Three-line summary
*Advanced economies that cut refining capacity face a wider supply shock in oil products as "two wars" overlap
*China and Korea use refining capacity as a breakwater, gaining weight in diesel and jet fuel supply chains
*The shift away from oil continues, but the transition calls for an orderly exit for fossil fuels
Two wars — the United States against Iran, and Russia against Ukraine — keep delivering shocks to energy markets. After crude, the strain has spread to refined products such as gasoline, diesel and jet fuel. One reason the squeeze has grown so severe is that the capacity to produce these fuels, namely refining capacity, has been shrinking as part of the energy transition. When supply is disrupted, as it is now, there is less room to absorb the blow. An unexpected war-driven crisis arriving in the middle of the transition has dealt a heavy hit to energy supply chains.
What stands out is a paradox: regions that moved fastest on the energy transition and cut refining capacity soonest are taking the hardest hit from the shock in oil products. The harder countries try to break away from oil, the stronger the power of oil becomes.
Demand Rose While Refining Capacity Fell
Global refining capacity grew an average 0.6% a year over the decade from 2015 through last year, according to the Energy Institute, a U.K. energy research body. Consumption of oil products rose 1% over the same period. Looking at last year alone, consumption of oil products climbed 1.3% while refining capacity fell 0.3%. Demand increased, but the capacity to meet it shrank.
The pullback in refining capacity is most pronounced in Western advanced economies. Across OECD countries, refining capacity contracted an average 0.2% a year between 2015 and 2025. That includes the European Union, which groups 27 countries, at minus 0.7%, along with Australia at minus 6.9%, Japan at minus 1.8% and the United States at minus 0.1%.
This weakened supply capacity ran into the U.S.-Iran war that broke out in February this year. Diesel and jet fuel prices jumped sharply, and European jet fuel inventories fell below 30 days of supply in June. Then came a second shock. Russia, whose refining facilities were badly damaged by Ukrainian counterattacks, restricted exports of oil products, and the bottleneck shifted to diesel. With Middle Eastern and Russian diesel off the market, demand surged for diesel from the United States, the world's largest diesel exporter, and U.S. diesel inventories as of September fell to their lowest level since 1982. That came even as U.S. refineries ran flat out at utilization rates of 97%. Against that backdrop, and after the administration of U.S. President Donald Trump threatened to block diesel exports, the Group of Seven nations including the EU agreed on the 2nd to jointly release 100 million barrels of diesel and crude.
A Refining Breakwater
Not every country has cut its capacity to make oil products. China is the clearest example. Its refining capacity grew an average 2.3% a year over the past decade, from 2015 to 2025. For a country that is not a traditional oil producer, that became a lever for exerting influence in global energy markets during the U.S.-Iran war.
China imposed emergency restrictions on exports of oil products in March, just after the Strait of Hormuz was blockaded, then gradually loosened export volumes in a way that expanded its sway over the market. Predictions that China would be the biggest victim of the U.S.-Iran war, given that more than 40% of its crude imports come from the Middle East, proved wide of the mark. With Beijing imposing another export ban on oil products this month, buyers of Chinese fuel such as Australia, Vietnam, Japan and Indonesia have already begun to worry about supply disruptions. The Wall Street Journal recently noted that China has the power to calm soaring diesel prices.
China's decision to bar oil product exports again is also closely tied to conditions at home, namely a sharp drop in oil inventories as the U.S.-Iran war drags on. Beijing has its own fuel to secure. To stress the point again, this is not to say China escaped the energy shock, but that its refining capacity served as a buffer that made the blow relatively less severe. The New York Times analyzed that China's control over the energy market is producing an effect similar to the influence the Organization of the Petroleum Exporting Countries exerts by adjusting crude supply.
What about South Korea? Korea also fits the pattern of refining capacity absorbing part of the shock in oil products. The country holds top-tier refining capacity, which grew an average 1.3% a year over the past decade from 2015 to 2025, according to Energy Institute data. That worked as a breakwater limiting supply disruptions for refined products at home. Europe's imports of Korean jet fuel averaged 129,000 barrels a day last month, the highest level since October 2022.
An Orderly Exit Is Needed Even as Oil Fades
Korea is an energy-vulnerable country that depends on imports for effectively all of its crude. The Middle East crisis hit the real economy, and its financial markets saw greater volatility than those of other countries. When it comes to oil products, however, its position was relatively better.
The move away from oil looks hard to reverse. The International Energy Agency expects global energy investment to reach a record $3.4 trillion this year. Of that, only $1.2 trillion, or 35%, goes to fossil fuels. The remaining $2.2 trillion is set to be concentrated in clean technologies such as renewable energy, nuclear power and electrification. The IEA also projects that demand for oil products will peak as early as next year, and markets are watching the pace of the shift to electric vehicles in China, the world's largest crude importer. Narrowing the view to recent years, Korea's refining capacity has stalled at 3.3 million to 3.6 million barrels a day. The country has entered a period of qualitative change rather than quantitative expansion.
Still, the cases reviewed here suggest that safeguards remain essential even as the energy transition proceeds. Refining capacity became the cushion that prevented shortages of diesel and jet fuel the moment supply chains wobbled. Regions that cut that capacity first, by contrast, had to find other countries to turn crude into the fuels they needed. As this series has reported, this too points to the need for an orderly exit for fossil fuels during the energy transition.
Related Petro-Electro articles
① Twenty Percent of Oil and Gas Vanished: The Hard-Landing Scenario for Decarbonization Exposed by War
② The Last Buyer of Crude Has Changed: Is China Becoming an Electric State?
③ What If the World's Largest Diesel Exporter Bars the Door?
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