The latest earnings from ExxonMobil and Chevron reveal how geopolitical instability is changing the distribution of profits across the global oil industry. While crude oil production remains central to the business models of major energy companies, disruptions to refining capacity have created an unusual situation in which processing crude into petrol, diesel and other fuels has become an exceptionally profitable activity.

Both American oil companies reported third-quarter earnings above market expectations, benefiting from stronger refining margins as conflict-related disruptions affected global fuel supplies. The US-Israeli war involving Iran and the continuing Russia-Ukraine conflict have contributed to the loss of refining capacity, tightening supplies of important petroleum products.

The development highlights an important distinction within the energy market. Higher crude oil prices do not necessarily produce higher profits for every part of the industry. The profitability of oil production, transportation and refining depends on different market conditions. In the latest quarter, shortages of refined products created an unusual advantage for companies with substantial refining operations.

For consumers, however, the same developments have contributed to higher fuel prices, demonstrating how energy companies can benefit from market disruptions while households and businesses face increasing costs.

Refining Margins Become a Major Source of Profit

ExxonMobil’s latest results demonstrated the scale of the shift. The company earned more from refining than from its upstream oil and gas operations for the first time in at least six years.

Traditionally, the upstream division has been a major contributor to the profits of large integrated oil companies. It includes exploration, production and the sale of crude oil and natural gas. Refining generally operates with different margins and is influenced by the availability of crude supplies, processing capacity and demand for finished fuels.

The situation has changed because geopolitical disruptions have affected the availability of refined products, particularly diesel.

Attacks on refineries in Saudi Arabia and Russia have reduced processing capacity, while restrictions and disruptions affecting the Strait of Hormuz have complicated the movement of energy supplies. The resulting shortage has pushed up the value of refined products relative to the crude oil used to produce them.

ExxonMobil has been able to benefit from this environment by operating its American refineries at high utilisation rates. Chevron has also reported particularly strong downstream earnings, supported by improved refining margins.

The results suggest that integrated oil companies with access to both production and processing infrastructure can benefit from market disruptions in ways that companies concentrated in a single part of the energy supply chain cannot.

Geopolitical Disruptions Are Reshaping Energy Supply

The Strait of Hormuz remains one of the world’s most important energy transportation routes. A substantial proportion of internationally traded oil passes through the narrow waterway, making it particularly vulnerable to geopolitical instability.

Any prolonged disruption can affect not only crude oil supplies but also the availability and movement of refined petroleum products. The consequences extend across international markets because refineries in different regions depend on imported crude and established shipping networks.

The Russia-Ukraine conflict has created additional pressure. Attacks on Russian refining infrastructure have affected fuel production and contributed to tighter supplies of diesel and other products.

These developments illustrate how modern energy markets depend on a relatively concentrated network of production facilities, shipping routes and processing infrastructure.

Even when global crude production remains substantial, the market can experience shortages of particular fuels if refining capacity becomes unavailable. A barrel of crude oil cannot immediately replace a shortage of diesel or aviation fuel without suitable processing capacity.

This is why refining margins can increase sharply even when crude oil prices are not rising at the same pace.

The latest results from ExxonMobil and Chevron reflect this imbalance. Their refining operations have benefited from the difference between the prices of crude oil and the finished products sold to customers.

Strong Earnings Do Not Mean the Entire Industry Is Benefiting Equally

ExxonMobil and Chevron’s results should not be interpreted as evidence that every energy producer is benefiting from the same market conditions.

Companies concentrated in crude production may face different financial pressures depending on production costs, oil prices and the location of their operations. Refiners also face differences in crude quality, transportation expenses and the efficiency of their processing facilities.

ExxonMobil reported adjusted third-quarter earnings of approximately $17.5 billion, exceeding analyst expectations. Its upstream earnings declined compared with the previous quarter as benchmark crude prices weakened, while refining provided a stronger contribution.

Chevron reported adjusted earnings of approximately $10.4 billion, with its American refineries operating at around 98% utilisation. Its downstream earnings also increased significantly compared with the previous year.

The results demonstrate the value of having operations across different parts of the energy supply chain. When one segment faces weaker market conditions, another may provide an offset.

However, this advantage depends on the company’s ability to maintain reliable operations and secure access to crude supplies. Refineries operating near capacity cannot necessarily increase production indefinitely, particularly when maintenance requirements and infrastructure limitations become important.

Consumers Face the Other Side of Higher Margins

The profitability of refining operations has a direct relationship with the prices paid by consumers. When supplies of petrol and diesel become tighter, refiners may be able to charge more for finished products, increasing their margins.

This can benefit energy companies but creates additional pressure for transport operators, manufacturers and households.

Diesel is particularly important because it is used extensively in commercial transportation, agriculture, construction and industrial operations. Higher diesel prices can therefore influence the cost of moving goods and producing essential products.

The effects may also extend into inflation. Businesses facing higher fuel and transportation expenses may eventually pass some of those costs to customers, depending on market competition and their ability to absorb the increase.

Governments may face pressure to respond through fuel reserves, tax adjustments or other measures intended to reduce the impact on consumers.

The problem is that such measures cannot quickly replace lost refining capacity or restore disrupted shipping routes. If geopolitical instability continues, the pressure on fuel markets may remain even when crude oil production elsewhere is relatively stable.

Energy Security Remains Dependent on Processing Capacity

The latest earnings highlight a weakness in the way energy security is often discussed. Governments and policymakers frequently concentrate on crude oil production and the availability of reserves, but the ability to convert crude into usable fuels is equally important.

A country can have access to sufficient crude oil and still face shortages if its refineries are damaged, operating below capacity or unable to process the available grades of crude.

This creates a strong case for maintaining resilient refining infrastructure and diversifying energy transportation routes. It also highlights the importance of strategic fuel reserves, particularly for economies heavily dependent on imported petroleum products.

For oil companies, the current market conditions demonstrate the financial benefits of integrated operations. But the same conditions are not necessarily sustainable. Refining margins can decline when disrupted facilities return to production or when fuel supplies improve.

ExxonMobil and Chevron have benefited from an unusual combination of geopolitical instability, restricted refining capacity and strong demand for finished fuels. Their earnings show how quickly the balance of profitability can change within the energy industry.

The broader lesson is that energy security depends on more than access to crude oil. It also requires functioning refineries, reliable transportation networks and sufficient capacity to deliver finished fuels to consumers. When any of these elements is disrupted, the consequences can be felt throughout the global economy.

(Adapted from Bloomberg.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy