How the World Lost Its Refining Buffer

Stephen Hay and Claude AI

This paper is the third in a series. The first paper, New Zealand’s Diesel Supply, examined the domestic reserve position and economic consequences. The second paper, New Zealand’s Broken Supply Chain, examined the geopolitical and logistical constraints on replacement supply. This paper examines a prior question that both companion papers assumed: how did the world arrive in March 2026 with so little refining buffer and why is the geographic concentration of surviving capacity so dangerous for countries like New Zealand? All three papers should be read together.

EXECUTIVE SUMMARY

The fuel supply crisis confronting New Zealand in March 2026 is not solely the product of the Strait of Hormuz closure. It is the product of a decade of decisions – accelerated by the Covid-19 pandemic – that permanently destroyed refining capacity in the developed world and concentrated surviving capacity in the regions now most disrupted.

Between 2019 and 2024, the world permanently closed approximately 3.8 million barrels per day of refining capacity. The closures were concentrated in the United States, Europe, Australia, Singapore and New Zealand – the countries that are now most exposed to the current crisis. The replacement capacity that was built went almost entirely to Asia and the Middle East: the same geography now under stress.

The result is that the world entered March 2026 simultaneously facing peak demand recovery and minimum spare refining capacity, with surviving capacity geographically concentrated in or dependent upon the Persian Gulf. New Zealand, which closed its only refinery in 2022, sits at the end of this chain with no domestic processing fallback and reserves calibrated for normal times.

This paper traces the mechanism by which Covid converted a cyclical demand shock into permanent structural change; analyses the asymmetric recovery in demand versus capacity; examines the geographic concentration of post-pandemic refining investment; compares New Zealand’s position with Australia’s, and with the fuel structure similarities between middle distillates – diesel, kerosene and jet fuel – that mean a shortage in one cascades immediately into all three. It concludes that New Zealand’s current vulnerability is not bad luck. It is the accumulated consequence of a supply chain optimised for cost at the expense of every other consideration.

1. COVID AND THE PERMANENT DESTRUCTION OF REFINING CAPACITY

1.1 How a Demand Shock Became Structural Change

The conventional economic model predicts that a demand shock – like the near-total collapse in transport fuel consumption during 2020 lockdowns – is temporary. Demand recovers; supply follows. The refining industry did not behave that way.

The reason is economics. An oil refinery is not a tap that can be turned off and on. It is a complex, capital-intensive facility with fixed operating costs, environmental compliance obligations, ongoing maintenance requirements, and a workforce whose skills dissipate rapidly if the plant is idle. When demand collapsed in 2020 and margins turned deeply negative, refinery operators faced a binary choice: run at a loss hoping for recovery, or close permanently and realise whatever value remained in the asset and land.

Across the developed world, hundreds of operators chose closure. The decision was not irrational – many of these refineries were already marginal, operating in regulatory environments increasingly hostile to fossil fuel processing, facing long-term decline in demand from EV adoption and efficiency improvements. Covid gave them permission, and in some cases financial necessity, to bring forward closures that were already contemplated.

The scale of permanent closure was unprecedented. More than 3.8 million barrels per day of global refining capacity was permanently shut down between 2019 and 2024 – equivalent to removing the combined refining output of Germany, France and the United Kingdom.

1.2 Where the Closures Happened

The closures were not evenly distributed. They were heavily concentrated in the countries that are now most exposed to the current supply crisis. 

The pattern is consistent across every column in that table: the countries that closed capacity are the countries now most exposed. Australia’s two-refinery position is precarious but functional. New Zealand’s zero-refinery position is unique among developed economies.

1.3 Why Closed Refineries Do Not Reopen

A question that arises naturally is: if refining capacity is now needed, why not reopen closed refineries? The answer lies in the economics of decommissioning.

When a refinery closes permanently, the operator does not simply lock the gates. Decommissioning involves draining and cleaning process vessels, disposing of hazardous residuals, removing catalysts and chemicals and beginning the environmental remediation that regulatory frameworks require. In many cases, the site is partially or fully demolished and the land repurposed. Staff are made redundant. Engineering expertise disperses.

Restarting a decommissioned refinery is not the reverse of shutting it down. It would require full reconstruction from a degraded baseline, environmental impact assessments and new consents, reconstruction of supply logistics and staffing pipelines, and capital investment that would need to be justified against a long-term demand outlook that remains uncertain. The timeframe for a full refinery restart from decommissioned state is measured in years and billions of dollars. For New Zealand, the Marsden Point conversion to an import terminal has made this path even less accessible – the infrastructure that would support refinery operations has been repurposed.

The world’s refining capacity that was closed during and after Covid is not coming back. The question is not whether it can be restored – it cannot, on any timeline relevant to the current crisis – but whether the surviving capacity, and where it is located, is adequate to serve global demand.

2. THE ASYMMETRIC RECOVERY: DEMAND RETURNED, CAPACITY DID NOT

2.1 What Demand Actually Did

Global oil demand recovered to approximately 1.3 per cent above 2019 pre-pandemic levels by 2024. But the aggregate number conceals a composition shift that matters enormously for New Zealand’s specific exposure.

The demand recovery was not uniform across fuel types: 

The critical observation is that the fuels most relevant to New Zealand’s current crisis – diesel and jet fuel – have not fully recovered in volume terms, yet are facing supply constraints. This is not a demand surge overwhelming a stable supply system. It is a demand-recovery meeting a permanently reduced and geographically concentrated supply system.

2.2 The Supply Side: Where New Capacity Was Built

While the developed world was closing refineries, new capacity was being constructed – but not where it would help countries like New Zealand.

Asia Pacific added approximately 2.7 million barrels per day of new crude distillation capacity between 2019 and 2024, accounting for 42 per cent of global additions. The Middle East and Africa accounted for most of the remainder.

The geographic pattern of new investment followed refinery economics: large, complex, export-oriented refineries built in regions with cheap feedstock access (the Gulf), growing domestic markets (China, India), or favourable regulatory and labour cost environments (Southeast Asia). The developed world – with its higher costs, declining domestic demand and hostile regulatory trend – attracted almost no new investment.

The result by 2025 was a global refining system whose centre of gravity had shifted decisively toward the Gulf and Asia – precisely the geography now under maximum stress. The new mega-refineries in Saudi Arabia, the UAE, China and India are either dependent on Gulf crude, subject to export controls, or operating in jurisdictions that have made clear they will prioritise domestic supply before export commitments.

 Going into 2026, global net refining capacity was projected to increase at the slowest rate in 30 years. There is no spare capacity waiting to be activated. The margin that would have absorbed a shock of this scale no longer exists.

3. THE COVID COMPARISON: WHAT IT REVEALS AND WHERE IT BREAKS DOWN

3.1 Why the Comparison Is Made

Covid-19 is the closest reference point in living memory for a sudden, economy-wide supply and demand shock in New Zealand. Airport closures, border shutdowns, supply chain disruption and the collapse of tourism provide a frame of reference that is both recent and broadly understood. When the current fuel situation is discussed publicly, Covid analogies appear frequently.

The comparison has genuine value in two respects. It illustrates the cascading nature of supply chain disruption – the way that a disruption to one node (airports, in Covid’s case; fuel terminals, in this one) propagates through every dependent system. And it demonstrates that New Zealand has a recent institutional memory of crisis management, including emergency legislation, supply chain coordination and public communication frameworks.

3.2 Where the Comparison Fails – And Why It Matters

The differences between Covid and a fuel depletion event are more important than the similarities, and misapplying the Covid frame leads to materially wrong conclusions about what can be done. 

The single most important distinction is this: Covid was a demand shock with a known recovery pathway that left physical infrastructure intact. A fuel crisis is a supply shock with no guaranteed endpoint that physically disables the infrastructure itself.

Covid showed that the supply chain was fragile. A prolonged fuel shortage would demonstrate that it was never really a chain at all – merely a sequence of dependencies, each one assuming the previous link would hold.

4. DIESEL, KEROSENE AND JET FUEL: THE MIDDLE DISTILLATE PROBLEM

4.1 Why They Are Related

A common public misconception treats petrol, diesel and jet fuel as separate products with separate supply chains. They are not. All three derive from the same fraction of the crude oil barrel – the middle distillates, sitting between lighter naphtha and heavier fuel oil in the refining process.

The distinction between them is one of processing and specification, not fundamental chemistry: 

•       Kerosene is the base middle distillate – a relatively clean, light product originally used in lamps and heating.

•       Jet fuel (Jet A/Jet A-1) is essentially highly refined kerosene with tightly controlled specifications for freezing point, flash point and contamination limits. The specifications are strict because the consequences of fuel failure at altitude are obvious. But chemically it is kerosene with quality control.

•       Diesel (road diesel) is from the same distillate cut but optimised for compression ignition engines, with different lubricity requirements, cetane number specifications, and in most markets, sulphur limits set for ground-level emissions compliance rather than altitude performance. 

The practical implication: when a refinery cuts middle distillate output, it cuts the feedstock for all three products simultaneously. South Korea’s export cap does not apply to diesel and leave jet fuel alone – it constrains the entire middle distillate slate.

4.2 The Emergency Substitution Question

In genuine fuel emergencies, militaries and logistics operators have burned jet fuel in diesel engines – it is possible with modifications and acceptance of reduced performance and potential long-term engine wear. The reverse – road diesel in a jet engine – is not feasible. The specification variance and contamination risk would be catastrophic.

This one-way substitutability has a specific relevance to New Zealand’s emergency planning. If diesel becomes critically short before jet fuel, there is a theoretical argument for blending or substituting jet fuel into critical diesel applications – emergency generators, priority freight, farm machinery. The engine damage risk is real but manageable for older machinery without catalytic converters or modern injection systems. The economic cost is significant; the alternative is worse.

No public indication exists that this option has been assessed or modelled by New Zealand authorities. It is worth noting that the government’s already-announced relaxation of diesel sulphur specifications – from 10 to 15 parts per million – is a step along the same logic: accepting product degradation to widen the supply universe.

4.3 The Competition Between Users

The middle distillate constraint means that New Zealand’s diesel crisis and its aviation fuel crisis are not separate problems competing for separate policy attention – they are the same problem expressing itself in different sectors. Air New Zealand’s suspension of earnings guidance reflects the jet fuel crack spread widening from approximately US$22 to US$115 per barrel. That widening is the same supply constraint that is pushing diesel toward depletion.

The competition for middle distillates between aviation (economically important, politically visible, jet fuel), road freight (economically essential, diesel), and agricultural machinery (seasonally irreversible, diesel) is a rationing problem that no market mechanism will solve equitably. Price will allocate available supply to whoever can pay the most. In March 2026, that is likely to be airlines, followed by large freight operators, with agricultural users – often smaller operators with thin margins and limited access to credit – at the back of the queue.

5. NEW ZEALAND VERSUS AUSTRALIA: THE COMPARATIVE POSITION

5.1 What Australia’s Article Got Right

The widely circulated Australian commentary that prompted this analysis contained arithmetic that was broadly accurate for Australia. Its core argument – that a country with almost no domestic refining capacity, low strategic reserves, and deep dependence on Asian refinery output is structurally exposed in ways that years of complacency concealed – applies with even greater force to New Zealand. 

Where the article understated the problem was in assuming Australia’s position was the worst case. For several key metrics, New Zealand’s position is materially worse.

5.2 The Structural Comparison 

5.3 The One Genuine New Zealand Advantage

New Zealand has one structural advantage over Australia that the companion papers have not emphasised: the Ballance Agri-Nutrients urea plant at Kapuni, Taranaki.

Australia produces zero urea domestically. Its entire nitrogen fertiliser supply – critical for wheat, grain and most cropping – is imported, predominantly from the UAE, Qatar and Saudi Arabia, through the Strait of Hormuz. The Incitec Pivot plant at Gibson Island in Brisbane, which previously provided some domestic production, was closed in 2022. The planned replacement in Western Australia is not scheduled to come online until 2027.

New Zealand’s Kapuni plant, which uses Taranaki natural gas to produce urea, covers approximately 40 per cent of domestic nitrogen fertiliser requirements. This is a genuine and meaningful buffer that Australia entirely lacks.

The buffer is partial, not complete. Approximately 60 per cent of New Zealand’s urea is still imported, with Saudi Arabia supplying around 72 per cent of imports. Phosphate, potash and trace elements are entirely import-dependent. And the Kapuni plant itself is not immune to the wider crisis – its operations depend on natural gas supply, and it is a single point of failure for the domestic production it does provide.

But the comparison is instructive: New Zealand retained one piece of productive sovereignty that Australia did not, and it matters specifically in this crisis.

5.4 California and the Competition for Korean Supply

A development that compounds New Zealand’s supply position is the effective entry of California into competition for the same Korean and Asian refined product that New Zealand depends on.

The closure of the Phillips 66 Wilmington refinery (139,000 bpd) in late 2025 and the effective idling of the Valero Benicia refinery (145,000 bpd) by April 2026 have removed approximately 17.5 per cent of California’s total refining capacity. California is effectively a ‘fuel island’ – cut off from the interstate pipeline network that serves the rest of the US and historically reliant on in-state refineries for the bulk of its gasoline supply.

The state is now sourcing replacement supply primarily from Asian markets, transported by sea – the same Korean, Singaporean and Malaysian refineries that serve New Zealand, now operating under export caps. California’s demand has effectively been injected into the same constrained supply pool at a time when that pool is at its smallest.

California’s procurement leverage – population of 39 million, deep capital markets, potential state government backing – is vastly greater than New Zealand’s. In a distressed procurement market where cargoes go to whoever bids highest, California is not a sympathetic competitor.

6. THE STRUCTURAL LESSON: COST OPTIMISATION VERSUS RESILIENCE

6.1 The Business Model That Led Here

The pattern of decisions that produced New Zealand’s current vulnerability was not irrational at the level of any individual choice. It was the aggregate result of a consistent philosophy applied across two decades of energy policy: minimise cost, externalise risk, optimise for normal times.

Closing Marsden Point made economic sense in 2022. The refinery was operating on thin margins, required significant capital investment to upgrade, faced competition from larger and newer Asian refineries with lower operating costs and was processing crude that itself had to be imported. The government assessed that importing refined product was cheaper than refining it domestically, and it was right – in normal times, and assuming normal times would continue.

Setting the Minimum Stockholding Obligation at 21 days for diesel – the level industry was already holding – made regulatory sense. It avoided imposing costs on industry beyond what the market was already bearing. It was calibrated for normal times.

Deferring the increase to 28 days until 2028 made political sense. It avoided a fight with the fuel industry during a cost-of-living crisis. It was optimised for normal times.

None of these decisions was made by bad actors. They were made by rational actors in a system that priced resilience at zero because resilience, by definition, only pays off when things go wrong – and things going wrong this severely had not been adequately modelled.

The accumulated result of rational individual decisions was a country with no refining capacity, minimal strategic reserves, and a just-in-time supply chain calibrated for a world that has now changed. The cost of the resilience that was not purchased is being paid now, in the worst possible circumstances.

6.2 The Comparison That Should Have Been Made

The countries that have managed this crisis best are those that treated energy security as an infrastructure problem, not a market problem – investing in resilience even when it was expensive and the case for it was not immediately visible. 

7. CONCLUSION

The fuel supply crisis confronting New Zealand in March 2026 has a proximate cause – the closure of the Strait of Hormuz – and a structural cause that predates it by years. The world that existed in March 2026 was one in which Covid had permanently destroyed 3.8 million barrels per day of refining capacity in the developed world; in which replacement investment had concentrated in the Gulf and Asia; in which New Zealand had made itself the only IEA member with zero domestic refining capacity; and in which global spare refining capacity was projected to grow at the slowest rate in three decades.

The Hormuz closure did not find the world at full strength. It found a world already operating on minimum margins, with its refining system geographically concentrated in exactly the regions under stress, and its most exposed nations – Australia and New Zealand in particular – holding reserves calibrated for normal times rather than disrupted ones.

The Covid comparison that dominates public discussion is partially useful and substantially misleading. Covid was a demand shock with a visible endpoint that left physical infrastructure intact. A fuel depletion event is a supply shock with no guaranteed endpoint that physically disables the infrastructure. The lesson of Covid – that supply chains are fragile and can be disrupted – was the right lesson. The response – which optimised for cost recovery in the post-Covid environment rather than for resilience – was not.

Three findings from this analysis are worth stating plainly: 

•       The closed refineries are not coming back. No intervention on any timeline relevant to the current crisis can restore the capacity that was decommissioned between 2019 and 2024. The question is how to manage within the surviving capacity, which is constrained, concentrated, and increasingly restricted by export controls.

•       The diesel, kerosene and jet fuel shortages are the same problem. Middle distillates come from the same refinery output and the same crude oil. Export caps and refinery run-rate reductions affect all three simultaneously. Treating aviation fuel as a separate policy problem from diesel is analytically wrong and will produce wrong policy responses.

•       New Zealand’s position is worse than Australia’s in the dimensions that matter most: zero domestic refining (versus Australia’s 20%), greater Korean supply dependency (51% versus 35–40%), lower absolute scale in a distressed procurement market, and no pre-existing emergency procurement infrastructure. The one genuine advantage – partial domestic urea production – is real but covers less than half of domestic fertiliser need. 

The window for the decisions that would change New Zealand’s trajectory – emergency procurement from India, accelerated IEA ticket conversion to physical product, sector prioritisation lists, upstream terminal allocation – is measured in weeks. That window is open now. 

New Zealand did not arrive at this position through malice or even negligence in any simple sense. It arrived here through the consistent application of a philosophy that treated energy as a market commodity to be purchased at minimum cost rather than a strategic resource to be secured at adequate resilience. The current crisis is the invoice for that philosophy.

NOTES AND SOURCES

1 IEA Oil 2024 medium-term market report; BP Statistical Review of World Energy 2024; EIA Short-Term Energy Outlook January 2026.
2 EIA: US operable refinery capacity data series 2019–2025; US refinery utilisation and capacity reports.
3 Phillips 66 Wilmington closure: company announcement Q4 2025; Reuters reporting. Valero Benicia: California Energy Commission notification January 2026; Governor Newsom statement; legislative response reporting.
4 IEA World Energy Outlook 2024: global refinery capacity additions by region 2019–2024.
5 IEA Oil Market Report March 2026: global refining capacity outlook to 2029; net capacity growth projections.
6 EIA US petroleum product demand data 2019-2025; gasoline, distillate and jet fuel demand series.
7 MBIE: Marsden Point conversion to import terminal, March 2022; refinery closure economic assessment.
8 Stats NZ international merchandise trade data: New Zealand fuel import origins, 12 months to March 2025.
9 MBIE Minimum Stockholding Obligation regulatory impact statement 2023; Energy (Fuels, Levies, and References) Amendment Act: schedule for 28-day diesel minimum (1 July 2028).
10 IEA member country emergency stock data 2025: Japan, South Korea, China, EU member state averages.
11 Ballance Agri-Nutrients: Kapuni plant production data; Stats NZ agricultural inputs data: urea import volumes and origins.
12 Incitec Pivot Gibson Island closure: company announcement 2022. Perdaman WA plant: project timeline and commissioning schedule.
13 Air New Zealand earnings guidance suspension: NZX announcement March 2026; jet fuel crack spread data: Platts Singapore kerosene assessments.
14 South Korea MOTIE emergency energy protocol: mandatory export cap announcement 13 March 2026; crisis Level 3 activation. Argus Media 19 March 2026: export ban under active consideration.
15 California refinery capacity data: California Energy Commission; 17.5% capacity reduction calculation based on combined Wilmington and Benicia nameplate capacity versus total state capacity.
16 MBIE Fuel Stocks Update 18 March 2026 (data at midnight 15 March 2026): onshore diesel 22.7 days, on-water 24.3 days, total 47.1 days.
17 IEA oil ticket system: IEA Emergency Sharing System rules; NZ emergency stockholding agreement with US, UK and Japan.
18 Petroleum Demand Restraint Act 1981 (New Zealand); MBIE National Fuel Plan (current version). 

All data sourced from publicly available MBIE, Stats NZ, IEA, EIA, S&P Global, Reuters and Argus Media reporting as at 23 March 2026. It is the third paper in a series, to be read alongside New Zealand’s Diesel Supply and New Zealand’s Broken Supply Chain. Claude is AI and can make mistakes; sources, citations and conclusions have not been independently checked.