The late US Senator John McCain quipped in 2014 that Russia is “a gas station masquerading as a country.” It got quite a few laughs at the time, but as Europe had to find out, if it is the only gas station available, the joke is less funny. Russia is one of the world’s largest Diesel exporters, but a recently announced export ban seems to indicate that Moscow is getting more stingy with this particular resource.
It looks like in 2023 it is not going to be natural gas (for now) but Diesel fuel that will dominate the headlines. Last year the world found out how crucial natural gas is for an economy, and this year we are repeating the same experience with Diesel. As it turns out, without this distillate it is almost impossible to move goods along the supply chains, since everything from ships, long-haul trucks to agricultural machines and mining equipment depends on it.
In the globalized world until the invasion of Ukraine by Russia, most people in the West accepted an abundant supply of gasoline, diesel, natural gas, and electricity as a simple fact of life. So did most governments, albeit they also are keenly aware that despite all the rhetoric of transitioning away from fossil fuels and the announcement of new green deals from Brussels to Washington, their electoral fortunes are closely tied to the price of fossil fuels. The year 2022 saw an absolute record in the distribution of subsidies for consumers of fossil fuels, either in the form of price caps or direct transfer payments.
What happened in 2022, however, cannot be repeated every year. The United States have already drawn down their strategic petroleum reserve (SPR) to historic lows, and French President Macron recently announced according to Bloomberg that “Last year, the government provided blanket subsidies at a huge cost to public finances. Macron dismissed reinstating those discounts and also said the government cannot afford to cut taxes on diesel and gasoline.” Alas, Macron also thinks to believe that he can simply dictate prices for producers: “He will push the country’s oil sector to sell gasoline and diesel at cost as the government seeks to mitigate the impact of surging prices.” This is of course entirely delusional – Europe is a giant in energy consumption, but a dwarf in its production: The EU’s global share of oil production is less than 0.4%. For natural gas, 2.3%, for coal, 3.8% of the global production share. Subsidies are the only option, because the producers of crude oil and refined products would simply take their business elsewhere.
Unfortunately for Macron, Biden, and other Western politicians the limitations on the Diesel supply are not solely determined by crude oil producers, but by available refining capacity. Among the 15 countries with the largest refining capacities are only two European nations, Germany and Italy, and capacities are already squeezed, since it has become almost impossible to build new refineries in Western nations for environmental reasons. Europe has outsourced too much of its energy infrastructure – from raw materials to refining – to other nations, and this strategic mistake is becoming ever more problematic in a world of strategic rivalries.
The financial analyst Luke Gromen talks about the tendency of Western governments to try to “ride two horses with one ass” – a colorful description of a policy that simultaneously tries to abandon fossil fuels but also to get others to produce them for you. At some point, policy makers have to make a decision which horse to ride.
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