(Bloomberg) — Crude oil is the world’s most important commodity, but it’s worthless without a refinery turning it into the products that people actually use: gasoline, diesel, jet-fuel and petrochemicals for plastics. And the world’s refining industry today is in pain like never before.

“Refining margins are absolutely catastrophic,” Patrick Pouyanne, the head of Europe’s top oil refining group Total SA (NYSE:), told investors last month, echoing a widely held view among executives, traders and analysts.

What happens to the oil refining industry at this juncture will have ripple effects across the rest of the energy industry. The multi-billion-dollar plants employ thousands of people and a wave of closures and bankruptcies looms.

“We believe we are entering into an ‘age of consolidation’ for the refining industry,” said Nikhil Bhandari, refining analyst at Goldman Sachs (NYSE:) Inc. The top names of the industry, which collectively processed well over $2 trillion worth of oil last year, are giants such as Exxon Mobil Corp (NYSE:). and Royal Dutch Shell (LON:) Plc. There are also Asian behemoths like Sinopec (NYSE:) of China and Indian Oil Corp., as well as large independents like Marathon Petroleum Corp (NYSE:). and Valero Energy Corp (NYSE:). with their ubiquitous fuel stations.

The problem for the refiners is that what’s killing them is the medicine that’s saving the wider petroleum industry.

When U.S. President Donald Trump engineered record oil production cuts between Saudi Arabia, Russia and the rest of the OPEC+ alliance in April, he may have saved the U.S. shale industry in Texas, Oklahoma and North Dakota, but he squeezed refiners.

A refinery’s economics are ultimately simple: it thrives on the price difference between and fuels like gasoline, earning a profit that’s known in the industry as a cracking margin.

The cuts that Trump brokered lifted crude prices, with benchmark soaring from $16 to $42 a barrel in the space of a few months. But with demand still in the doldrums, gasoline and other refined products prices haven’t recovered as strongly, hurting the refiners.

The industry’s most rudimentary measure of refining profit, known as a 3-2-1 crack spread (it assumes three barrels of crude makes two of gasoline and one of diesel-like fuels), has slumped to its lowest level for the time of the year since 2010. Summer is normally a good period for refiners because demand rises with consumers hitting the road for their vacations. This time, however, some plants are actually losing money when they process a barrel of crude.

Worst Fear

Just a few weeks ago, the outlook appeared to be improving for the world’s biggest oil consumers. Demand in China was almost back to pre-virus levels and U.S. consumption was gradually rebounding. Now, a second wave of infections has prompted Beijing to lock down hundreds of thousands of residents. Covid-19 cases are also on the rise in Latin America and elsewhere.

With demand in the U.S. now showing signs of heading south again as coronavirus cases flare up in top gasoline-consuming regions including Texas, Florida and California, the margins are at risk of deteriorating in America, which accounts for nearly two in each ten barrels of oil refined worldwide.

“The worst fear for refiners is a resurgence of the virus and another series of lockdowns around the world that would again significantly impact demand,” said Andy Lipow, president of Lipow Oil Associates in Houston.

Another problem is that — where it has been recovering — the demand pickup has been uneven from one refined product to the next, creating significant headaches for executives who need to select the best crudes to purchase, and the right fuels to churn out. Gasoline and diesel consumption has surged back, in some cases to 90% of their normal level, but jet-fuel remains nearly as depressed as at the nadir of the coronavirus lockdowns, running at just 10% to 20% of normal in some European countries.

Refiners had resolved the problem by blending much of their jet-fuel output into, effectively, diesel. But that, in turn, is creating a new challenge: too much of so-called middle distillates like diesel and .

“Right now gasoline demand is barely keeping some plants alive,” said Stephen Wolfe, head of crude oil at consultant Energy Aspects Ltd. “And with jet production shifting over to diesel and gasoline production, that puts even more strain on product supply,” he added.

In the U.S. refining belt, processing rates are being continually tweaked in response to potential fluctuations in demand. In April, during the height of U.S. lockdowns, Valero Energy Corp.’s McKee, Texas, refinery cut rates to about 70%. It then raised processing to near 79% in anticipation of the Memorial Day holiday, before finding a new low of 62% by mid June, according to people familiar with the situation.

Ultimately, if refiners don’t make money, they buy less crude, potentially capping the oil-price recovery of the past few months for Brent and other benchmarks. Even so, the actions of Saudi Arabia, Russia and the rest of the OPEC+ group suggest that refiners will remain squeezed for longer, with oil prices outpacing the recovery in fuel prices.

The immediate problem is compounded by a longer-term trend: the industry has probably overbuilt over the last decades, and older plants in places like Europe and the U.S. can’t compete with new ones popping up in China and elsewhere in the world.

“Refinery margins in the next five years are going to be worse than the average for the last five years, and particularly bad in Europe,” said Spencer Welch, vice president of oil markets and downstream consulting at IHS Markit. “We already thought that refining was in for a tough time, even more so now.”

Catalyst for Change

The weakness means that the industry’s collective earnings will plunge to just $40 billion this year, down from $130 billion in 2018, according to an estimate from industry consultant Wood Mackenzie Ltd. of 550 refineries around the world.

That could be a catalyst for change. The demand hit from the virus is yet to cause any delays in a number of mega-refining projects, most of which are in China and the Middle East, that will start operations from 2021 to 2024, according to the analysts at Goldman Sachs. This will cause global utilization rates to be 3% lower over this period than in 2019. Plants are more likely to close in developed countries because the bulk of demand — and new refining capacity — is in developing nations, they said.

Many of the refineries that are being built in the Middle East and China will also get government backing, a fact that only makes life more challenging for the plants in Europe and the U.S.

The industry is already moving to resolve the overcapacity: oil trader Gunvor Group Ltd. has said it may mothball its refinery in Antwerp, and U.S. refining group HollyFrontier Corp. in June announced it was changing its Cheyenne plant from processing crude oil into a renewable diesel facility.

For now though, there’s a more mundane reality to deal with: the market. OPEC and its allies can constrain the supply of crude — squeezing refiners — but they can’t make end users consume fuel.

©2020 Bloomberg L.P.