Geopolitical conflicts in the Middle East and Russia are reshaping the profit landscape of the global oil industry.
As a large amount of global refining capacity is disrupted, supplies of gasoline, diesel, and jet fuel remain tight, and refining margins have surged to historic highs.
An industry once thought to be fading amid the wave of electric vehicle adoption is now enjoying an unprecedented profit boom.
Since the start of this year, attacks in the Middle East, Ukraine's strikes on Russian refining facilities, and export restrictions imposed on Russia and other countries have together worsened a global shortage of refined products.
According to estimates from the Dallas Fed, as much as about 10% of global refining capacity has been affected this year.
Tight supply has forced refineries in other regions to operate at full capacity and given them stronger pricing power for their products.
In September, refining margins along the U.S. Gulf Coast soared to a record high of $72 per barrel, more than tripling from the level at the start of the year.
Refining margins in Europe and Asia also climbed sharply, pushing up prices for gasoline, diesel, and jet fuel.
The profit explosion in the refining industry has also driven related stocks sharply higher.
So far this year, shares of Marathon Petroleum Corp (MPC.US), Valero Energy Corp (VLO.US), and Phillips 66 (PSX.US) have each gained more than 100%, ranking among the 20 best-performing components of the S&P 500 this year.
Jeff Wyll, a senior analyst at Neuberger Berman, which manages about $600 billion in assets, said this year's geopolitical conflicts have highlighted the importance of the refining business to the global economy.
For many years, investment in facilities producing refined products was insufficient, but refined products are in fact an indispensable foundation for economic operations.
Refining profits may even surpass oil exploration and production to become a new profit engine for energy giants.
Although crude oil prices rose 42% in the third quarter, with the quarterly average reaching $91 per barrel, analysts still expect Exxon Mobil Corp (XOM.US) refining profit for the quarter to exceed profit from its massive oil and gas production business.
If that forecast proves correct, it would be the first time since 2017 that the company's refining business has been more profitable than its upstream oil and gas production business.
At the same time, Shell PLC (SHEL.US) third-quarter refining margins may also set a record high.
According to analyst forecasts compiled by Bloomberg, combined third-quarter profit for Exxon Mobil Corp (XOM.US), Chevron Corp (CVX.US), Shell PLC (SHEL.US), TotalEnergies SE (TTE.US), and BP PLC (BP.US) is expected to reach about $50 billion, potentially marking the third-highest quarterly profit on record, behind only the two quarters during the energy price surge after Russia's invasion of Ukraine in 2022.
However, the current refining boom is not solely caused by geopolitical conflicts; long-term underinvestment in global refining capacity is the deeper reason.
Over the past decade, dozens of refineries in North America and Europe have closed one after another, while some facilities have been converted to produce biofuels.
The United States has not built a major new refinery since 1977, and two large refineries were shut down last year alone.
Refinery construction in Europe has similarly stalled, with the number of closures continuing to rise.
International Energy Agency data show that since 2015, global investment in refining capacity has fallen by more than half.
This trend can be traced back to the early 2010s.
At that time, international oil prices exceeded $100 per barrel, and several major oil companies chose to divest or scale back refining operations and devote more resources to oil and gas exploration.
In 2011, Marathon Oil spun off its refining business into Marathon Petroleum Corp (MPC.US); in 2012, ConocoPhillips (COP.US) spun off Phillips 66 (PSX.US).
After that, energy companies such as Murphy Oil and Hess also exited refining one after another.
At the same time, Exxon Mobil Corp (XOM.US), Shell PLC (SHEL.US), BP PLC (BP.US), and TotalEnergies SE (TTE.US) sold or converted dozens of refineries over the past 20 years, concentrating their operations on larger, more technologically advanced, and more profitable refining facilities.
Although new refining facilities continue to be built in regions such as the Middle East, and Exxon Mobil Corp (XOM.US) also expanded its Beaumont refinery in Texas, the added capacity is still not enough to meet growth in global fuel demand.
Dallas Fed data show that from 2019 to 2025, global daily liquid fuel consumption increased by about 4 million barrels, but refining capacity rose by only about 2.3 million barrels over the same period, creating a clear gap between supply and demand growth.
Marcus McGregor, managing director of commodity research at asset management firm Conning, said global refining supply is contracting faster than fuel demand is falling, and refiners are the main beneficiaries of this structural imbalance.
For consumers, however, the refining industry's profit feast means heavier pressure on the cost of living.
So far this year, U.S. diesel prices have risen 83% and gasoline prices have risen 50%, further fueling global inflation and creating political pressure for governments.
With the U.S. midterm elections approaching on November 3, persistently rising fuel prices are also bringing new challenges to the Trump administration.
Wyll believes that until global refining investment returns to a level sufficient to meet demand, refiners' valuations are justified in remaining above historical averages, and this adjustment process could take years.
Still, this surge in refining profits has not benefited all global refiners equally.
The International Energy Agency points out that record tanker freight rates and higher crude oil prices are squeezing profit margins for refiners in Europe and Asia.
By contrast, U.S. refiners are able to obtain relatively discounted crude feedstock, so their margins have climbed to historic highs.
Morningstar analyst Allen Good said refineries along the U.S. Gulf Coast are currently enjoying extremely generous profits.
Although refiners in Europe and Asia are also benefiting from higher refined product prices, high crude procurement and transportation costs mean their actual earnings improvement may be lower than what benchmark refining margins suggest.
Good also warned that refining profits in some regions may pull back in the fourth quarter of this year.
It is worth noting that even if Middle East conflicts ease, tight supply in the global refining industry may not be resolved quickly.
HSBC analyst Kim Fustier pointed out that even if the Strait of Hormuz reopens immediately, crude oil prices may fall quickly as they did during the ceasefire this summer, but restoring damaged or shut-down refining capacity will take longer.
She believes the refining capacity shortage is the hardest problem in the current energy supply chain to solve quickly.
However, that does not mean major energy companies will immediately launch a new round of refinery construction.
Fustier expects energy companies are more likely to pause plans to further sell, close, or convert refining facilities rather than invest heavily in new projects.
Conning's McGregor expects high refining margins may last until the middle to late part of 2027, then return to more normal levels as shipping volumes through the Strait of Hormuz gradually recover.
He reminded energy company management that they should not blindly expand investment because of short-term windfall profits.
Historical experience shows that sharp energy price spikes are sometimes only temporary, and in the face of the current profit boom, maintaining capital discipline may be more important than rapid expansion.
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