U.S. refiners are facing an unprecedented test as they operate near maximum capacity to capitalise on extraordinary profits created by the Iran war, but the strategy carries a growing risk: the harder refineries are pushed, the greater the possibility of equipment failures and unplanned shutdowns that could deepen an already severe global fuel shortage.
The stakes extend well beyond the U.S. refining industry. With the closure of the Strait of Hormuz disrupting a major share of global oil flows and Ukrainian attacks damaging Russian refining capacity, American refineries have increasingly become a supplier of last resort for international fuel markets.
That makes their ability to sustain current production levels one of the most important variables in the global energy system.
Why are U.S. refineries running at full capacity?
The current refining boom is being driven by an unusual combination of geopolitical disruption and exceptionally high margins.
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The U.S. Israeli air campaign against Iran in late February triggered the closure of the Strait of Hormuz, disrupting roughly one fifth of global oil supply and severely affecting refining operations in Asia. At the same time, Ukrainian attacks on Russian refineries have reduced Moscow’s ability to produce and export refined fuels.
The result has been a sharp decline in global refining output.
According to the International Energy Agency, global refinery throughput fell to around 81 million barrels per day in July, almost 5 million bpd, or about 6%, below the level recorded a year earlier.
The United States has responded by increasing exports of crude, gasoline, diesel and jet fuel to record levels, helping prevent the supply shock from becoming even more severe.
For American refiners, however, this has created an extraordinary financial incentive to keep operating.
Refining margins have averaged more than $50 a barrel since the beginning of the war, more than twice their 10 year average. Major refiners including Valero, Phillips 66, Marathon Petroleum and Exxon Mobil consequently reported record or near record second quarter earnings.
The market is effectively rewarding American refiners for keeping every available barrel moving.
The 95% warning line
The extraordinary nature of the current situation becomes clearer when viewed historically.
U.S. refinery utilisation has remained above 95% for 11 consecutive weeks, a sustained level not seen in more than two decades.
EIA data going back to 1990 shows that similarly prolonged periods have occurred only a handful of times.
The closest comparisons are 1997 and 1998, when U.S. refiners recorded two separate 24 week periods above 95% utilisation. In 1998, utilisation even exceeded 100%, the only time that has happened in the EIA’s historical records.
But those episodes also demonstrate why today’s situation deserves caution.
After the 1998 period of exceptionally high utilisation, refinery utilisation fell sharply from around 95% in late September to approximately 86% by the middle of October as several plants were forced into emergency maintenance.
The pattern was repeated, on a smaller scale, in 2018. An eight week period above 95% was followed by utilisation falling rapidly to around 89%.
History therefore offers an uncomfortable lesson: maximum utilisation can generate enormous short term profits while increasing the probability of a sudden capacity shock.
The maintenance dilemma
The biggest concern is not necessarily that American refineries will immediately collapse.
It is that operators have increasingly postponed maintenance to take advantage of extraordinary margins.
Many planned maintenance programmes scheduled for the second quarter have reportedly been delayed until late 2026 or even 2027.
Under normal market conditions, delaying maintenance may be manageable.
Under today’s conditions, it becomes much more dangerous because there is little spare capacity elsewhere in the global system.
A refinery outage that might have been absorbed by international markets under normal circumstances could now remove fuel from a market already operating with very limited flexibility.
This creates a dangerous incentive structure.
As long as refining margins remain extremely high, companies have a powerful financial reason to continue operating at maximum rates. But every additional week of intensive utilisation increases wear on complex equipment and raises the probability of an unplanned shutdown.
The market is therefore caught between two risks:
Run too little and fuel shortages worsen immediately. Run too hard and an eventual failure could make the shortage dramatically worse.
Why this crisis is different from 1997 or 2000
Historical comparisons are useful, but today’s situation is fundamentally different.
The 1997 and 1998 episodes were driven largely by favourable economic conditions, including relatively cheap crude and strong fuel demand. Refiners had an incentive to maximise production because the underlying market environment supported it.
The 2000 episode was also connected to strong global demand during the early stages of the China driven commodities boom.
Today’s super refining cycle has a very different foundation.
It is being driven primarily by destruction and disruption of global refining capacity.
Refineries in Iran and Russia have suffered severe disruption, while Asian refining operations have been affected by restrictions on Middle Eastern crude flows.
That means American refiners are not simply responding to unusually strong demand. They are compensating for capacity that has disappeared elsewhere.
This distinction is crucial.
If today’s high utilisation rates were driven by temporary demand, the market could eventually cool as prices rose. But if the underlying problem is physical destruction of refining capacity, the pressure on U.S. refiners could persist for much longer.
America’s new role in the global fuel system
The United States has effectively become the global refining market’s shock absorber.
Record exports of gasoline, diesel and jet fuel are helping countries compensate for shortages created by the war.
This gives Washington and American energy companies enormous strategic importance.
But it also creates a vulnerability.
The global market is becoming increasingly dependent on a relatively limited number of U.S. refineries operating close to their physical limits.
The IEA estimates that global refining output is already nearly 2 million barrels per day below demand.
Fuel inventories are also being depleted.
That means the global system has very little room for error.
A major American refinery outage would therefore have consequences far beyond the local market. Several simultaneous outages could potentially produce a much larger shock, particularly if they occurred during a period of high seasonal demand.
The refining crisis could become an economic crisis
The consequences of a sustained refining shortage would extend beyond petrol prices.
Diesel is critical to transportation, agriculture, mining and industrial production. Jet fuel is essential to aviation. Higher fuel costs feed into transportation expenses, logistics and ultimately consumer prices.
A prolonged shortage could therefore create another round of inflationary pressure at a time when economies are already dealing with the consequences of the Iran war.
There is also the possibility of demand destruction.
If fuel prices rise sufficiently, households and businesses reduce consumption. Airlines could cut capacity, transport companies could face higher costs and manufacturers could experience increased input expenses.
The irony is that a supply crisis can eventually suppress demand through economic pain rather than through an improvement in physical supply.
The global energy system’s weakest link
The most important issue is therefore no longer simply how much oil is being produced.
It is how much usable fuel the world can refine and distribute.
The closure of Hormuz has demonstrated the vulnerability of crude transportation. Damage to Russian and Iranian refineries has demonstrated the vulnerability of processing capacity. The current strain on U.S. refineries highlights the danger of relying on a small number of remaining producers to compensate for the losses.
These risks are interconnected.
A disruption to crude supply reduces refinery feedstock. Damage to refineries reduces fuel production. Higher demand for alternative suppliers raises shipping costs. Falling inventories amplify price volatility. And exceptionally high margins encourage remaining refineries to operate at increasingly aggressive utilisation rates.
The result is a global energy system with fewer buffers at every stage.
What happens if U.S. refiners break down?
The worst case would not require America’s entire refining fleet to fail.
Even a relatively small loss of U.S. capacity could have an outsized effect because the market is already so tight.
If one or several major refineries experience unplanned shutdowns, American fuel exports could fall just as international buyers become increasingly dependent on them.
That could push gasoline, diesel and jet fuel prices sharply higher, particularly if alternative refining capacity remains unavailable in Asia, Russia and the Middle East.
The consequences would then feed back into the broader economy through higher transportation costs, inflation and weaker consumer demand.
This is why the current situation represents more than a profitability story for American refiners.
It is a global resilience test.
The real danger is the lack of spare capacity
The most important takeaway is that today’s refining market has very little redundancy.
Under normal circumstances, individual refinery failures are an unavoidable part of the industry and can be compensated for through spare capacity, inventories or imports.
Today, those buffers are shrinking.
The longer the war continues, the more difficult it becomes for the global market to absorb another major disruption.
American refiners are therefore caught in an extraordinary position. They are earning unprecedented profits because the world desperately needs their output, but their success is simultaneously increasing the importance of keeping their plants running without interruption.
That creates a dangerous paradox.
The global fuel market needs U.S. refiners to run harder than ever precisely when running harder is increasing the risk that they will fail.
If American refineries can maintain high utilisation without major breakdowns, they may continue preventing a much larger global fuel crisis.
But if sustained overcapacity operations trigger significant unplanned outages, the world’s refining bottleneck could become even tighter.
The question is therefore not simply how much longer can U.S. refiners maintain these extraordinary production rates?
It is whether the global fuel system can afford to find out what happens when they cannot.
With information from Reuters.
