Diesel shortages as prices soar – here’s what it means for inflation

Gas and diesel fuel prices, over $6.00 a gallon, are displayed at a Los Angeles gas station, March 2, 2022.

Frederick J. Brown | AFP | Getty Images

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

“Diesel is the fuel that powers the economy,” said Patrick de Haan, head of petroleum analysis at GasBuddy. The higher prices, he said, will “certainly translate into more expensive goods,” because those higher fuel costs will pass on to consumers. “Especially at the grocery store, hardware store, and wherever you shop.”

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

diesel increase

The price jump comes on the heels of increased demand as economies around the world return to work. This in turn led to inventories dropping to historical low levels. Products such as diesel, heating oil, and jet fuel are known as “middle distillates,” because they are made from the middle of the boiling range when the oil turns into products.

US distillate stocks are now at their lowest level in more than decades. The move is considered even more extreme on the East Coast, where stocks are at their lowest levels since 1996. Diesel and jet fuel in New York Port are now trading above $200 a barrel, according to UBS.

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

“[T]He said the tight global supply would be exacerbated by the European Union’s proposal to ban Russian oil imports. And if the ban is approved, it will have a major impact on product markets especially diesel… There is now growing concern that Europe is running out of diesel fuel.”

Energy consultancy Rystad echoed the point, saying the loss of Russian refined products would make Europe’s diesel shortages “more severe”.

Refiners can not only increase production to meet the increasing demand, utilization rates are already above 90%. In the United States, refining capacity has declined in recent years. The largest refining complex on the East Coast – Philadelphia Energy Solutions – was closed after a fire broke out in June 2019.

Many refineries are now being reconfigured to produce biofuels, which has also reduced capacity.

Some refineries are also undergoing routine maintenance checks that were late in the wake of the pandemic. These facilities usually operate steadily – 24 hours a day, seven days a week – and so at some point, the machines have to be checked.

De Haan said the East Coast is largely located in other areas of the country for refined products. Now, Europe is competing for the same fuels as it is moving away from Russia.

‘Unrestricted’ rates

A common saying in commodity markets is “the cure for high prices is high prices.” But that may not be the case this time. According to UBS, demand for distillates tends to be less elastic than gasoline prices.

In other words, while higher prices at the pump may deter consumers, if a company needs to get goods from point A to point B, it will pay those higher prices.

In years past, a barrel of diesel has typically sold for $10 more than the price of crude oil, said Tom Kloza, head of global energy research at OPIS. Today, that spread – known as the crack spread – has risen to a record high above $70.

“It’s become loose, untethered, and a little bit looser. These are prices we’re not used to seeing,” he said, adding that there are huge price differences across the United States.

Kloza said that New York Harbor diesel now trades at about $5 a gallon, while jet fuel prices at the port, which usually reflect diesel prices, are about $6.72. This equates to approximately $282 per barrel.

“These are numbers that aren’t just off the charts. They’re outside the walls, outside the building, and possibly outside the solar system,” he said.

Diesel retail prices also rose. The national average gallon hit a record high of $5.51 on Friday, according to the AAA, after hitting a new high every day for the past week.

Higher diesel prices translate into higher profit margins for refiners, who are now incentivized to make as much profit as possible. At some point, this could lead to tightness in the gasoline market, driving up the high prices that consumers are already seeing at the pump.

In the meantime, consumers can expect the price of goods to continue to rise.

“It’s going to be a double whammy on consumers in the coming weeks and months as these diesel prices flow into the cost of goods – another piece of inflation going to hit consumers,” GasBuddy’s De Haan said, adding that the full impact of the recent price hike was not being felt.

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