Gasoline Crisis in Russia Linked to Refinery Strikes

How Russian refinery strikes caused a gasoline shortage

As William Spaniel explains, Ukraine’s ongoing campaign of long-range drone strikes on Russian refineries has significantly disrupted the Kremlin’s ability to produce gasoline and diesel. These strikes have incapacitated a notable portion, about a quarter to a third, of Russian refinery capacity. This has pushed the nation into a full-scale consumer fuel crisis.

Spaniel notes that while the Iran War inadvertently boosted global crude oil prices, leading to a revenue windfall for Russia due to its status as a major energy exporter, the simultaneous disruptions to Russian refining facilities became a critical counterbalance. Refineries transform crude oil into usable fuels, and damaging them deprives the state of the refined products necessary to meet domestic demand. The situation highlights the strategic vulnerability of over-reliance on relatively limited energy infrastructure and Ukraine’s focus on providing maximum pressure by targeting Russia’s war economy and its dependence on oil revenues.

Spaniel adds that refinery disruptions are doubly impactful because consumer fuels like gasoline have a shelf life, which adds urgency to resolve the current shortages. This makes the ability to consistently refine crude oil into gasoline and diesel critical but also precarious when that infrastructure is damaged. The fuel crisis, while deeply disruptive on its own, also compounds the personal frustrations of Russian citizens and limits their mobility, thereby amplifying the broader political and economic ramifications for the Kremlin.

Understanding the crack spread and its role in fuel economics

To further understand the gravity of the current crisis, Spaniel explains the concept of the crack spread, a term used in energy economics to describe the profit margin refineries earn by processing crude oil into consumable products like gasoline and diesel. The crack spread measures the price difference between crude oil and refined products, scaled volumetrically. The term originates from the process of "cracking" complex hydrocarbons into simpler, usable ones.

The crack spread is always positive: refined fuels cost more due to added value. However, fluctuations in this margin reveal imbalances between crude oil supply and refinery capacity. Spaniel points out that when there’s a scarcity of crude oil, its prices rise and influence consumer fuel costs. Conversely, when crude oil is abundant but refiners struggle to keep pace with demand, the shortage of refined products inflates their prices, as refineries can command higher premiums.

Currently, Spaniel observes, the world is in the latter scenario. Despite disruptions from the Iran War, crude oil stocks are relatively high, but refined product reserves are falling. This imbalance has created an extraordinarily high crack spread, more than doubling its pre-war levels. This has left gasoline prices elevated globally. For Russia, this has turned into a perfect economic storm, as it faces the catastrophic combination of reduced refining capacity at home and sharp hikes in global fuel prices.

Spaniel underscores that, given this dynamic, a drop in crude oil prices wouldn’t necessarily translate into lower gas prices for consumers. Price movements in the gasoline market are now primarily dictated by limited refinery operations and rising demand for scarce products. Consequently, the ongoing surge in fuel prices directly impacts daily life in Russia, exacerbating public discontent as visibly high fuel prices intensify economic and political pressures on the Kremlin.

Challenges in expanding refinery capacity during a crisis

Given the pressure of the current fuel shortage, Spaniel notes that expanding refinery capacity might appear to be a logical solution. However, the reality is far more complex and constrained. He explains that building new refineries is a highly capital-intensive effort, often requiring up to $10 billion and several years of construction. Even then, a refinery may take decades to become profitable. This creates an unattractive investment prospect under current circumstances.

Spaniel highlights wider global trends that further deter refinery development. Gasoline consumption has stagnated in part due to advancements in fuel efficiency and increasing adoption of electric vehicles. Additionally, economic shifts sparked by the pandemic, including the widespread transition to remote work, have led to reduced commuting and, consequently, a decline in fuel demand. These factors make the refinery business particularly risky amid a volatile global energy market.

Adding to these issues are practical hurdles. Routine maintenance temporarily takes existing refineries offline, further constraining production capacity. In the case of Russia, destruction caused by Ukrainian drone strikes and resulting damage to refinery facilities compounds the problem. Additionally, refineries in the Persian Gulf that were adversely impacted during the Iran War are also struggling to recover as they face lingering uncertainties over the stability of the oil trade.

Spaniel concludes that the logistical and economic challenges of boosting refining capacity during a crisis mean the problem is not likely to be resolved anytime soon. Even in the best of economic climates, expanding infrastructure is pricey and time-consuming.

Alternative strategies Russia has explored

With limited domestic options for immediate increases in fuel production, Russia has turned outward to secure refined fuel supplies. According to Spaniel, the Kremlin has approached allies like Belarus, Kazakhstan, and India for assistance. While some relief has come from these efforts, the scale of their contributions remains limited due to their own domestic constraints and, in the case of Belarus and Kazakhstan, shared political pressures to maintain stable prices internally.

India has also emerged as a supplier of refined products to Russia. This is ironic, Spaniel notes, given that the crude oil originally originated from Russia, was refined in India, and is now re-exported back to Moscow. However, this arrangement is not without logistical complications. Russia lacks sufficient specialized oil docking stations, which are crucial for handling large fuel shipments. Historically, the country has not invested heavily in such infrastructure because it relied on domestic refining capacity to meet its fuel needs.

This challenge is particularly acute in regions like Crimea. After widely publicized attacks on the strategic Crimean Bridge, Russia curtailed the transport of large fuel shipments across it, wary of the risk posed by Ukrainian drone strikes. Alternative supply routes, like roads along the Azov Sea, have also been compromised by midrange drone strikes, leaving sea routes as the most viable option.

Spaniel suggests that, even with these fallback methods, Russia is grappling with severe logistical bottlenecks that prevent it from adequately addressing the fuel supply issue. The destruction of infrastructure caused by Ukraine’s strikes has tied up the resources and manpower that could have otherwise been employed to build out additional supply routes.

The crisis's broader implications for Russia

Spaniel argues that this fuel crisis represents not just an economic issue but a significant political challenge for the Kremlin. High gasoline prices and their visibility at gas stations across the country serve as a potent symbol of public dissatisfaction. Unlike other issues that can be shielded by government messaging or controlled narratives, high prices are immediately apparent to all citizens and have a unifying effect on public discontent.

He draws parallels between the current unrest triggered by fuel shortages and past instances of public dissatisfaction under autocratic regimes. Autocratic governments, Spaniel explains, rely on creating the illusion of widespread public approval to minimize resistance. However, visibly high gasoline prices erode that facade, as citizens see concrete evidence of broad dissatisfaction. The realization that others share their frustrations amplifies dissent, destabilizing perceptions of government control and competence.

Spaniel further observes that this crisis follows a broader pattern of strain on the Kremlin. Unlike the backlash against Russia's fall 2022 mobilization policy, which could be mitigated through policy changes, there is no quick fix for the gasoline shortage. The underlying issue of the loss of refining capacity demands long-term infrastructural and logistical solutions that cannot be implemented swiftly.

While Spaniel stops short of predicting the immediate collapse of the Putin administration, he emphasizes that this crisis is among the most severe challenges the Kremlin has faced since the start of its invasion of Ukraine. The fuel shortages exacerbate economic fragility, undermine public confidence, and expose the limits of Russia’s resilience in maintaining its war effort and domestic stability during prolonged conflict and economic isolation.

:::faq

crack spread: why the russian gasoline crisis is worse than it looks explained

William Spaniel explains that the crack spread, the profit margin for refining crude oil into gasoline or diesel, is extraordinarily high right now. While crude oil prices remain elevated, falling refining capacity has created shortages of refined products like gasoline, increasing their prices. This dynamic exacerbates Russia's fuel crisis because domestic refining damage has coincided with a global surge in fuel prices, amplifying its economic and political impact.

What was said, and when

The points this article makes, and the moment in the recording where each was said. Every time below opens the recording at that moment.

• Ukraine’s ongoing campaign of long-range drone strikes on Russian refineries has significantly disrupted the Kremlin’s ability to produce gasoline and diesel. 02:30.
• These strikes have incapacitated about a quarter to a third of Russian refinery capacity. 02:30.
• The Iran War boosted global crude oil prices, leading to a revenue windfall for Russia as an energy exporter. 00:51.
• Refinery disruptions deprive Russia of refined products necessary to meet domestic demand. 02:30.
• Refineries transform crude oil into usable fuels, and damaging them limits domestic fuel supply availability. 02:30.
• Consumer fuels like gasoline have a shelf life, which adds urgency to resolve current shortages, according to Spaniel. 03:05.
• The world is currently in a scenario where crude oil stocks are relatively high, but refined product reserves are falling. 07:18.
• The current crack spread has more than doubled its pre-war levels. 06:16.
• Gasoline prices are elevated globally due to the extraordinarily high crack spread caused by a scarcity of refined products. 07:31.
• Building new refineries often requires up to $10 billion and several years of construction, according to Spaniel. 08:19.
• Advancements in fuel efficiency and increasing adoption of electric vehicles contribute to stagnated gasoline consumption. 08:38.
• Maintenance efforts temporarily take refineries offline, reducing production capacity, according to Spaniel. 09:20.
• Damage from Ukrainian drone strikes to Russian refinery facilities worsens production constraints. 02:30.
• Refineries in the Persian Gulf affected during the Iran War still face lingering uncertainties over oil trade stability, according to Spaniel. 02:41.
• Russia has turned to Belarus, Kazakhstan, and India for assistance in securing refined fuel supplies, according to Spaniel. 10:28.
• India has emerged as a supplier of refined products to Russia, despite logistical complications. 11:01.
• Russia lacks sufficient specialized oil docking stations for handling large fuel shipments. 11:12.
• Russia has curtailed the transport of large fuel shipments across the Crimean Bridge following Ukrainian drone strikes, according to Spaniel. 11:42.
• Alternative supply routes near the Azov Sea have been compromised by midrange drone strikes. 11:52.
• High gasoline prices visibly impact public dissatisfaction in Russia, according to Spaniel. 13:28.
• Spaniel draws comparisons between public disdain for gasoline shortages and past dissatisfaction under autocratic regimes. 13:28.
• Spaniel emphasizes that there is no quick solution to resolving Russia’s gasoline shortage due to the infrastructural issues. 10:09.
• Spaniel remarks that this crisis is one of the most severe challenges the Kremlin has faced since its invasion of Ukraine. 00:00.
• Fuel shortages exacerbate Russia's economic fragility and undermine public confidence, according to Spaniel. 13:59.