From 2021 to 2023, refining was among the best businesses in the energy sector. Pandemic closures had removed capacity, demand recovered faster than expected, and the loss of Russian product exports to Europe in 2022 widened margins further. Refiners in the United States, Europe and Asia enjoyed unusually strong earnings.
That period has ended. According to the US Energy Information Administration, refinery margins measured by the 3:2:1 crack spread have been below their five-year (2019 to 2023) average since the spring of 2024, and fell further in late summer and early autumn. The September 2024 monthly average was the lowest for that month since 2020, when pandemic travel restrictions had flattened transport fuel demand.
The 3:2:1 crack spread is a simple proxy: the value of two barrels of gasoline plus one barrel of distillate, minus the cost of three barrels of crude. The EIA uses regional crude benchmarks, Brent for New York, Los Angeles and the Amsterdam-Rotterdam-Antwerp hub, Light Louisiana Sweet for the US Gulf Coast, West Texas Intermediate for Chicago and Dubai for Singapore. The fact that margins weakened across all of these hubs points to a global rather than regional cause.
The demand side
The first half of the explanation is weak product demand, especially for diesel. In the United States, the EIA reports that product supplied of distillate fuel oil from June to September 2024 averaged 6 per cent less than in 2023 and 8 per cent less than in 2019. The agency attributes this mostly to declining manufacturing activity and greater use of biofuels in place of petroleum diesel on the West Coast. Gasoline and jet fuel consumption over the same months were slightly below 2023 and both remained 6 per cent below 2019 levels.
Outside the United States, the EIA points to slowing economic activity in China and Europe. It also notes the structural forces steadily reducing petroleum fuel use across much of Asia and Europe: electric vehicles, biofuels and LNG in trucking. These are not cyclical effects that reverse with the next upturn. They erode the base of demand that refiners serve.
The supply side
The second half is new capacity. The EIA highlights three large projects outside the OECD. Kuwait's 615,000 barrel-a-day Al-Zour refinery reached full capacity early in 2024. Oman's 230,000 barrel-a-day Duqm refinery has begun operations. Nigeria's 650,000 barrel-a-day Dangote refinery has been ramping up.
Each of these plants changes trade flows. Al-Zour and Duqm are export-oriented and well placed to supply Asia, East Africa and Europe. Dangote is designed first to replace Nigeria's imports of gasoline and diesel, much of which historically came from European refiners. As it ramps up, it removes a market for Northwest European exporters and potentially adds exports of its own into West Africa.
The United States has also added capacity. The EIA reports that US operable atmospheric distillation capacity reached 18.4 million barrels per calendar day at the start of 2024, 2 per cent more than a year earlier. Most of the increase came from expansions at existing plants. ExxonMobil's Beaumont expansion in March 2023 lifted that refinery from 369,000 to 609,000 barrels per calendar day, and Marathon's Galveston Bay refinery grew 6 per cent to 631,000 barrels per calendar day, making it the largest in the country.
Gasoline export competition
The United States is now the world's largest exporter of motor gasoline, according to the EIA, supplying more than 16 per cent of global exports. US gasoline exports averaged 900,000 barrels a day in 2023, around 10 per cent of domestic consumption. More than 500,000 barrels a day goes to Mexico, with most of the rest going to Central and South America, and over 90 per cent leaves from the Gulf Coast.
The EIA's explanation for this export position is that US refinery capacity and utilisation have grown while domestic gasoline consumption has not. US motor gasoline consumption in 2023 was flat compared with 2010 and 0.4 million barrels a day below its 2018 peak. China and India have also added refining capacity since 2010 and increased gasoline exports. Every new export-oriented refinery competes for the same import markets, and when demand growth in those markets slows, margins fall.
Who adjusts
When margins fall, the least competitive capacity eventually closes. The EIA notes that some refiners worldwide have cut runs and that some in Europe have announced plans to close or reduce capacity. In the United States, LyondellBasell plans to close its Houston refinery, of around 264,000 barrels a day, by the first quarter of 2025, a decision made before the recent drop in margins.
The pattern of closures matters. Older, smaller, simpler plants in Europe and parts of Asia are most at risk. Large, complex US Gulf Coast refineries with access to cheap natural gas and a range of crude grades are better placed, as are new Middle Eastern plants with low feedstock costs and modern configurations. Nigeria's Dangote has a captive domestic market. The result over the next few years is likely to be a geographic shift in refining toward the Gulf of Mexico coast, the Middle East and parts of Asia and Africa, at Europe's expense.
West Coast refiners in the United States are a special case. Several closed or converted to renewable diesel in recent years, which helped support margins in that region. But the growth of renewable diesel is also one reason distillate demand for petroleum-based diesel on the West Coast has fallen, so the conversions both removed supply and displaced demand.
Why this cycle is different
Refining has always been cyclical, and low margins have been followed by recoveries before. What is new is the demand outlook. In past cycles, refiners could rely on growth in emerging markets to absorb new capacity within a few years. Now, the largest of those markets, China, is seeing gasoline and diesel demand fall, and growth elsewhere is not large enough to fill the gap left by new capacity in the Gulf, Africa and Asia.
That implies a prolonged period of pressure on the weakest refiners and more closures, particularly in Europe. It also implies that geopolitical disruption, rather than demand growth, may become the main source of margin spikes. The 2022 episode showed how quickly product markets tighten when a large exporter is cut off. Without such a shock, the structural trend is toward lower margins and slow consolidation.