Winter Fuel Prices Threaten to Upend Global Economy, Central Banks Warn

The surge in oil, gas, and diesel prices is forcing central banks and governments to reassess the impact of the wars in Iran and Ukraine. Central bankers were able to ignore the energy supply hit from the conflict for much of the Iran war, but with oil surges again, the prices of diesel and natural gas are climbing even faster. The European Central Bank highlighted higher oil and gas prices as one of the potential risks pushing its inflation forecasts higher in the coming months. "If I had talked to you about refining margins six months ago, we wouldn't have known what we are really talking about," ECB President Christine Lagarde said on Thursday after delivering a widely anticipated increase in the cost of borrowing. The Bank of England Governor Andrew Bailey gave UK politicians a lesson in oil-market economics in parliament, noting that crack spreads are adding to price pressures. Markets are now expecting two increases in interest rates by February to help tackle inflation. Diesel futures in some parts of the world are north of $200 a barrel, and with taxes some consumers are paying more than $300. Europe's natural gas prices hit the highest since late 2022, the year of Russia's full-scale invasion of Ukraine, as inventories remain thin before the weather turns colder. Diesel prices in the US are also at a record. The situation is still far from the disaster scenarios when the Iran conflict started at the end of February. China's refiners have played a key role in the recent price rally, but it remains to be seen if they will continue to be so given the costs. The world needs oil heading into winter and refinery capacity is still constrained, which will keep stressing fuel costs. Ukraine's attacks on Russian refineries have brought its diesel exports to a record low, while Middle Eastern processing plants are still recovering from attacks early in the Iran war. There remains a gap between current and prewar flows through the Strait of Hormuz, which before the war accounted for about a fifth of the world's oil and liquefied natural gas flows. Many of the energy market's workarounds have been shut off, including strategic reserve releases which are slowing, while China has been buying more oil and stockpiles have steadily dwindled. Yemen's Houthi militants have also been repeatedly attacking Saudi Arabia, one of the world's biggest oil and gas producers. Following multiple attacks on Thursday, the kingdom closed its East-West pipeline, a key alternative to the Strait of Hormuz for its exports. "We're going to see a very difficult winter coming in Northern Europe," Shaikh Khaled Al-Sabah, managing director for international marketing at Kuwait Petroleum Corp., said at a conference this week. "This is only the beginning."