallen to levels of end-2019 would have required a 3 mb/d inventory draw in December and January, which is not impossible but would certainly be unusual.

The table below compares the oil market in early January 2020, the last time prices were this high, with the current (lagged) data. The best indicators of market fundamentals do not suggest these prices are warranted: spare capacity in OPEC and Russia is much above year-ago levels, implying recovering demand will not tighten markets but allow a relaxation of quotas. (At $60/barrel, some growth in U.S. shale is possible, although the increase by year’s end should be modest.)

Inventories are also a primary indicator of market fundamentals, since they represent the difference between supply and demand, at least kind of, in a vague way. Unfortunately, as mentioned, OECD inventory data is lagged, but the U.S. less so, and traders often focus on that info the way drunks look for their keys under the street light. U.S. inventory data is very timely and does not show a balanced market by any means, which does not support a bullish price outlook.

Some would object that U.S. inventories are a mere 5% above the level of a year ago, which is true, but as petroleum economist Meryl Streep would say, “It’s complicated.” For one thing, actual usable inventories are much smaller than the total, as I discussed last year. Some Clarity On Oil Storage Capacity Estimates (forbes.com) Oil in pipelines remains at a constant level; you can’t draw them down without emptying the pipeline. And storage tanks have to maintain certain minimum levels to operate, so that the amount which can be drawn upon, the ‘usable inventory,’ is a fraction of the total. Thus, with inventories up by 5%, the usable inventories have probably doubled.

A further complicating factor is that the absolute inventory level is less important than the relative level. If demand drops, as it has done lately, less inventories are needed. Expert traders pay sharp attention to inventories in days of consumption or, for crude oil, days of refinery runs. Both are shown in the table above and given the depressed level of demand it is hardly surprising that relative inventories have increased significantly.

Of course, there are two other drivers of oil prices that need to be considered. First are the expectations of traders for future supply and demand, which arguably are having a bullish effect. However, the possibility of a tight market in the fourth quarter of this year should not be elevating prices to the extent seen now (I think, guess, speculate, okay not speculating). This implies to me that oil prices are higher in part because of asset inflation due to the extraordinary fiscal stimuli being enacted (or promised) around the world, including the U.S.

Which suggests to me that current prices might be inflated, such that I wouldn’t expect them to go much higher in the next six months, but the gradually tightening market also implies that they won’t drop significantly. But, and it is another big but, I have been wrong before and there is always the possibility that day traders on social media will talk us into another bubble.

Forbes by Michael Lynch, February 26, 2021

About a week ago, alternative energy plays scored crucial wins seemingly at the expense of the oil and gas sector after President Biden ramped-up his radical climate agenda by announcing plans to halt new oil and gas leasing on federal territory in a bid to become carbon-neutral by 2050.

Some of the biggest oil companies, including ExxonMobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX), are actively drilling on federal lands in New Mexico. Biden has also touted a $2 trillion clean energy pledge, easily the biggest investment by the federal government into the sector.

As you might expect, the fossil fuel sector has been up in arms against the president’s latest pledge.

Mike Sommers, chief executive of the American Petroleum Institute, has quipped:

“Energy abundance or foreign dependence. American jobs or overseas jobs. Economic revival or small-town decline. Progress or retreat,’’ while adding that, “Thus far, President Biden is on the wrong side of a number of these consequential choices.”

But maybe Mike Sommers and the oil sector are pointing fingers at the wrong guy.

Whereas many oil and gas investors view the renewables sector as its biggest rival, the truth is a bit more nuanced.

In fact, the oil industry has a lot more to fear from the likes of Tesla Inc. (NASDAQ:TSLA) and NIO Ltd (NYSE:NIO) than it does the solar and wind sectors.

The EV Reckoning

President Biden has paused drilling on federal lands for 60 days, though most shale oil and gas drilling happened in privately owned lands. The oil and gas sector has countered by pointing at the high unemployment rate mainly due to Covid-19 and declared that now is not the time to carry out such a policy.

For instance, Sommers points at New Mexico, where the ban on federal leasing could eliminate $1 billion from the state’s budget and cost 62,000 jobs. Shutting down the construction of the Keystone Pipeline is likely to immediately cost 1,000 temporary jobs.

But that ignores the fact that only 9% of fracking is currently done on federal lands, and also the fact that the ban does not affect existing permits. After all, such drilling netted the federal government just $6 billion in revenues last year.

The brutal truth is the biggest threat to the oil and gas sectors does not come from climate regulation but rather from the natural progression of the EV megatrend.

Exponential Growth Path

Biden has specifically reiterated his earlier plans to build 500,000 new EV charging stations and also replace the federal government’s auto fleet with EVs.

But the fact of the matter is that the EV sector has been recording exponential growth over the past few years despite a lack of support from the federal government.

A recent report by clean energy watchdog Bloomberg New Energy Finance (BNEF) proves that the renewable energy sector has remained largely immune to the ravages of Covid-19, with global energy transition investments in 2020 clocking in at a record $501.3 billion, good for 9% Y/Y growth.

Yet, digging deeper into that report reveals that the clean energy boom is heavily lopsided in favor of a single segment: Electric vehicles or EVs.

BNEF analysis shows that both public and private investments in renewable energy capacity came to $303.5 billion, up 2% on the year, thanks mainly to the biggest-ever build-out of solar projects as well as a $50 billion surge for offshore wind.

he EV sector, however, performed much better, with investments in the burgeoning sector, including charging infrastructure buildout clocking in at $139 billion, good for a 28% Y/Y increase. Meanwhile, the passenger EV market reached an estimated $118 billion representing a four-fold growth compared to 2016 levels.

But here’s the gist in the two numbers: Renewable energy investments have been mostly flat, managing a meager 0.15% CAGR growth over the past five years compared to 20.74% CAGR for electrified transport over the timeframe.

In fact, at this rate, investment in the global electrified transport sector is set to overtake the entire renewable energy sector by 2025.

The biggest catalyst for the global EV sector is this: The sector is close to a “tipping point” of mass adoption thanks to falling costs.

Indeed, EV sales increased at a torrid 43% clip globally last year, with price parity with ICE on an unsubsidized basis expected to be achieved as early as 2023.

Batteries and the EV powertrain make up 70% of the cost of an EV. Luckily, the cost of lithium-ion batteries has dropped dramatically since 2010 and is expected to continue to do so in the coming years. To illustrate the point, consider that back in 2010, the price of an EV battery pack was $1,160/kWh (USD) compared to the 2018 average price of $176/kWh.

BloombergNEF has forecast the cost will be nearly cut in half to $94/kWh by 2024, and then to just $62/kWh by 2030.

BNEF has predicted that EVs will account for 10% of new car sales by 2025 from 2.7% in 2020 and 28% by 2030.

That’s a very big deal considering that the transport sector consumed more than 40% of global oil production in 2019 and has accounted for more than half of total oil demand growth since 2000.

In other words, President Biden’s executive orders are the least of Big Oil’s worries.

Oilprice.com by Alex Kimani, February 26, 2021

The kingdom is working with many countries on green and blue hydrogen projects. Saudi Arabia wants to emulate Germany’s success with renewable energy and be a pioneer in hydrogen production, as the world’s biggest oil exporter seeks to diversify its economy.

“We will be another Germany when it comes to renewables,” Energy Minister Prince Abdulaziz bin Salman said Wednesday on a panel at the Future Investment Initiative conference in Riyadh. “We will be pioneering.”

The kingdom is working with many countries on green and blue hydrogen projects and those to capture carbon emissions, he said.

The green version of the fuel, which produces only water vapour when burned, is made with renewable energy, typically solar and wind power. The blue type is produced from natural gas, with the greenhouse gas emissions being captured so they can’t escape into the atmosphere.

While hydrogen is seen as crucial for the switch from oil and gas to cleaner fuels, the technology to make it is still expensive.

Neom Plant

State energy giant Saudi Aramco is leading the nation’s efforts with blue hydrogen. When it comes to green hydrogen, Pennsylvania-based Air Products & Chemicals and local firm ACWA Power International are building the world’s biggest such plant at Neom on the Red Sea coast.

Prince Abdulaziz said Saudi Arabia planned to convert half its power sector to gas, while the remainder would be fueled by renewable energy. Presently, the kingdom burns plenty of oil in its power plants.

The country is committed to carbon neutrality, he said, without giving a time frame for achieving that. And reaching the goals set out in the Paris climate agreement will help the Saudi economy become less reliant on oil, he said.

Saudi Arabia’s past efforts to boost renewable-energy production have met with little success. Germany, a country not known for sunny weather, has become one of the world’s biggest producers of solar energy, largely thanks to heavy government subsidies that helped spur the industry.

OPEC Vigilance

Oil remains crucial to the economy for now, and Saudi Arabia is leading efforts by the Organization of Petroleum Exporting Countries (OPEC) to restrict supplies and bolster prices.

The kingdom is not worried about the impact of the latest coronavirus wave on oil demand, Prince Abdulaziz said in a separate interview at the same conference.

“There is not yet anything that would make us more concerned,” he said.

Despite several major economies, including Germany and China, tightening lockdowns in recent weeks, oil inventories continue to fall.

That’s “a good sign,” the minister said. “And I hope these lockdowns will not become more serious. But we remain ready. Vigilance is our motto.”

Saudi Arabia and other OPEC members are benefiting, he said, from Riyadh’s decision earlier this month to unilaterally cut crude output by 1 million barrels a day in February and March.

That move has helped raise Brent oil prices by more than 7 per cent this year to around $55 a barrel.

The reduction in supplies by Saudi Arabia, as well as those announced by Iraq, will ensure that 1.4 million barrels of oil will be held back from the market each day in February, Prince Abdulaziz said.

The figure will rise to 1.85 million barrels daily in March, he said.

Bloomberg, by Matthew Martin, Salma El Wardany, and Abeer Abu Omar, February 26, 2021

The CEOs of Chevron and ExxonMobil last year discussed the possibility of merging the two companies, The Wall Street Journal reported Sunday, citing unnamed people familiar with the talks.

The newspaper reported that Chevron CEO Michael Wirth and Exxon CEO Darren Woods spoke about the prospect after the Covid-19 pandemic began to negatively impact oil prices.

The talks are not ongoing and were described as preliminary, according to the Journal. Representatives from the two companies declined to comment. The talks were later reported by Reuters.

A merger between Chevron and Exxon would be among the largest in history, and would likely face antitrust scrutiny from President Joe Biden’s Department of Justice. Both companies descend from John D. Rockefeller’s Standard Oil, which was broken up by the Supreme Court in 1911.

Chevron’s market cap is $164 billion, and Exxon’s is $189 billion, meaning that the combined company would be worth north of $350 billion. The combined firm would be the second largest oil and gas company in the world, after Saudi Aramco.

Oil prices have recovered much of their losses since cratering in March, though they have remained somewhat depressed amid a slower-than-expected vaccine roll out and worries of new coronavirus variants.

CNBC, Editor: Haley Zaremba, February 26, 2021

Although the novel coronavirus has wreaked havoc on many sectors of the global economy, leaving double the people unemployed in the United States as compared to February of last year, a rising long-term unemployed rate, and leading to more than 8 million U.S. residents slipping under the poverty line since the summer, the stock market continues to go gangbusters.

In no sector is this more true than in the domain of electric vehicles, which have been hot–crazy hot. Tesla alone gained over 700% in 2020 and received an extra boost from being admitted to the S&P 500, making Elon Musk a centibillionaire and even allowing him to eclipse Jeff Bezos as the richest man on Earth for a short stint.

Indeed, green energy and EV stocks have been seeing record-breaking investments as Environment, Sustainability, and Governance (ESG) investing goes mainstream, and 2021 is set to be another great year for renewables in the stock market.

Much has been made of the admittedly heavily symbolic coincidence of Tesla, an electric vehicles company that has become emblematic of a more climate-friendly future, entering the S&P 500 just a couple of months after oil giant Exxon Mobil was dropped from the Dow Jones Industrial Average Index after nearly a century in the ranks of some of the most revered and stalwart blue chip companies in the world.

It all pointed to a very tidy and sellable story line: fossil fuels out, clean and green energy in. onward and upward. But the reality, of course, is never so simple.

“A roaring bull market can make even contradictory ideas true, as both electric-vehicle and fossil-fuel investors could tell you,” leading financial and investment news outlet Barron’s reported this week. “The former is trying to displace the latter, but for now, both sectors are happily coexisting in the market.”

It’s true that oil stocks are not burning quite as bright as they once were, and that EV stocks are almost too hot to handle, but it’s way too soon to count fossil fuels out. This has been proven by the oil sector’s impressive bounceback from the brutal hit that the COVID-19 pandemic gave the sector.

Less than a year ago, on April 20th, the West Texas Crude Intermediate benchmark plummeted to nearly 40 dollars below zero per barrel. They couldn’t give the stuff away. But now, as the global economy recovers and oil demand comes back, crude prices have risen to a 52-week high and European oil benchmark Brent Crude topped $60 for the first time since last year’s spectacular crash.

“More electric vehicles will eventually mean lower demand for oil,” Barron’s admits, but that transition won’t happen overnight. Around the world, campaigns to replace gas-fueled cars with EVs are picking up speed, but a sweeping transition will require a lot of technological and infrastructure advances, and these things take time.

The projected time that it will take, however, keeps contracting as more investors, world leaders, and industry leaders throw their weight behind the transition.

So while oil has recovered in the markets, it’s days are numbered. Many experts contend that peak oil is already happening as we speak, while it’s impressive that oil has managed to return to acceptable levels, it’s certainly not seeing the exciting kind of growth that the energy sector is.

“The Energy Select Sector SPDR ETF is up about 1% in premarket trading and has added 12% year to date, far better than the S&P 500’s 3.5% rise,” Barron’s reports.

“So EV or oil?” the article asks. “In a market overflowing with money, the answer is yes.” While that may be true today, it certainly won’t be true for too much longer. Whether it’s for environmental reasons or purely economic reasons or both, investors and markets are making one thing clear: fossil fuels are still relevant for now, but EV and renewables are the way of the future.

Oilprice.com , by Haley Zaremba February 26, 2021

National governments still tend to think about oil refineries as strategic assets that must preserved to provide fuel security in the event of armed conflict, but that reflects an outdated view of risks arising from modern warfare.

Exxon’s decision to convert a small refinery near Melbourne into an import terminal has sparked more anguish in Australia about the progressive closure of the country’s refineries and growing reliance on imported fuels.

Like many other countries, Australia’s government views the maintenance of domestic refining capacity as a way to safeguard the supply of critical transport fuels in the event of an armed conflict or blockade.

But maintaining a few old, small and relatively inefficient refineries likely adds little to the country’s energy security (“Australia faces fuel security challenge as refineries close”, Financial Times, Feb. 10).

WORLD WAR LESSONS
In most oil-importing countries, the desire to protect domestic refining capacity stems from fears that a naval blockade or attacks on shipping could disrupt the supply of imported fuels such as gasoline and diesel.Even before the Second World War, governments had become increasingly concerned about the potential impact of blockades or attacks on shipping (“Oil: a study of war-time policy and administration”, U.K. Official History of the Second World War, Payton-Smith, 1971).

Pre-war British planning focused on how to maintain fuel supplies for the armed forces, industry and domestic transport in the event conflict with Germany or Japan led to attacks on tanker shipping.

In the event, between 1940 and 1942, German submarine attacks on British and allied tankers succeeded in reducing oil imports and helped create severe fuel shortages at home as well as in other parts of the British Empire.And in 1941, the U.S. decision to impose an embargo on crude and fuel sales to Japan was one of the factors that accelerated the outbreak of armed conflict between the two countries later in the year.

Fears about fuel supplies are therefore understandable, but future conflicts are likely to be fought differently, which makes lessons from the Second World War less relevant. The Second World War was fought in relatively slow motion with limited explosive power, mostly by slow-flying, limited-range bombers carrying small payloads, slow-moving ships and large slow-moving ground armies.

In a slow-moving conflict, there is more time for an embargo or blockade to exhaust pre-conflict fuel inventories and undermine the willingness and ability of the belligerents to keep fighting.Since 1945, however, the speed of armed conflicts has accelerated and the available explosive power has risen by several orders of magnitude.

The development of long-range heavy bombers, short-range and inter-continental missiles, and nuclear weapons has fundamentally altered the speed and destructive power of conflicts.

In a much faster-moving conflict, with much more explosive power, a slow-acting embargo or blockade is unlikely to be an effective strategy.

ESCALATION SCENARIOS
In the last two decades, the United States and its allies have employed partial embargoes and blockades against North Korea, Venezuela, Yemen and to some extent Iran, with limited success. But in a major inter-state conflict it is unlikely a fuel embargo would play a significant role because it would be highly escalatory while failing to be decisive, worsening rather than resolving a conflict.

In a major inter-state conflict, any state subject to embargo or blockade would likely regard it as an existential attack justifying an all-out response to break the stranglehold before fuel stocks ran low. Implementing an embargo or blockade would likely provoke a response with missiles designed to destroy blockading vessels and possibly spread the conflict to the homeland of the blockader.

In most scenarios, an embargo or blockade would probably escalate into attacks on the fuel supply system of all belligerents, including tankers, refineries, pipelines, tank farms and electricity systems.Attempts to blockade fuel supplies might even escalate into a broader conflict involving other industrial and economic targets, cyber-attacks on critical systems, or even the threat to use nuclear weapons.

It is very difficult to envisage a scenario in which a blockade is serious enough to force one of the belligerents to concede, but not so serious as to spill over into total war (“On escalation”, Kahn, 1965).

REFINERIES AS TARGETS
Even in the event of a successful blockade, domestic refineries are unlikely to be much help in maintaining domestic fuel supplies.

In most countries outside OPEC and Russia, domestic refineries rely on imported crude, which would be impacted by a blockade as well – except in an implausible scenario in which fuel is blockaded, but not crude.

Australia, for example, produced 0.5 million barrels per day of crude domestically in 2019. But the country consumed 1.1 million barrels per day of refined products, leaving it relying on imported crude and fuels to make up the shortfall.

Finally, in any major conflict between states, the refineries of all belligerents would be large, hard-to-defend targets, highly vulnerable to missile attack, so having domestic refineries would not protect fuel supplies.

For an oil refinery to be a strategic asset we have to assume a scenario in which there is a blockade serious enough to threaten the economy, but not so serious it provokes all-out conflict; a blockade that targets imported fuels, but not crude; and a blockade that does not provoke attacks on the refineries of all belligerents.

It is just about possible to envisage such a contorted scenario, but it is very unlikely – so most countries should probably stop treating oil refineries as strategic assets.

Reuters, by Angus Mordant, February 26, 2021