An energy shock is brewing, and it's not just about oil prices. While oil prices have been volatile this summer, with each twist and turn in the Iran war affecting the market, the real concern lies in the rising prices of oil products like gasoline and diesel. This phenomenon is driven by a concept known as a "crack spread" and a series of supply disruptions that are uniquely squeezing oil product markets. The closure of the Strait of Hormuz and strikes on Middle East refineries have disrupted more than 20% of global seaborne oil product trade this year. Meanwhile, Ukraine's drone attacks have knocked more than 40% of Russia's refining capacity offline, forcing the country to import these products. China, too, has exacerbated the strain by cutting fuel exports, worried about its own domestic supply. The result is a market that is about to enter its strongest seasonal demand period with very little margin for error. In my opinion, this situation is particularly fascinating because it highlights the interconnectedness of global energy markets and the impact of geopolitical events on everyday consumers. It also raises a deeper question: how can we ensure a stable and affordable energy supply in the face of such disruptions? The answer lies in diversifying energy sources and investing in renewable energy, but that's a topic for another day. For now, let's focus on the crack spread and its implications. The crack spread refers to the difference between the price of oil and the products derived from it, such as gasoline, diesel, and jet fuel. These spreads have been pushing to record highs, with gasoline prices up 98% this year compared to the 44% rise in WTI crude oil prices. This is where the "perfect summer storm" analogy comes in. BofA Global Research describes it as such, noting that three of the world's four major refining hubs remain impaired for one reason or another. The middle distillate markets have tightened rapidly, with diesel and gasoil cracks up more than 85% since June and jet fuel cracks surging nearly 140%. This situation is further complicated by the fact that the United States, the only major refining hub "open for business," is experiencing record exports, drawing down already tight inventories. So, what does this mean for consumers? Based on just oil prices, fuel inflation would have contributed 0.6 percentage points to headline inflation in developed economies in July. However, due to the surge in crack spreads, fuel inflation is probably contributing closer to 1 percentage point. This is a significant increase, and it's likely to have a ripple effect on the cost of living. In my view, this energy shock is a wake-up call for governments and businesses to invest in renewable energy and energy efficiency. It's also a reminder of the importance of diversifying energy sources and reducing our reliance on any single region or supplier. As we move forward, it's crucial to consider the long-term implications of these disruptions and take steps to ensure a more resilient and sustainable energy future. Personally, I think this energy shock is a call to action for all of us to reevaluate our energy consumption habits and consider the impact of our choices on the environment and our wallets. It's a complex issue, but one that demands our attention and action.
