Crack spreads, defined as the price differential between refined petroleum products such as gasoline and diesel and crude oil, are becoming a key indicator for central banks in assessing inflationary pressures. Conflicts in the Middle East and between Russia and Ukraine have disrupted global refining capacity, tightening the supply of refined products and driving crack spreads sharply higher. Bank of England Governor Andrew Bailey stated that he is currently more concerned about the widening of crack spreads than about crude oil prices, while the European Central Bank has also incorporated them into its assessment of energy prices and inflation risks.
Crack spreads (the price differential between refined fuel products and crude oil) are emerging as a new benchmark for central banks and markets to assess inflationary pressures, with their significance beginning to surpass that of crude oil price trends themselves.
According to Bloomberg, Bank of England Governor Andrew Bailey stated that he is currently more concerned about the widening of crack spreads than about crude oil prices. The European Central Bank (ECB) had previously issued similar warnings: two geopolitical conflicts have impacted global refining capacity, tightening the supply of refined products. The effective price of gasoline and diesel borne by European consumers has reached an equivalent of over $370 per barrel.
As supply constraints in the refining sector intensify, a new transmission channel is emerging for the impact of rising oil prices on inflation. Vanguard, a leading global asset manager, has begun hedging against the risk of U.S. inflation exceeding expectations, while the Trump administration is pressuring U.S. refiners to increase gasoline and diesel output to alleviate the upward pressure on transportation costs caused by rising fuel prices.
Why Central Banks Are Shifting Focus from "Oil Prices" to "Crack Spreads"
Bailey stated, "We do not actually consume crude oil, but rather its processed products." In his view, crack spreads reflect the price premium formed when crude oil is refined into finished fuel products such as gasoline and diesel.
This implies that even if crude oil prices rise only moderately, bottlenecks in the refining process can still drive refined product prices significantly higher, directly increasing costs for consumers and businesses. An analysis by the ECB in late July also pointed out that constrained refining capacity is raising gasoline and diesel prices, creating additional inflationary pressures that benchmark oil prices fail to fully reflect.
Therefore, for central banks, crude oil prices largely reflect upstream energy costs, whereas crack spreads more closely represent the stage at which energy costs are ultimately transmitted to the broader economy.
Refining Capacity Damaged; Market and Policy Responses Align
The core driver behind rising crack spreads is the sustained冲击 to global refining capacity. Conflicts in the Middle East and between Russia and Ukraine have resulted in the loss of millions of barrels per day in refining capacity, with supply contraction exerting greater upward pressure on refined product prices.
This shift has already begun to influence investment and policy decisions. According to Bloomberg, Vanguard started purchasing instruments to hedge against U.S. inflation exceeding expectations as early as July, with the widening of crack spreads being one of the factors under consideration.
The U.S. government is also taking action. Trump has urged U.S. refiners to increase gasoline and diesel output in an effort to curb fuel costs and prevent further pass-through of rising transportation prices into overall inflation. With the November midterm elections approaching, the stability of energy prices has become a key variable influencing political pressure on the administration.
In other words, the market is shifting its focus from "how much crude oil prices rise" to "how much more expensive refined products become after processing." If refining bottlenecks persist, crack spreads may serve as an important indicator for monitoring future energy-related inflationary pressures.
Editor/Stephen