Global energy needs are likely to grow steadily for at least the next 25 years. The International Energy Agency (IEA) reports that if the world continues with the current energy-related policies, its energy needs would be more than 50 percent higher in 2030 than now. Over 60 percent of that increase would be in the form of oil and natural gas; much of this demand would be centered on gasoline and distillates.

Despite this ever-rising demand, the global refining capacity has been steadily shrinking. The capacity has decreased to 103 percent of the total oil demand in 2004, down from 109 percent in 1990 and 107 percent in 2000. Prime reasons for this trend are traditionally low profit margins and stiff regulations.

The soaring demand and the resulting spiraling higher prices of oil products prompt for huge investments. A global investment of $3 trillion has been projected by the IEA for the period 2001-2030, mostly to maintain current production levels.

However, this will not be easy to accomplish without the availability of sizable markets, secure ports to market the products, and the availability of guarantees to protect investments. But if the refining problem is truly a global issue — of importance to the people around the world — then it needs a global response that a fragmented industry, on its own, can’t provide.

In large measures, the high level of oil prices today has been driven by concerns about the availability of spare crude oil production capacity to meet growing global demand for oil products, and the potential for supply disruptions in crude production. Consequently, major oil consumers, including the United States, have pushed oil-producing countries to raise their production capacities. However, the ability to meet forecast demands for oil will be driven by refining capacity issues, not crude oil availability.

Demand for oil products is certainly increasing, particularly in the larger developing countries such as India, China, Russia, and Brazil, in addition to the industrialized countries. Much of this demand is centered on gasoline and distillates as these countries industrialize, and as the wealth effect sees a growing middle class with demands for private transportation (Bassam).

Combined with the growth in demand is the shift in the global product demand profile toward lighter products. Demand for gasoline and middle-distillates are growing, whereas that for heavier fuel oils is declining. The growth in demand for light products such as gasoline and diesel has been matched by the rise in concern over mobile source emissions and their effects on the environment and public health. While the increase in total oil consumption in the 2001-2004 timeframe is 1.7 percent, the increase in gasoline and distillate on an absolute volume basis represents a growth of 3,748 thousand barrels per day (API).

However, the developing economies of the world (including Asian countries like India and China) are showing a strong demand for gasoline. With the recent strides in economic growth in the Asian countries and increased wealth among the population, there is a growing demand for cars — resulting in a 3.9 percent increase in demand for gasoline since 2000. In Asia, diesel demand has grown at the rate of 2.7 percent since 2000 (API). The gasoline and diesel demand growth rates in Asia are much higher than the overall world average growth rates.

The growth in global demand for gasoline and diesel, and the regulatory actions that are requiring lower and lower sulfur content in these products, is creating a mismatch between the demand for clean products and the availability of refining capacity to produce the products from available crude oils (ICF). This situation is likely to change the dynamics of the international crude and product supply and trade, and create strong and sustained margins for refiners, higher prices and potentially supply shortfalls for the consumers.

The challenge, therefore, is increasing gasoline supplies and supplies of lower sulfur products. Failure to do so will contribute to higher prices. The problems are two-dimensional. Firstly, with the refining industry’s need for upgrading capacity — upgrading oil from sour to sweeter crudes — rather than primary distillation capacity, the first process in refining. Secondly, most governments around the world are increasingly tightening sulfur specifications on diesel (Forbes). Therefore, costly desulfurization equipment is required to produce the lower sulfur products. And, the only other way to increase gasoline supplies and supplies of lower sulfur products is for refiners to use lighter and sweeter crude.

Problems in refining go a long way to explain the relatively high price of certain oil products. The obvious solution is greater investment in upgrading existing refineries, though this would not be a quick fix because of the long lead times on such projects. Furthermore, tight upgrading capacity has greatly improved refinery margins, which provides a strong incentive for the oil companies to invest in the sector.

Therefore, an initiative to upgrade existing refineries and/or build new ones is essential. It will require strategic planning, partnerships, commitment as well as mobilization of adequate capital. While all nations will suffer from higher prices and shortages, only a “cooperative” program will avert the even more extreme economic and geopolitical crises that would otherwise ensue. Hence, an urgent need for establishing the proposed Global Cooperative Investment Refining Fund — one that will comprise world’s leading oil companies and relevant institutions of international repute.

The “vision” of the Global Cooperative Investment Refining Fund is to be an international center for competence, and a forum for dialogue for the stability of the international oil supply system. The fund will be committed to realizing its “vision” of a world with sustainable economic growth and socioeconomic development by stable supply of its oil products needs.

Its “mission” will be to work collectively and in collaboration with other significant bodies, and the world at large, to efficiently and effectively tap their oil resources and, promote their welfare in meeting the ever-rising global demand for oil products. Furthermore, it will address the world’s oil products needs by upgrading and/or building and operating refineries, and monitoring their production worldwide.

Without the proposed fund, the oil companies may enjoy record revenues from refining for some time. But they will be blamed for profiting from the misery of the societies; meanwhile, they will be hampered in their operations by the destabilization of national economies resulting from skyrocketing oil prices. Being an institutional body, the fund will attain reliability that would avoid what otherwise would be chaotic situations in the oil industry and its markets. The international oil companies (IOCs) would probably accept this arrangement recognizing that a stable economic environment is more important to the IOCs in the long-run than the opportunity to make momentary windfall profits.

Bringing the proposed refining fund into being could be an uphill task. But, times have changed, and the urgent need to expand the world refining capacity is the main and most important request by the global oil production community. If nothing is done, the best that could happen is that consumers will have to pay a much higher price to live and yet continue to maintain their lifestyles.

The worst that could happen is a world of higher prices, supply shortages, global economic chaos, extreme geopolitical tensions, rising specters of war, terror and even famine.

The fund will have far-reaching implications for the global economy and peace. The governments and key stakeholders of the producing and the consuming nations alike do have a mutual interest in addressing the concerns highlighted. The information and analysis presented in the original fund proposal can provide a solid framework for understanding the challenges, deepening the dialogue between the producers and the consumers, as well as devising the appropriate policy responses to sustain world economic growth decades ahead.

— Ibrahim A. Al-Mutrif, Ph.D., is the president of Al-Mutrif Economic Consulting House. This article represents a summary of a research document prepared on the “world refining capacity shortages” which resulted in proposing the establishment of a “Global Cooperative Investment Refining Fund.”