Diesel is in short supply due to rising prices – here’s what it means for inflation

Gas and diesel prices in excess of $6 a gallon are displayed at a gas station in Los Angeles, March 2, 2022.

Frederick J. Brown | AFP | Getty Images

Diesel prices are rising, fueling inflationary headwinds due to the vital role fuel plays in the US and global economy. Tanker trucks, trains, trucks and planes run on diesel fuel. The fuel is also used in various industries, including agriculture, manufacturing, metallurgy and mining.

“Diesel is the fuel that powers the economy,” said Patrick De Haan, head of oil analysis at GasBuddy. Higher prices “will definitely lead to more expensive goods,” he said, as those higher fuel costs would be passed on to consumers. “Especially in the grocery store, hardware store, anywhere you shop.”

In other words, the effects will be felt throughout the economy.

Diesel Splash

The surge in prices comes on the heels of rising demand as economies around the world get back to work. This, in turn, has driven stocks down to historic lows. Products such as diesel, heating oil and jet fuel are known as “middle distillates” because they are produced from the middle of the boiling range when oil is turned into products.

U.S. distillate inventories are currently at their lowest level in more than a decade. The move is even more extreme on the East Coast, where oil inventories are at their lowest level since 1996. Diesel and jet fuel in New York Harbor are now trading well above $200 a barrel, according to UBS.

Europe’s move away from dependence on Russian energy is accelerating the rapid rise in prices. The bloc currently imports about 700,000 barrels of diesel per day from Russia, according to Stephen Brennock of brokerage PVM.

“[T]The limited global supply will be exacerbated by the EU proposal to ban the import of Russian oil, he said. “The ban, if approved, will have a huge impact on food markets and especially diesel runs out.”

Energy consultancy Rystad echoed that view, saying the loss of Russian oil products would make Europe’s diesel shortage “more acute”.

Refineries can’t just ramp up production to keep up with growing demand, and utilization rates are already over 90%. In the US, refining capacity has declined in recent years. Philadelphia Energy Solutions, the largest refinery complex on the East Coast, closed after a fire in June 2019.

Several refineries are currently being reconfigured to produce biofuels, which has also resulted in capacity cuts.

Some refineries are also undergoing routine preventive inspections that have been delayed due to the pandemic. These facilities are usually running at full capacity – 24 hours a day, seven days a week – and so at some point the equipment needs to be checked.

The east coast is heavily dependent on other parts of the country for petroleum products, De Haan said. Now Europe is competing for these same fuels, turning away from Russia.

“Unmoored” prices

There is a saying in commodity markets: “The cure for high prices is high prices.” But this time it might not be. According to UBS, demand for distillates is less elastic than gasoline prices.

In other words, although high gas station prices may deter consumers, if a business needs to get a product from point A to point B, it will pay those higher prices.

Tom Kloza, head of global energy research at OPIS, said that in past years, a barrel of diesel has typically sold for $10 above the price of crude oil. Today, that spread, known as the crack spread, has risen to an all-time high of over $70.

“He became unattached, unattached, a little upset. These are prices that we are not used to seeing,” he said, adding that there are big differences in prices in the US.

Kloza said New York Harbor diesel currently trades at about $5 a gallon, while harbor jet fuel prices, which typically reflect diesel prices, are around $6.72. This corresponds to about 282 dollars per barrel.

“These are numbers that are not just going through the roof. They are outside the walls, outside the building, and possibly outside the solar system,” he said.

Retail prices for diesel fuel are also rising. On Friday, the national average per gallon reached a record high of $5.51. AAAafter reaching a new high every day of the previous week.

Higher diesel prices mean higher profit margins for refiners, who are now incentivized to do as much as possible. At some point, this could lead to a cap on the gasoline market, driving up the prices that consumers are already seeing at the gas station.

In the meantime, consumers can expect commodity prices to continue rising.

“It will be a double whammy for consumers in the coming weeks and months as these diesel prices drop to the cost of goods — another piece of inflation that will hit consumers,” GasBuddy’s De Haan said, adding that the full impact of the recent price surge yet to be felt.

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