Refinery closures left Australia and Japan exposed to China's fuel export bans

Compounding the Energy Institute's annual rates over ten years, as Seoul Economic Daily reports them, leaves Australia with about 49% of the refining capacity it had in 2015, Japan with about 83% and the European Union with about 93%, while China ends the decade with roughly a quarter more ^[1][2][3][4]. Across the OECD, capacity shrank 0.2% a year ^[2]. The paper argues that the regions that cut soonest are taking the hardest hit from the shortage of oil products ^[16].

Australia is the strongest case for that argument. It cut fastest ^[3]. Japan, Vietnam and Indonesia join it on the paper's list of buyers of Chinese fuel that started worrying about supply once Beijing banned product exports again this month ^[11]. A country that shuts a refinery still needs the diesel and jet fuel, so it takes on a foreign supplier. This month that supplier is putting its own needs first: Seoul Economic Daily ties the new ban to a sharp drop in China's own oil inventories as the war drags on ^[12].

The counter-thesis is that the wars took so much product off the market that closures only decide who runs short first, and the United States supports it. American capacity fell just 0.1% a year ^[3], and US diesel stocks hit their September low anyway ^[6]. The US is the world's largest diesel exporter. Buyers turned to it after Russia, its refineries damaged by Ukrainian attacks, restricted product exports and Middle Eastern diesel left the market ^[5][6].

China's position comes from a decade of building ^[8]. With more than 40% of its crude imports coming from the Middle East, it was expected to be the war's biggest victim, and according to the paper those predictions were wide of the mark ^[10]. The Wall Street Journal noted that China has the power to calm soaring diesel prices ^[13], and The New York Times compared Beijing's grip to the influence OPEC exerts by adjusting crude supply ^[14], both as cited by Seoul Economic Daily. What Beijing is not doing with that power is selling into the jump in diesel and jet fuel prices ^[4]. It is keeping product at home ^[11][12].

The paper's summary puts South Korea beside China as a country using refining capacity as a buffer that is gaining weight in diesel and jet fuel supply chains ^[15]. None of the decade figures above cover Korea. The Korean half of the leverage claim rests on that summary line.

That leaves three possible readings: closures decide exposure, war-driven volume losses decide it, or the shortage is simply severe enough that both count. I think the closure thesis holds for Australia and Japan and overreaches as a general rule, because the US barely closed anything and is still drawing down. The thesis would be wrong if Australia and Japan kept supply steady through China's October ban, since that would show other refiners had barrels to spare. Globally there are few spare barrels. Last year demand growth outran the change in capacity by 1.6 percentage points ^[5].