'We're solving the crude dilemma, but we are not solving the product dilemma'
Mitchell Yerxa and his family run a 3,500-acre farm in California's Sacramento Valley that grows 16 crops, including tomatoes, walnuts and rice. A fifth-generation farmer in an area with agricultural soil that is the envy of the world, Yerxa is facing a hurdle during this fall's harvest that he didn't see coming.
This season, Yerxa said he's paying roughly double for the diesel he uses to power the farm's tractors, combines, harvesters and dozens of other heavy-duty machines. He's also paying steeper fuel surcharges for services like crop dusting. Regardless of the extra costs, Yerxa must keep harvesting his crops, because leaving the tomatoes on their vines to rot or the walnuts on the ground around the trees would make it harder to farm his fields next year.
"Diesel isn't something we can choose to buy or not buy," Yerxa said. "We don't have a choice to not harvest something because of the price of fuel. We don't have that luxury."
He's far from the only person worrying about the record prices of diesel, gasoline, jet fuel and other oil products. The inflationary shock cascading through the economy is now a refining crisis more than an oil crisis, experts say. It's about oil products, not crude. The situation may have started with the stalemate at the Strait of Hormuz, but experts say that the real reckoning is happening in the global refining industry, and the seeds of it were planted long ago.
Simply put, there are too few refineries turning crude into fuels. In Russia, some of them have been damaged by Ukrainian drones, while in countries like Kuwait and Qatar, others have been cut off from global markets by Iran and its attacks on tankers in the Strait of Hormuz. That has left the world with little cushion, because in the U.S. and Europe there is now less refining capacity, mainly because the oil industry a decade ago started to slow down in earnest the rate at which it produces refined oil products.
In places like Philadelphia, which used to be a refining hub, the economics of refining no longer work, particularly for an industry that measures decision-making payoffs in decades rather than years. For U.S. refiners in particular, there's also a longstanding disconnect between places where domestic crude supplies are plentiful, and therefore cheaper, and places where demand for fuels is at its highest. As a result, refineries in the U.S. and Europe had been operating without much slack even before the start of the war with Iran in late February. That has left them vulnerable to strains from unplanned outages, natural disasters or conflicts.
In the U.S., the world's biggest economy, refinery capacity has dropped every year since 2018, with the exception of a couple of postpandemic catch-up years in 2022 and 2023. The industry's capacity peaked in 2017 at 18.6 million barrels a day and dropped to 17.6 million barrels a day in 2025, according to Turner, Mason & Co. in Dallas. The energy consulting firm expects capacity to slide to 17.45 million barrels a day this year.
The U.S. economy has become a less energy intensive for several reasons, including the shift from manufacturing to services. As a result, it has made more economic sense in the U.S. to shut down underperforming refineries and focus on expanding and tweaking overperforming ones than to build a new refinery from scratch that would cost billions of dollars. The gradual emergence of mazelike permitting processes further slowed more ambitious new refining projects, at least in some areas.
The last major U.S. refinery came online in Garyville, La., in 1977, with an original capacity for 200,000 barrels of fuels a day. That refinery now has capacity for more than 600,000 barrels of fuels a day, part of an industry trend of focusing on existing profitable refineries in areas with lower crude costs, which was followed by waves of shutdowns. The pandemic intensified the rate of those closures.
"It's really just project economics," said Skip York, chief energy strategist at Turner, Mason & Co. "The slow, incremental growth of U.S. demand can be met through improving operations rather than building new capacity. So that's the base case."
The U.S. refinery industry is also mostly a gasoline-driven market. Most of the decline in U.S. gasoline demand in the past two decades or so can be traced to improvements in the fuel efficiency of the internal-combustion engine, York said, while about a third of the demand drop can be attributed to more electric vehicles on the road, people driving fewer miles and Americans owning fewer cars.
"2026 is a refining crisis," John Arnold, the billionaire energy trader, recently declared on the social-media platform X.
Sorting out crude flows, but not fuel flows
In the aftermath of Iran declaring the Strait of Hormuz closed in March, the world feared running out of jet fuel just ahead of peak summer air travel, because Kuwait and the United Arab Emirates export massive amounts of jet fuel. Refineries in the U.S. and elsewhere started increasing their own production of jet fuel at the expense of diesel runs. Both fuels come from the same middle-distillate group at the refining stage, while gasoline is a light distillate.
Retail diesel prices promptly started climbing, spooking markets, because diesel is the workhorse fuel of the economy. The war started off as the worst oil-supply shock in history, but in the months that followed, it turned into a fuel crisis. The average retail price for diesel in the U.S. was recently $6.41 a gallon, just below the record it hit in September, and the average U.S. retail gasoline price was recently $4.43 a gallon, according to AAA. Benchmark U.S. crude, meanwhile, has dropped to around $90 a barrel from $119 in March.
The amount of crude and crude products flowing through Hormuz is still below historical averages, but there is a lot of oil now flowing through the strait, usually in vessels that hug the coast of Oman under U.S. military protection. But it's mostly crude oil, not refined products, that is exiting the Gulf. A portion of the oil is exiting via ship-to-ship transfers, for example, in which shuttle tankers take on the most hazardous part of the journey and then move it to ships headed to Asian refiners.
"The crude side is largely being sorted out," said York, the energy strategist. "We're solving the crude dilemma, but we are not solving the product dilemma."
Before the Iran war, some 5 million to 7 million barrels a day of crude products were being moved out of the Persian Gulf, including a mix of gasoline, diesel, jet fuel and liquified petroleum gas, or LPG, which is propane and butane for cooking.
J.P. Morgan said this week that oil exports out of the Persian Gulf are now only 11% lower than prewar levels, but product levels remain at 42% below normal. Much of the oil products exiting the Gulf are LPG.
"The crude market has largely normalized, even as refined product supplies remain constrained," J.P. Morgan said.
About 2,000 miles away from the Persian Gulf, the war between Russia and Ukraine has further impacted middle-distillate oil products like diesel and jet fuel.
See also: It's not just Hormuz. Another war is providing fresh price shocks to fuel and food.
Russia has carried out regular, deadly strikes on Kyiv, and Ukraine has used drones to hit Russia's energy infrastructure, including refineries. These Ukrainian attacks have put a dent in Russia's output of refined oil products. They have also led Russia to implement a ban on exports of diesel and other fuels, which was just extended through the end of October.
"That's starving the world of diesel," York said, just as demand for the fuel is picking up.
There's continuous underlying demand globally for diesel used in transportation, but the Northern Hemisphere sees a surge in diesel demand in the fall, due to the harvest, and again toward the end of the year. Some additional demand for heating oil also comes into play, mainly for residential heating in the U.S. Northeast and in parts of Europe.
Fewer refineries
The U.S. currently has 130 operating refineries, down from 301 in 1982, according to the Energy Information Administration. Those refineries are running at historically high rates as plants race to produce products that are in demand. But the overall limited capacity of the U.S. refining industry has left less room room for error.
"The situation we are in, it just makes it more obvious that this is kind of a potential problem," said Debnil Chowdhury, head of Americas and Europe refining and marketing for S&P Global Energy. At the same time, however, companies make multibillion-dollar decisions based not on the possibility of wars or natural disasters, but rather on even demand with a multiyear, and sometimes multidecade, horizon.
Some of the U.S. refineries slated for closure may have gone through initial shutdown studies a decade or more ago, he said. Companies make those calls not unlike car owners trying to decide whether to pay for vehicle repairs or buy a new car. Every so often, refineries shut down for months to work on "turnarounds" - top-to-bottom refurbishment and replacement cycles due to safety and other regulations - which are expensive propositions.
"One of the things that chemical engineers spend a lot of time doing and learning about is how to maximize profit," Chowdhury said.
Californians are paying some of the nation's highest prices for gasoline and diesel. The state recently lost two of its aging refineries, even as it imports oil products from Japan and Korea, Chowdhury said. Once a major player in refining, California had more than 40 operating refineries in the early 1980s, mostly suited to refine the heavy crude grades that were the standard at the time, not the lighter crude that started flowing in the U.S. during the shale revolution. California now has 12 refineries, according to the EIA.
MW The latest oil-price shock rippling through the economy is a refining crisis - not a crude crisis
By Claudia Assis
'We're solving the crude dilemma, but we are not solving the product dilemma'
Mitchell Yerxa and his family run a 3,500-acre farm in California's Sacramento Valley that grows 16 crops, including tomatoes, walnuts and rice. A fifth-generation farmer in an area with agricultural soil that is the envy of the world, Yerxa is facing a hurdle during this fall's harvest that he didn't see coming.
This season, Yerxa said he's paying roughly double for the diesel he uses to power the farm's tractors, combines, harvesters and dozens of other heavy-duty machines. He's also paying steeper fuel surcharges for services like crop dusting. Regardless of the extra costs, Yerxa must keep harvesting his crops, because leaving the tomatoes on their vines to rot or the walnuts on the ground around the trees would make it harder to farm his fields next year.
"Diesel isn't something we can choose to buy or not buy," Yerxa said. "We don't have a choice to not harvest something because of the price of fuel. We don't have that luxury."
He's far from the only person worrying about the record prices of diesel, gasoline, jet fuel and other oil products. The inflationary shock cascading through the economy is now a refining crisis more than an oil crisis, experts say. It's about oil products, not crude. The situation may have started with the stalemate at the Strait of Hormuz, but experts say that the real reckoning is happening in the global refining industry, and the seeds of it were planted long ago.
Simply put, there are too few refineries turning crude into fuels. In Russia, some of them have been damaged by Ukrainian drones, while in countries like Kuwait and Qatar, others have been cut off from global markets by Iran and its attacks on tankers in the Strait of Hormuz. That has left the world with little cushion, because in the U.S. and Europe there is now less refining capacity, mainly because the oil industry a decade ago started to slow down in earnest the rate at which it produces refined oil products.
In places like Philadelphia, which used to be a refining hub, the economics of refining no longer work, particularly for an industry that measures decision-making payoffs in decades rather than years. For U.S. refiners in particular, there's also a longstanding disconnect between places where domestic crude supplies are plentiful, and therefore cheaper, and places where demand for fuels is at its highest. As a result, refineries in the U.S. and Europe had been operating without much slack even before the start of the war with Iran in late February. That has left them vulnerable to strains from unplanned outages, natural disasters or conflicts.
In the U.S., the world's biggest economy, refinery capacity has dropped every year since 2018, with the exception of a couple of postpandemic catch-up years in 2022 and 2023. The industry's capacity peaked in 2017 at 18.6 million barrels a day and dropped to 17.6 million barrels a day in 2025, according to Turner, Mason & Co. in Dallas. The energy consulting firm expects capacity to slide to 17.45 million barrels a day this year.
The U.S. economy has become a less energy intensive for several reasons, including the shift from manufacturing to services. As a result, it has made more economic sense in the U.S. to shut down underperforming refineries and focus on expanding and tweaking overperforming ones than to build a new refinery from scratch that would cost billions of dollars. The gradual emergence of mazelike permitting processes further slowed more ambitious new refining projects, at least in some areas.
The last major U.S. refinery came online in Garyville, La., in 1977, with an original capacity for 200,000 barrels of fuels a day. That refinery now has capacity for more than 600,000 barrels of fuels a day, part of an industry trend of focusing on existing profitable refineries in areas with lower crude costs, which was followed by waves of shutdowns. The pandemic intensified the rate of those closures.
"It's really just project economics," said Skip York, chief energy strategist at Turner, Mason & Co. "The slow, incremental growth of U.S. demand can be met through improving operations rather than building new capacity. So that's the base case."
The U.S. refinery industry is also mostly a gasoline-driven market. Most of the decline in U.S. gasoline demand in the past two decades or so can be traced to improvements in the fuel efficiency of the internal-combustion engine, York said, while about a third of the demand drop can be attributed to more electric vehicles on the road, people driving fewer miles and Americans owning fewer cars.
"2026 is a refining crisis," John Arnold, the billionaire energy trader, recently declared on the social-media platform X.
Sorting out crude flows, but not fuel flows
In the aftermath of Iran declaring the Strait of Hormuz closed in March, the world feared running out of jet fuel just ahead of peak summer air travel, because Kuwait and the United Arab Emirates export massive amounts of jet fuel. Refineries in the U.S. and elsewhere started increasing their own production of jet fuel at the expense of diesel runs. Both fuels come from the same middle-distillate group at the refining stage, while gasoline is a light distillate.
Retail diesel prices promptly started climbing, spooking markets, because diesel is the workhorse fuel of the economy. The war started off as the worst oil-supply shock in history, but in the months that followed, it turned into a fuel crisis. The average retail price for diesel in the U.S. was recently $6.41 a gallon, just below the record it hit in September, and the average U.S. retail gasoline price was recently $4.43 a gallon, according to AAA. Benchmark U.S. crude, meanwhile, has dropped to around $90 a barrel from $119 in March.
The amount of crude and crude products flowing through Hormuz is still below historical averages, but there is a lot of oil now flowing through the strait, usually in vessels that hug the coast of Oman under U.S. military protection. But it's mostly crude oil, not refined products, that is exiting the Gulf. A portion of the oil is exiting via ship-to-ship transfers, for example, in which shuttle tankers take on the most hazardous part of the journey and then move it to ships headed to Asian refiners.
"The crude side is largely being sorted out," said York, the energy strategist. "We're solving the crude dilemma, but we are not solving the product dilemma."
Before the Iran war, some 5 million to 7 million barrels a day of crude products were being moved out of the Persian Gulf, including a mix of gasoline, diesel, jet fuel and liquified petroleum gas, or LPG, which is propane and butane for cooking.
J.P. Morgan said this week that oil exports out of the Persian Gulf are now only 11% lower than prewar levels, but product levels remain at 42% below normal. Much of the oil products exiting the Gulf are LPG.
"The crude market has largely normalized, even as refined product supplies remain constrained," J.P. Morgan said.
About 2,000 miles away from the Persian Gulf, the war between Russia and Ukraine has further impacted middle-distillate oil products like diesel and jet fuel.
See also: It's not just Hormuz. Another war is providing fresh price shocks to fuel and food.
Russia has carried out regular, deadly strikes on Kyiv, and Ukraine has used drones to hit Russia's energy infrastructure, including refineries. These Ukrainian attacks have put a dent in Russia's output of refined oil products. They have also led Russia to implement a ban on exports of diesel and other fuels, which was just extended through the end of October.
"That's starving the world of diesel," York said, just as demand for the fuel is picking up.
There's continuous underlying demand globally for diesel used in transportation, but the Northern Hemisphere sees a surge in diesel demand in the fall, due to the harvest, and again toward the end of the year. Some additional demand for heating oil also comes into play, mainly for residential heating in the U.S. Northeast and in parts of Europe.
Fewer refineries
The U.S. currently has 130 operating refineries, down from 301 in 1982, according to the Energy Information Administration. Those refineries are running at historically high rates as plants race to produce products that are in demand. But the overall limited capacity of the U.S. refining industry has left less room room for error.
"The situation we are in, it just makes it more obvious that this is kind of a potential problem," said Debnil Chowdhury, head of Americas and Europe refining and marketing for S&P Global Energy. At the same time, however, companies make multibillion-dollar decisions based not on the possibility of wars or natural disasters, but rather on even demand with a multiyear, and sometimes multidecade, horizon.
Some of the U.S. refineries slated for closure may have gone through initial shutdown studies a decade or more ago, he said. Companies make those calls not unlike car owners trying to decide whether to pay for vehicle repairs or buy a new car. Every so often, refineries shut down for months to work on "turnarounds" - top-to-bottom refurbishment and replacement cycles due to safety and other regulations - which are expensive propositions.
"One of the things that chemical engineers spend a lot of time doing and learning about is how to maximize profit," Chowdhury said.
Californians are paying some of the nation's highest prices for gasoline and diesel. The state recently lost two of its aging refineries, even as it imports oil products from Japan and Korea, Chowdhury said. Once a major player in refining, California had more than 40 operating refineries in the early 1980s, mostly suited to refine the heavy crude grades that were the standard at the time, not the lighter crude that started flowing in the U.S. during the shale revolution. California now has 12 refineries, according to the EIA.
(MORE TO FOLLOW) Dow Jones Newswires
October 01, 2026 08:53 ET (12:53 GMT)
MW The latest oil-price shock rippling through -2-
West Coast states have long paid some of the highest fuel prices in the U.S., mostly thanks to their modest regional production and the lack of a pipeline connection to the Gulf Coast, the nation's refining hub. Gulf Coast refineries benefit from lower-cost crude coming from Texas oil basins such as the Permian and Eagle Ford. A joint venture by Phillips 66 (PSX), Kinder Morgan $(KMI)$ and HF Sinclair (DINO) was recently finalized, and the companies made the final investment decision to move forward with the proposed Western Gateway pipeline, a 1,300-mile refined-products pipeline system that would create a new fuel-supply path from St. Louis, Mo., and from the Gulf Coast to Arizona and California.
That's cold comfort for California farmers like Yerxa. In early September, Yerxa paid $5 for a gallon of "red" diesel, which is the standard ultra-low-sulfur diesel dyed red to identify it as exempt from some taxes and intended for off-road uses in agriculture, construction, mining and other industries. Only a few weeks later, he was paying $6.50 to $7 a gallon, he said. Earlier in the year, red diesel cost between $3.50 a gallon and $4 a gallon.
"That's a massive, massive increase in pricing," Yerxa said. It also comes as other expenses, such as for water, maintenance and labor, have also increased. All the while, what he earns for some crops is largely stagnant or, worse, has fallen.
"The hard thing is this: We are making as much on things like corn, rice, wheat that we did in the 1970s," he said. Walnuts for next year are going for about 65 cents a pound, a roughly 35-cent loss per pound to growers like him. Processing tomatoes - those used in products such as canned diced tomatoes and ketchup - are also fetching lower prices than they did a few years ago.
Retail looks at controlling shipping costs
Manufacturers and retailers are also walking an oil-products tightrope, trying to balance higher fuel costs with their profit margins, and passing costs along to consumers is not always in their best interest. Doing so at a time when customers are feeling a general inflation squeeze might lead to fewer sales and a loss of market share.
Many are opting to manage their costs and are looking for alternatives, said Ashley Hetrick, supply-chain lead at accounting and advisory firm BDO. The recent sudden spikes in fuel prices are making it trickier.
"A slow rise you can offset with a couple of basis points in your margins," Hetrick said. Diesel spikes and the immediate strain on an organization's near-term costs and cash flow has led businesses to look at the changes they can make to control those costs, she added.
Immediate actions are not necessarily about raising prices, Hetrick said. Businesses are taking "a very close look" at transportation costs, trying to spot inefficiencies and looking to maximize shipping.
In recent days, one of her clients, a medium-size consumer-products company, told its retail clients that for the next 30 days it was not going to ship any orders of less than one truckload, and that anything less would have to be shipped via slower parcel shipping or merged with bigger orders.
Other clients are looking at shipping by rail, which is not an option for every manufacturer, as rail is traditionally slower, less predictable and sometimes not available in the area of either the shipper or buyer. Companies are also taking a hard look at pricier expedited orders, calculating whether some customers can wait or even if some can pick up their orders themselves.
Those are conversations companies are having, but many have not made decisions yet. "They don't want to make any changes that might impact long-term profitability and customer demand," Hetrick said.
Such calculations fall disproportionately on small and medium producers, as big consumer-product companies are moving product on company-owned trucks and selling it by the truckload.
"The impact is being borne more by those retailers and manufacturers who may serve clients on a partial or single pallet. That's where your shipping expenses become very high, particularly if you're going on a non-owned carrier," she said. Those using leased carriers or independent trucks, which add their own fuel surcharges, are trying to get as close to a truckload as they can or limit smaller orders, she added.
The Trump administration has openly considered a diesel export ban but seems to be holding off on the idea, which industry insiders and experts consider would do more harm than good. U.S. refiners would need to reduce production to prevent a diesel surplus that an export ban would create. Fewer refinery runs would lead to lower supply of gasoline and jet fuel, raising prices for those fuels.
With the Hormuz stalemate and ongoing impacts from the Russia-Ukraine war, the U.S. has exported record levels of fuels, but exporting U.S. refining riches has not been a winning strategy in past years.
"Building refineries for export purposes only works in places that have incredibly low crude costs. In other words, the Middle East," York said.
While in theory, new U.S. refineries could be built with exports in mind, there's a much better value-creation proposition in exporting crude, which the country has successfully done.
In the last three decades, most of the growth in refinery capacity has come from other parts of the world, specifically the Middle East, Africa and countries such as China and India, said S&P Global's Chowdhury.
In emerging markets, the growth of the middle and upper classes powered higher rates of vehicle ownership and air travel around the early 2000s, just as demand had largely peaked in the world's big Western economies.
Making current matters trickier on a global level, China is on an economic road that will lead to diminishing demand for transportation fuels, much like the U.S. experienced in the 2000s, according to Chowdhury. In the last 25 years, China has been responsible for 40% to 60% of global growth in transportation fuels, Chowdhury said.
"Our data is showing that they're very close to peaking, if they've not already peaked," he said. "They're now moving from being a very quickly growing market to a stagnating and slower-growth market when it comes to transportation fuels," mostly because of China's massive push toward electric vehicles.
That means that future global oil shocks are likely to resemble 2026 and turn into refining shocks.
-Claudia Assis