Publications: Notes at the Margin

Distillate Squeeze; Could AI Break the Global Economy? Possible Consequences for Oil (July 14, 2025)

 

Distillate prices have been rising rapidly. One trader likened the 2025 increases to those that followed Russia’s 2022 invasion of Ukraine. We see several factors that explain the upswing, including further rule tightening on maritime fuel emissions, a refinery closing in Europe, the changing mix of global crude supplies, and a possible decline in Russian distillate exports.

 

Meanwhile, OPEC boosted its 2050 oil consumption forecast to 123 million barrels per day. The group released its projection last week at its international seminar in Vienna, a meeting from which it idiotically barred five of the world’s most important financial reporting organizations, including Financial Times, The New York Times, and The Wall Street Journal.

 

OPEC’s projection for global oil consumption will likely be wrong due to emerging drags on economic growth. While the group’s secretary-general, Haitham al-Ghais, defended oil at the seminar, asserting “there is no peak oil demand on the horizon,” external developments warn of impending constraints.

 

Al-Ghais’ view might have been different had he listened as a mining executive told Financial Times that limited electricity supplies would slow global growth, adding that the dynamic today was “not Alcoa versus China but Alcoa versus Google.” Alcoa is losing that fight. As another executive told FT, “Big Tech” had “a much higher ability to pay for the power compared to an industry like aluminum.”[i]

 

The coming electricity supply strain means that some consumer demand, whether it be data centers, aluminum plants, or other reshored manufacturing facilities, will go unmet. PJM Interconnection, which operates the United States’ largest power grid, warned on July 9 that consumption was outpacing generating capacity construction.[ii] PJM’s situation is not unique. A July Department of Energy report observed that “absent decisive intervention, the Nation’s power grid will be unable to meet projected demand for manufacturing, re-industrialization, and data centers driving artificial intelligence (AI) innovation.”[iii]

 

Decisive intervention now will not help in the immediate term. US and European power prices will rise sharply, making basic industries less competitive with those in China. Economic policymakers confront a dilemma. They can accept higher inflation and interest rates by blocking low-cost Chinese imports or allow basic industries to languish. Either way, global growth will not support projections of rising oil and energy consumption. The surging energy demand from AI data centers will push the global economy into a period of low growth unless world leaders stop their expansion.

 

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