War Profits Revive Big Oil’s Refining Sector, but the Boom May Be Short-Lived

The global oil refining industry, long considered the unglamorous and volatile stepchild of the energy sector, is experiencing a sudden and dramatic renaissance. Driven by the dual shocks of the Iran war and ongoing conflicts in Ukraine, refining profits have surged to levels not seen in decades, turbocharging the earnings of major Western oil companies. For investors who had largely abandoned the sector due to fears of declining demand and rising carbon costs, the current windfall offers a tempting reprieve. Yet, beneath the surface of these record-breaking margins lies a fragile reality: this boom is built on scarcity and destruction, not sustainable growth, and its star is likely to fade as quickly as it rose.

The Great Retreat: How Western Majors Abandoned Refining

To understand the magnitude of the current surge, one must first appreciate the depth of the sector’s previous decline. Over the past two decades, Western oil majors have steadily retreated from refining, deterred by high operating costs, razor-thin margins, and the looming threat of climate regulation. The rise of state-backed refiners in the Middle East, Asia, and Africa further squeezed out Western competitors, who found it increasingly difficult to compete with subsidized giants.

This retreat accelerated in the late 2010s, particularly in Europe, as governments and corporations bet heavily on the rapid adoption of electric vehicles (EVs). The prevailing wisdom was that fuel demand would peak and then plummet by the 2030s, rendering new refining investments obsolete. Consequently, Western refining capacity shrank dramatically. According to Reuters Open Interest calculations, the combined refining volumes of BP, Chevron, Exxon Mobil, Shell, and TotalEnergies fell from 16.4 million barrels per day (bpd) in 2005—representing about 22% of the global total to just 10.4 million bpd last year, or roughly 13% of worldwide crude processing.

Shell exemplifies this trend, having reduced its refinery interests from 40 facilities to just seven over the period. This widespread exit left the global system with little spare capacity, setting the stage for the volatility we see today.

Perfect Storm: Iran, Ukraine, and the Supply Shock

The refining environment has improved drastically in the past year, not due to strategic investment, but because of geopolitical chaos. Two major conflicts have converged to create a perfect storm for refining margins:

1. The Iran War: The months-long effective closure of the Strait of Hormuz has severely limited refiners’ access to crude oil. Simultaneously, Iranian attacks on refineries throughout the Middle East have damaged critical infrastructure. These disruptions forced Asian refiners, particularly in China, to cut operating rates aggressively. Despite enormous crude stockpiles, China halted fuel exports to offset its sharp reduction in crude imports, removing a key source of global supply.

2. The Ukraine Conflict: Relentless Ukrainian drone attacks on Russian energy infrastructure have sharply reduced Russia’s refining output. In response, Moscow banned diesel exports, sending global diesel prices soaring.

Together, these conflicts removed approximately 5 million barrels per day, or about 6%, of pre-war global refining output in the second quarter. Global refinery runs averaged around 78 million bpd, the lowest level since the depths of the COVID-19 pandemic in 2020, according to the International Energy Agency (IEA).

Pricing Superpower: Big Oil’s Windfall

The resulting shortage of refined products has granted Big Oil enormous pricing power. With supply constrained and demand resilient, operators are running plants at maximum capacity. U.S. refineries, which have emerged as the world’s largest fuel suppliers during the conflict, operated at 97% of capacity in the week ending July 24, well above their long-term average of 90%.

The financial results have been staggering:

• BP’s refining-indicator margin climbed to $30 per barrel in the second quarter, up from $17 in the first quarter and $12 a year earlier. The indicator has averaged an astonishing $42 per barrel so far in the third quarter.

• Exxon Mobil posted downstream profits of $5.5 billion in the second quarter, its strongest result since 2022, driven by record diesel production.

• Chevron’s downstream earnings reached $4.9 billion, the highest level this decade.

• Shell reported adjusted earnings of $2.5 billion for its products division, also its best performance this decade, with its refining network operating at a utilization rate of 102%.

TotalEnergies CEO Patrick Pouyanne summarized the sentiment, telling analysts that the company’s refining segment had performed in "an exceptional way."

Can the Boom Last?

The immediate question for investors is sustainability. Most of the pressures supporting these margins are transient. A sustainable resolution to the U.S.-Iran conflict, involving the reopening of the Strait of Hormuz and the recovery of Chinese refining activity, would significantly loosen fuel markets. However, the timeline for such a resolution remains uncertain.

Furthermore, the physical damage to dozens of refineries in the Middle East and Russia will take months, if not years, to repair. In the meantime, global spare refining capacity remains exceptionally thin. On the demand side, the war has revived concerns about energy security, prompting governments to expand strategic storage facilities for both crude oil and refined fuels. Global oil stocks fell by 5.1 million bpd in the second quarter and are forecast to decline by a further 2.2 million bpd in the third quarter. Rebuilding these inventories will create persistent demand for years.

Alan Gelder, senior vice president for refining at Wood Mackenzie, expects refining margins and utilization rates to remain strong through the end of the decade, supported by continued growth in oil demand and a limited pipeline of new refining projects.

The Fragility of War Profits

Despite the optimistic near-term outlook, the boom masks a deeper fragility. Today’s windfall profits are generated by war, damaged infrastructure, and scarcity, not by a structural improvement in the industry’s fundamentals. Refiners are benefiting because the world has lost capacity faster than demand has disappeared.

However, this dynamic may not last. Several countries with limited domestic refining capability, such as Australia, are now reassessing their reliance on imports and considering plans to build local processing capacity. Over time, these investments could create a new wave of supply, potentially leading to oversupply and compressing margins once again.

The oil majors understand this reality. While a few years of exceptional margins may slow the decline of the refining sector, they are unlikely to reverse it. The structural headwinds of decarbonization, EV adoption, and efficiency gains remain intact. For now, Big Oil is enjoying a lucrative intermission, but the final act of the refining story is still being written, and it may not be as profitable as the current chapter suggests.