The Four Horsemen of the Dieselpocalypse with Doomberg

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

The Energy Stakes in the Middle East

Paul Chapman: From an energy and commodities perspective, where do you think the conflict in the Middle East stands today? Has it already become a strategic loss for the US?

Doomberg: We think it is catastrophic, with the remaining question largely one of degree. This was a war that could not be won, even if regime change had occurred. The structure of Iran’s military command meant autonomous, militarily capable groups could still disrupt the Strait of Hormuz, interfere with global oil and gas trade, and threaten assets the world depends on to feed itself, heat itself, and run the global economy.

In our view, the US never possessed escalation dominance. One of the principal reasons not to begin a war is that it is much harder to leave than to enter. We would define a lost war as one that cannot be won. Once that becomes clear, game theory suggests reaching the earliest and best available settlement. The political and emotional difficulty lies in admitting that the original decision was a mistake.

The Limits of Energy Statecraft

Paul Chapman: Could the conflict be part of a wider strategy to restrict hydrocarbon supplies to China while making US energy more valuable?

Doomberg: We do not believe there is a sophisticated, multidimensional strategy behind it. Political and corporate leaders are ordinary people dealing with finite amounts of information, existing beliefs and the usual human frailties. The people controlling the information reaching a decision-maker can therefore exercise disproportionate power.

There were people inside the Pentagon who understood that this war could be disastrous, and there is analysis going back decades. The decisive issue is who was speaking to the president in the weeks and months before the decision, and what information they chose to present.

Outside parties may influence a leader, but that does not remove the leader’s agency. In the American system, responsibility ultimately rests with the president as commander-in-chief.

Why Diesel Has Become the Market to Watch

Paul Chapman: The oil has continued to flow, but the pressure now appears to be emerging in diesel. Are we moving towards the kind of “tank bottom” moment in which the system can no longer move sufficient product?

Doomberg: To understand what is happening in diesel, it is important to begin with how many analysts, including us, initially got the oil market wrong.

When the Strait of Hormuz closed, we expected crude oil to move towards $150 or $200 a barrel. It did not. China was able to remove approximately 5mn barrels a day of crude demand, while strategic reserves, temporary overland routes, shadow fleets, trucks, railways and alternative shipping arrangements helped keep barrels moving. Those measures were intended to provide a bridge to a future point at which the conflict had been resolved.

Instead, the war persisted. Measures designed to last temporarily were required to support the system for much longer than anticipated. The particular manifestation of that strain has emerged in diesel.

The underlying problem is refining capacity. Attacks on Russian refineries have removed facilities capable of turning crude into useful products. Europe has also closed refining capacity of its own. This matters because crude oil is not directly consumed by the economy. It must first reach a refinery, where it is converted into diesel, petrol, jet fuel, heating oil and other products.

Taken to an extreme, crude oil without functioning refineries has little value. It becomes difficult and costly to store, with no obvious route to the consumer. The economically important products are those produced at the refinery gate.

That is why the relationship between crude and diesel is now so revealing. If both crude and refining capacity were in equally short supply, crude prices and refined product prices would rise together. That is not what the market is showing. Crude has remained comparatively well managed, while diesel crack spreads have moved sharply higher.

This divergence indicates that the shortage sits at the refinery node, rather than the crude node. Refiners are not competing aggressively for crude barrels. Buyers are competing for diesel, jet fuel, petrol and other refined product barrels.

The sustained attacks on Russian refineries are central to that shortage. In our assessment, they are a major cause of the diesel crisis and the consequences are likely to rebound most severely on Europe, the region most dependent on imported supply.

Europe’s Exposure to the Refining Shortage

Paul Chapman: Why is Europe particularly exposed to the loss of Russian refining capacity?

Doomberg: Europe is more dependent on imports than any other major region. If Russian refineries are removed from the system, the effect is not limited to Russia. It reduces the availability of refined products within a market on which Europe depends.

The EU consumes roughly 11mn barrels a day of crude oil while producing only about 300,000. It refines some crude domestically, but not enough to satisfy its full requirements. In a fragmenting commodity market, Europe is therefore exposed at both the crude and refined product levels.

The Global Impact of US Diesel Export Controls

Paul Chapman: What would happen if the US restricted or banned diesel exports?

Doomberg: The competitive international market for diesel is approximately 7mn barrels a day, despite total global production of about 26mn to 28mn barrels. Roughly three-quarters of production is consumed within the countries where it is refined, leaving only a relatively small pool of seaborne barrels to determine global prices.

Before attacks on its refineries intensified, Russia supplied roughly 800,000 barrels a day to that pool. It subsequently shifted from being a contributor to becoming a buyer, reportedly exchanging crude with countries such as China and India for diesel.

The US, meanwhile, traditionally exported about 1.3mn barrels a day, with volumes reaching as high as 1.9mn barrels a day in August as the market sought to compensate for lost Russian supply.

An American export ban could lower domestic prices temporarily, but the international price would move sharply higher. The market outside the US could become so tight that price alone might not be sufficient to clear it. Whether Washington imposed a full prohibition or designed a more nuanced control mechanism, the global market is already tight enough that a substantial reduction in US supply would be highly disruptive, especially for Europe.

India’s Role in Europe’s Diesel Supply

Paul Chapman: How could sanctions on buyers of Russian crude affect India’s contribution to global diesel markets?

Doomberg: India supplied 60 per cent of the diesel moving through the Red Sea towards Europe in August. If sanctions led it to stop purchasing Russian crude, India could withdraw from the international diesel market and protect domestic supply instead. That would create a disruption comparable with US export controls.

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

AI's Real Bottleneck

Paul Chapman: Data centres are expanding rapidly to support AI, but power supply increasingly appears to be the real constraint. How do you view the relationship between AI demand and the energy sector?

Hill Vaden: Much of the public discussion around AI focuses on models, software and productivity gains. The physical reality is that AI ultimately depends on infrastructure. Data centres are becoming the critical bottleneck to hyperscaler growth, and power supply has become the critical bottleneck to data centre development.

What we are seeing is an unprecedented demand pull from hyperscalers. Their appetite for compute is creating an equally large appetite for power. That demand is now shaping investment decisions throughout the energy sector and creating opportunities for entirely new generation projects to be financed and built. 

The Financial Engine Behind the AI Buildout

Paul Chapman: How does the financing process work when a hyperscaler decides it needs another major data centre?

Hill Vaden: It starts with a long-term contract. A hyperscaler agrees to purchase power over an extended period, giving developers confidence that there will be a reliable source of revenue behind a new project.

That contract then becomes the foundation upon which financing is raised. Lenders and investors are far more willing to support a project if the offtaker is a highly creditworthy company with a long-term need for electricity.

At the same time, enormous amounts of infrastructure capital have been raised globally. Investors are searching for long-duration assets that can generate predictable returns, and power infrastructure increasingly fits that requirement. The intersection between AI growth and energy demand has therefore become one of the most attractive themes in infrastructure investing today. 

The Race for Speed to Power

Paul Chapman: We keep hearing the term "speed to power". Why has it become so important?

Hill Vaden: Data centre developers want capacity online quickly, but grid connections often take years. That gap has encouraged increasingly creative solutions, including behind-the-meter generation using gas engines and fuel cells. In many cases, the ability to secure power quickly has become one of the most important competitive advantages in the entire AI infrastructure buildout. 

Why Natural Gas Sits at the Centre of the Story

Paul Chapman: What role does natural gas ultimately play in enabling AI-driven growth?

Hill Vaden: The issue is less about AI itself and more about reliability. Data centres require power around the clock, often with extremely demanding uptime requirements. While renewable generation continues to grow, hyperscalers still need access to dispatchable power that is available whenever it is required.

That reality has placed natural gas in a particularly strong position. It remains one of the most practical ways to provide large amounts of reliable power at scale, which is one reason why regions such as Texas continue to attract investment.

Interestingly, the hyperscalers do not generally want to become energy companies themselves. Their preference is to secure long-term power through contracts while leaving generation and operational risk to utilities and developers. 

Why This Looks More Like Shale Than Dot-Com

Paul Chapman: Many people compare AI to the dot-com boom. Why do you think shale is the more useful analogy?

Hill Vaden: Shale was the last energy investment boom that combined technological innovation, abundant capital and intense competition. It was location-specific, infrastructure-intensive and characterised by a race to secure strategic positions before the opportunity became fully understood.

You can see similar dynamics emerging today. Developers are competing for land, power access and customers in much the same way that shale operators once competed for acreage. There is a clear winner-takes-most mentality in parts of the market.

The other similarity is the importance of demand pull. Hill points to George Mitchell's early pipeline commitments as an example of how guaranteed demand helped unlock investment and innovation in shale. In today's market, hyperscaler demand is playing a similar role by providing the commercial rationale for new power projects.

The details may be different, but the combination of capital, infrastructure development, innovation and competitive urgency gives this cycle a distinctly shale-like feel.

The Operational Limits of Global Refineries

Paul Chapman: Can the world’s remaining refineries simply run harder to replace the lost production?

Doomberg: Refineries are complex, integrated chemical plants processing enormous quantities of highly combustible material under intense pressure and temperature. Running them continuously at 98, 99 or even more than 100 per cent of stated capacity while postponing maintenance increases the probability of operational failure.

The economics of refining add to the problem. It is frequently a poor business in which returns are difficult to earn consistently. When margins improve, operators have a strong incentive to maximise output. Yet prolonged underinvestment means facilities may be least resilient precisely when the market needs them most.

An additional outage could come from an accident, equipment failure or sabotage. Whatever the cause, the result would be the loss of more refining capacity from an already constrained system.

The Four Risks Facing Diesel Markets

Paul Chapman: What are the four developments that could turn the current diesel shortage into a more severe crisis?

Doomberg: The first is a US restriction on diesel exports. The second is India withdrawing supply from the international market. The third is an outage among refineries already operating at exceptionally high utilisation. The fourth is further escalation in the Middle East. The risks are also synergistic. The development of one increases the probability or severity of the others.

Shipping Routes as a Commodity Risk

Paul Chapman: How important have shipping constraints become to the wider energy crisis?

Doomberg: Increasingly important. Further escalation could threaten Middle Eastern gas assets, the Red Sea or the Suez Canal. A large vessel disabled in a narrow waterway would materially disrupt global trade.

Ships that cannot use their normal route must travel substantially farther, pushing utilisation and freight rates higher. Shipping costs are consequently becoming almost as important as the underlying oil price in determining the delivered cost of a cargo.

Commodity Fragmentation and Europe’s Vulnerability

Paul Chapman: Could government intervention and the fragmentation of commodity markets begin to undermine the global trading system itself?

Doomberg: The natural response to deglobalisation is for each country to secure its own supply when scarcity intensifies. Export bans and other interventions may protect domestic consumers, but they also weaken the international flows that have allowed the global economy to absorb shortages without more severe consequences.

The vulnerable parties are those without control over their own resources. Europe does not produce enough crude oil or refined product to meet its needs. If globalisation brought both benefits and costs, reversing it means surrendering the benefits as well. For commodity-importing economies, that process is likely to be particularly painful.

Natural Gas, Weather and Europe’s Winter Risk

Paul Chapman: Where does El Niño sit within the wider European energy outlook? Is it another factor through which the market should view the current crisis?

Doomberg: Europe faces a second potential energy crisis through natural gas. It moved away from long-term, fixed pipeline contracts towards greater dependence on spot LNG imports, predominantly from the US and Qatar. The war in Ukraine exposed the risks associated with that decision.

During the previous crisis, Europe benefited from an extraordinarily mild winter. Without it, the outcome could have been very different. Europe now approaches another winter with, in several respects, a worse starting position.

We are cautious about making catastrophic weather predictions. Weather is a nonlinear system and is extremely difficult to forecast. However, disrupted weather patterns create the possibility that Europe receives a harsh winter rather than another mild one. If that coincided with acute pressure in diesel markets, it would place additional strain on the continent’s energy system.

Political Cycles and Energy Investment

Paul Chapman: What could the US midterm elections mean for energy policy and commodity investment?

Doomberg: We would expect at least one chamber of Congress to move to the Democrats, and possibly both. From an energy perspective, that would stall the momentum of the administration’s early policies.

The deeper problem is that the capital cycle in heavy industry is already longer than the American political cycle. Policy can swing from an administration supporting 30GW of offshore wind to its successor making such development extremely difficult. That whiplash destroys capital and discourages future investment.

Even without a complete reversal of existing policy, the prospect of another change in 2028 can be enough to delay investment in the midstream assets required to make the energy system function.