The crack spread, which measures the price difference between refined fuels and crude oil, is becoming a key barometer for global central banks and markets assessing inflation risks, with its significance now potentially surpassing that of raw oil price movements alone.
Bank of England Governor Andrew Bailey has stated he is currently paying more attention to the expansion of the crack spread than to crude oil prices themselves. The European Central Bank has similarly warned that two geopolitical conflicts are disrupting global refining capacity, tightening refined product supply, with the effective cost of gasoline and diesel borne by European consumers equivalent to more than $370 per barrel.
As supply constraints in the refining sector intensify, a new transmission channel for oil price impacts on inflation is emerging. Global asset management giant Vanguard has begun hedging against the risk of US inflation exceeding expectations, while the Trump administration is pressuring American refiners to boost gasoline and diesel output to mitigate the upward pressure on transportation costs from rising fuel prices.
Why central banks are shifting from tracking oil prices to monitoring the crack spread
Bailey noted that "what we actually consume is not crude oil but the processed products derived from it." In his view, the crack spread reflects the price premium that emerges when crude undergoes refining to produce finished fuels such as gasoline and diesel.
This implies that even if crude oil price gains remain limited, finished fuel prices can still rise substantially whenever refining bottlenecks occur, directly elevating costs for consumers and businesses. An analysis from the European Central Bank in late July also indicated that limited refining capacity is pushing up gasoline and diesel prices, creating additional inflationary pressure that benchmark oil prices fail to fully capture.
For central banks, crude oil prices primarily reflect upstream energy costs, whereas the crack spread more closely tracks the stage at which energy expenses ultimately transmit through to the broader economy.
Damaged refining capacity prompts simultaneous market and policy responses
The core driver behind the widening crack spread is the sustained damage to global refining capacity. Conflicts in the Middle East and the Russia-Ukraine war have resulted in the loss of millions of barrels per day of refining capacity, with the supply contraction placing greater upward pressure on refined product prices.
This shift is already influencing investment and policy decisions. According to reports, Vanguard began purchasing instruments to hedge against the risk of higher-than-expected US inflation as early as July, with the widening crack spread being one of the factors it monitors.
The US government is also taking action. President Trump has requested that American refiners expand gasoline and diesel production in an effort to lower fuel costs and prevent rising transportation prices from feeding further into overall inflation. With the November midterm elections drawing near, energy price stability has become a significant variable affecting political pressure on the administration.
In other words, the market is transitioning from asking "how much have crude prices risen" to focusing on "how much more expensive crude becomes after refining." If refining bottlenecks persist, the crack spread could become a vital gauge for monitoring future energy-driven inflationary pressures.
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