Downstream Bottlenecks in the Oil Supply Chain Are Contributing to Historically High Refinery Margins and Fuel Prices

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Supply shocks and energy infrastructure damage from the ongoing Iran conflict as well as the Russia-Ukraine War are disrupting broad segments of the global oil supply chain. Chart 1 shows that since the start of the Iran conflict, global oil supply shocks have driven oil prices (blue line) roughly 63 percent higher, while gasoline (purple line) and diesel prices (green line) surged by roughly 75 percent and 93 percent, respectively. This sharp rise in fuel prices reflects extreme tightness in refined product markets for both diesel and gasoline.

Chart 1: Fuel prices have risen more than oil prices since the start of the Iran conflict

As global petroleum markets have come under strain, petroleum inventory buffers have fallen sharply (Rodziewicz 2026). Panel A of Chart 2 shows that while total U.S. petroleum inventories (purple line) were growing at the beginning of the year, hovering near their five-year averages, they have plummeted in recent months. Total U.S. petroleum inventories are now at decadal lows, driven in part by large releases of emergency reserves announced by the United States following the onset of the Iran conflict (IEA 2026a; DOE 2026). Indeed, the U.S. Strategic Petroleum Reserve (SPR) (green line) fell by over 130 million barrels throughout the year, causing U.S. total inventories to fall 10 percent below their five-year average. Absent emergency releases from the SPR, domestic commercial inventories (blue line) would likely be much lower.^_

Chart 2: Petroleum and fuel inventory buffers are depleted

While the petroleum inventory situation is tenuous, fuel inventories are also under great strain. Panel B of Chart 2 shows that distillate inventories (green line) have been on a steady decline since the end of the COVID-19 pandemic, creating extreme tightness in domestic diesel markets. After years of inventory declines, U.S. distillate (mostly diesel) inventories are now roughly 20 percent lower than their pre-pandemic levels. Gasoline stocks (purple line), while low, have fared slightly better and are currently 10 percent lower than their pre-pandemic averages.^_

As inventories eroded, bottlenecks have emerged in the downstream sector of the oil supply chain. Amid extraordinary market conditions, refiners are commanding historically high margins for converting crude oil into finished fuel products. Chart 3 shows that gasoline and diesel crack spreads—an estimate of the margin received by a refinery for converting oil into refined products—have widened dramatically over the past year.^_ Although crack spreads have retraced somewhat in recent weeks, the gasoline crack spread (purple line) is still a little over double what it was last year, and the diesel crack spread (green line) is more than three times year-ago levels. While refinery margins historically make up a modest share of retail fuel prices—less than 20 percent—in recent weeks crack spreads accounted for closer to 30 percent of the cost of a gallon of gasoline and more than 40 percent of the cost of a gallon of diesel.

Chart 3: U.S. refinery margins are at historic highs

Even with refinery margins at historical highs, refining capacity additions are limited in the short run and unable to grow to provide material relief. Panel A of Chart 4 shows that U.S. refining capacity (purple line) has been little changed over the last decade, while capacity utilization (blue line) is near all-time highs. While domestic refiners are working at near full capacity to produce more refined products and capture historic margins, global refinery capacity is now at risk from the Iran conflict and Russia-Ukraine War. Panel B of Chart 4 shows that roughly 18 percent of global refining capacity resides in regions currently in conflict—6.5 percent in Russia (light purple bar) and 11.5 percent in the Middle East (dark purple bar). These exposures are substantial, equivalent to roughly 20 years of global refining capacity growth.

Chart 4: Refineries have limited capacity to relieve market constraints

Refinery capacity will likely remain constrained going forward. Attacks have continued on refineries in both Russia and the Middle East. While estimates of current refinery damages or disruptions range widely—from a few percent of global refining capacity to over 10 percent—the damages are imposing additional constraints amid extraordinary market conditions, lowering the output of refined products globally (Thompson and Golding 2026; Collins 2026; IEA 2026b, 2026c). Repairing damaged refinery infrastructure can take months to years, suggesting capacity constraints will likely persist even after the conflicts and supply disruptions end. As a result, refinery margins, and therefore fuel prices, are likely to remain elevated for an extended period, even if crude oil prices decline.