European leaders are turning a blind eye to an impending diesel crisis
The late US Senator John McCain quipped in 2014 that Russia is “a gas station masquerading as a country”. It got a few laughs at the time, but as Europe found out, the joke isn’t so funny when it is the only gas station available. Russia is one of the world’s largest diesel exporters, but a recently announced export ban seems to indicate that Moscow is getting stingier with this particular resource.
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.
Until the invasion of Ukraine, 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: despite all the rhetoric about transitioning away from fossil fuels, the year 2022 saw a record 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 has already drawn down its strategic petroleum reserve (SPR) to historic lows, and French president Emmanuel Macron recently announced that he would push the country’s oil sector to sell gasoline and diesel at cost. Alas, it is not in the French president’s power to simply dictate prices to companies, however much he might like.
By the same token, it’s easy to see why he’s so desperate: Europe is a giant in energy consumption, but a dwarf in production: the EU’s global share of oil production is less than 0.4%. Subsidies are the only option because the producers of crude oil and refined products would simply take their business elsewhere.
Unfortunately for Macron, Joe Biden, and other Western politicians, the limitations on 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 two European nations, Germany and Italy. And in these two countries, 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 colourful description of a policy that simultaneously tries to abandon fossil fuels but also to get others to produce them for you. At some point, policymakers will have to make a decision about which horse to ride.