Why Russia’s Gasoline Crisis Is Even Worse Than It Seems

You have undoubtedly heard about the fuel crisis happening in Russia right now, largely the result of Ukraine's long-range strike campaign to sabotage every oil refinery that its drones can reach. However, the problem is still way worse than it seems. It is the worst crisis that the Kremlin has faced since the start of the invasion, both structurally and politically. Structurally, we are looking at a surprising negative side effect of the Iran war. Politically, signs like this one are especially troublesome for autocratic regimes, as they try to keep their citizens from stirring up trouble. And understanding what is happening in the Kremlin is also critical for understanding what is happening in your everyday life, plus what might be happening in less than four months on Capitol Hill. Let's rewind to the beginning of March. The Iran war had just started, and the shutdown of the Strait of Hormuz was beginning to send shockwaves across the world economy. Crude oil prices surged, as about 20% of the world's seaborne trade was stuck inside of the Gulf. Looking at the larger world at war, the obvious ripple effect was the Kremlin receiving a miracle of a lifeline. The invasion of Ukraine was starting to take a serious toll on the Russian federal budget, and the timing was awful. Due to a variety of other factors, Ukraine was starting to make its first net gains on the battlefield in years. Well, Russia has largely funded its war effort through revenue raised from energy exports. It seemed that the Iran war would supercharge the Kremlin's profits, allowing it to quickly expand its weapons production and increase contract offers to potential recruits. More men and materiel would then rectify the situation on the front line. Ukraine, of course, could try to mitigate the damage by striking Russia's oil export terminals and its shadow fleet of tankers. But the end result would still be worse than if barrels of oil were trading at regular prices. Well, the fears of Kremlin windfall profits have indeed come to pass. But while the Kremlin was counting its rubles, a second crisis began, also ironically in part due to the Iran war. Indeed, there is a consumer fuel crisis in Russia, with gasoline and diesel hard to find and expensive where available. Ukraine will rightly take primary credit here. That is what happens when long-range strikes have knocked offline about a quarter to a third of Russia's refinery capacity. Yet some portion of Russia's current woes go back to the Strait of Hormuz. While everyone was focused on the shutdown preventing crude oil from moving through the choke point, Iran took the opportunity to strike refineries in Saudi Arabia, the United Arab Emirates, Bahrain, and Kuwait. Although the damage there has not been as extreme as in Russia, it did set the region back. To make matters worse, the refining companies had to decide what to do in response to the ongoing crisis. Gasoline has an expiration date. Thus, many refineries chose to shut down, not knowing what the fate of the Strait would be, and not wanting to pay to refine fuel that would end up having to go to waste. This was not an easy decision. Once shut down, restarting them can take a couple of weeks, preventing the businesses from quickly responding to the will-they-or-won't-they tension between Trump and Tehran, which seemingly never goes away. Thus, when the ceasefire started, the braver captains began racing their crude oil through Hormuz. Gasoline, meanwhile, was in no position to move. You can see how Russia began taking countermeasures. The Kremlin banned diesel exports for July, trying to maintain some price stability at home by preventing export companies from exploiting high prices abroad. It is not the first time that the Kremlin has tried such a move, and it likely will not be the last. Fortunately, this story had broad coverage across the political landscape. But the description of the story varied based on the source. Left-leaning outlets framed the announcement as evidence of Ukraine's strike campaign working. Right-leaning outlets framed it as crisis management, and focused on inflation issues. I know this thanks to the returning sponsor of today's video, Ground News. For stories that do not have as broad of coverage, Ground News has the Blindspot feature, a handful of stories that one side of the political aisle disproportionately neglected. It is an easy way to make sure that you are not living in a partisan bubble. And by going to ground.news slash linesonmaps or scanning the QR code on your screen, you can take a fantastic 40% off a vantage plan, which grants you access to all of these features and more. So thanks again to Ground News for sponsoring today's video. Now, in a simple world, Russia would solve its fuel crisis by importing more fuel from abroad. If only it were that simple. For one, there is an issue that everyone is facing right now. The crack spread. And before you roll your eyes at me, that is actually what it is called. You likely hear about two benchmark energy prices in the news. The cost of a barrel of crude oil, and the cost of whatever your regional unit of gasoline is. And apologies for those of you who want to call it petrol. The crack spread is the difference between the two, scaling them both in barrels, and being mindful that crude oil also splits into diesel. This is because refineries crack the complex hydrocarbons in crude oil into the simpler products that we can use. Meanwhile, you get a price spread between them. Hence you get the ridiculous name, crack spread. The refined products are always more expensive because there is value added. However, the crack spread varies over time because crude and gasoline operate on their own supply and demand logics. The width of the crack spread tells us what portion of the profits go to the refineries. On the eve of the war, the crack spread was $28.55. As of this writing, it is currently $62.22, an all-time high. When crude is in short supply relative to refinery capacity, then the cost of crude and consumer demand drive the end price of consumer gasoline. That is because each refinery has to undercut the other to make sure that they receive some product. The crack spread that we see afterward reflects how refineries need to cover their costs. In contrast, when crude is abundant but refineries are few, consumer demand dictates the end price. The crude suppliers have to undercut each other to bring anything to market. Consumers do not get passed along the savings because they are still willing to buy just as they were before, and so there is no need for refineries to act more competitively. Well, we are in this latter case now. Despite all of the drama in the Gulf, stored crude supplies have risen. Stored gasoline supplies, in contrast, have declined. Thus, we have an overabundance of crude, at least in terms of refinery capacity. The refineries control the market at this point, hence the wide crack spread. And because so much refinery capacity is offline at the moment, prices at the pump correspondingly remain elevated. So, for your own personal sanity as you watch the news, please ignore what is happening with the price of crude oil. It may matter again eventually, but right now it does not, despite it remaining the focus of most media broadcasts. That information is irrelevant to you. Unless you own some refineries, you love crack spread, and you are enjoying windfall profits. Now, you might wonder why businesses are not racing to build more refineries. After all, there are windfall profits to be made. What are they? Stupid? Well, the problem is that refinery construction is enormously capital intensive. You might have to front 10 billion dollars and years of construction to get one going. Consequently, it takes many decades for one of them to turn profitable. Unfortunately for this aspect of the global economy, the Iran war is a blip on the radar. Gasoline consumption trends have stalled due to higher fuel efficiency and the electric vehicle revolution. Throw in a pandemic that transitioned many of us to work from home, and demand is looking bearish. No oil company wants to be in a position to lose billions of dollars because they failed to read the direction of the winds. The world has been teetering on the brink of a fuel crunch crisis for more than a decade, and we are just now experiencing it. Thus, every refinery that can be operating right now is operating right now. But it is not enough. Some have to undergo routine maintenance. Others in Russia have to undergo Ukraine-mandated maintenance. Others remain behind Hormuz and are as baffled as anyone about what Trump is doing there. It is a problem that is not about to go away, and it has congressional Republicans incredibly nervous. High energy prices and elevated inflation are never good news for an incumbent party. And unless you see a way that all of this gets magically resolved before November, then a blue wave might be incoming. Yes, there should be more refineries reopened at that point, and seasonal demand for gasoline will be down. But the damage may already be done by then. Anyway, back to Russia, because the problem there is somehow worse. For everyone else living in a normal, efficient marketplace, the solution to Russia's fuel shortage is straightforward. Stop rationing. Stop restricting even-odd license plates to even-odd calendar days. Just buy more oil on the international market and let supply meet demand. If only it were that simple. Russia has a number of barriers in the way. For one, Moscow has a limited number of partner countries to approach here. That is not stopping the folks in the Kremlin from trying, with Belarus, Kazakhstan, and India providing some relief. Belarus and Kazakhstan do not have much supply available, and they are subject to similar political concerns about high gas prices. In turn, the consumer market still does not dictate where gasoline goes via pricing mechanisms. India is more interesting, not least because Russia is ironically receiving refined products from its crude oil it originally shipped to India. However, one does not simply put oil on a tanker and drop it off in St. Petersburg. You need specialized oil docking stations, which Russia does not have in large quantities. And why would it? It can produce all of the gasoline it needs itself. Well, at least when Ukraine still allowed Russia to do so. What is worse, Russia cannot easily build out that infrastructure. The same people who would normally do it are also busy right now trying to repair the damage Ukraine is dealing to oil and gas terminals. The problem is especially acute in Crimea. Russia has stopped transporting large quantities of fuel across the Crimean bridge for fear that Ukraine will hunt them with a low-powered drone to make a much larger explosion. The next option is to run trucks along the Azov Ring, but Ukraine is making those roads impassable with mid-range drone strikes. Good thing there is still the sea route to drop off supplies. Wait, never mind. Now, if you are Putin right now, you are probably sad about everything you have heard in this video so far. That being the case, you might want to sit down because this is just about the worst political crisis you could have. We have discussed this a thousand times before, but the central problem for would-be revolutionaries against an autocratic government is uncertainty that they are alone. It is a really, really bad idea to try to confront security forces unless the movement is so large that the security forces worry for their own safety if they try to engage the protesters. As a result, autocratic governments run meta-level disinformation campaigns. They worry less about whether you actually like or dislike the government. That is hard to control. Instead, they exert much more effort to try to convince you that others are satisfied with the job that the government is doing. That is manipulable, and it is just as effective at convincing you to not go out onto the streets. See the Great Firewall of China for these principles in action. Okay, now think of this in terms of gas prices. What do you see here? Is this something that makes you happy? Probably not. But it is something that gas stations have to post because it is a price that consumers need to know. And it is also awful for autocrats. It is not just a sign that makes you angry. It is a sign that makes everyone else angry as well. And it is a sign that you know that everyone else sees, so you know that everyone else is angry. There is no quiet compliance here, where you stay silent about your frustrations because you are unsure whether someone else politically disagrees with you. High prices affect everyone, and everyone sees these signs all over the place as they drive around the city. And that is why this is the worst crisis that the Kremlin has faced since the start of the war. At least with the backlash to the fall 2022 mobilization, the Kremlin could take the simple step of retracting the policy. Here, there is no magic cure for a lack of gasoline. It has to come from somewhere, and the proverbial gas station that masquerades as a country can no longer even claim that first title. There are no simple solutions here either. It is a storm that the Kremlin will have to weather until the global gasoline market cools off, or Russia figures out a way to protect its domestic supply. And neither of those possibilities seem close to the horizon. Russia could try asking Iran to let go of its stranglehold on the Strait of Hormuz, but the Kremlin does not control Iran's bargaining leverage. The Strait does. Russia could also try asking its other allies for more refined fuel, but they are all autocratic governments, and they are all concerned about the same problem that Putin is. They just have better control over the situation. This does not spell the immediate downfall of Putin, so please take this latest Kremlin crisis in stride. But it is a problem in need of a solution. Otherwise, that is where this is headed. Thanks again to Ground News for sponsoring today's video. Go to ground.news.com or scan the QR code on your screen to take a fantastic 40% off a Vantage plan. And if you enjoyed today's video, then please like, share, and subscribe, and I will see you next time. Take care.