Diesel fuel is in short supply as prices surge — Here’s what that means for inflation
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A Los Angeles petrol station displays the prices of gas and diesel fuel at $6.00 per gallon on March 2, 2022.
Frederic J. AFP | AFP | Getty Images
The rise in diesel prices is contributing to inflationary pressures. Diesel plays a vital part in America’s and worldwide economies. Diesel is used in all types of transport, including tanks, planes, trucks, and buses. Diesel is used in many industries, including mining, farming and metals manufacturing.
Patrick De Haan from GasBuddy, who heads the petroleum analysis department at GasBuddy said that diesel is “the fuel that drives the economy.” He said that higher prices will “certainly translate into more costly goods” since consumers will have to pay the fuel cost increase. It is especially true at grocery stores, hardware shops, and everywhere else you shop.
The economic effects will therefore be felt throughout the entire economy.
Diesel is on the rise
As economies across the globe get back in business, the rise in prices is directly related to the growing demand. In turn, inventories have dropped to historic lows. Middle distillates are used to describe products such as diesel, heating oil, and jet fuel. They are produced from the mid-temperature when oils are turned into products.
U.S. distillate stockpiles are now at their lowest levels in more than a decade. On the East Coast stockpiles have dropped to their lowest level since 1996, making this an even more dramatic move. UBS says diesel and jet fuel in New York harbor now trade well above $200 per barrel.
Europe’s shift away from Russian energy dependency is accelerating the price appreciation. According to Stephen Brennock, a broker at PVM, the bloc imports approximately 700,000 barrels of diesel per day from Russia.
“[T]”The EU’s plan to ban Russian oil imports will only exacerbate the tightness of global supply,” he stated. “The ban, if approved, will have an outsized impact on product markets and especially diesel….There is now growing anxiety that Europe might run out of diesel.”
Rystad, an energy consultancy Rystad said that diesel shortages will be worsened by the Russian loss of refined products.
The utilization rate is already over 90%, so refiners are not able to just boost output in order to satisfy rising demand. Refining capacity in the United States has declined over recent years. The largest refining complex on the East Coast — Philadelphia Energy Solutions — shut down following a fire in June 2019.
Many refiners have been reconfigured for biofuel production. This has resulted in a reduction of capacity.
Routine maintenance is also being performed on some refiners that have been affected by the pandemic. These facilities typically run flat out – 24 hours a day, seven days a week – and so at some point the machinery needs to be checked.
De Haan stated that the East Coast heavily depends on products from other parts of the country. Europe competes with Russia for those same fuels.
Prices for ‘Unmoored”
One common phrase in the commodity market is, “The cure for high-priced commodities is high prices”. This might be wrong this time. UBS says that gasoline prices are less flexible than distillate demand.
This means that, even though high pump prices might discourage consumers, businesses will pay higher prices if they need to transport goods from one place to another.
Tom Kloza of OPIS’ global energy research said in years past that a barrel diesel sold at $10 more than the oil price. Today, that differential – known as the crack spread – has surged to a record high above $70.
“It has become untethered. It is unmoored. A little unhinged.” “These are prices that we aren’t used to seeing,” said he, noting that the U.S. has large price variations.
Kloza reported that New York’s diesel is trading for $5 per gallon. Jet fuel prices in New York are about $6.72. This equates roughly to $282 per barrel.
These numbers are more than just off-the-charts. “They’re not just off the walls. They are out of buildings and perhaps out of solar systems,” he stated.
The retail diesel price is also on the rise. According to the National Average for a Gallon on Friday, it was $5.51. AAAAfter reaching a new peak every day in the last week, it is now.
Refiners who make more profit from diesel are seeing higher prices. The gasoline market could become tighter, which will lead to higher prices for consumers.
Consumers can still expect rising prices of goods in the interim.
“It’s going to be a double whammy on consumers in the weeks and months ahead as these diesel prices trickle down to the cost of goods — another piece of inflation that’s going to hit consumers,” GasBuddy’s De Haan said, adding that the full impact of the recent surge in prices has yet to be felt.
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