Diesel fuel is scarce as prices rise – Here’s what that means for inflation

Prices for gas and diesel, over $6.00 a gallon, are displayed at a gas station in Los Angeles, March 2, 2022.

Frederic 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 economies. Tankers, trains, trucks and airplanes all run on diesel. The fuel is also used in various industries including agriculture, manufacturing, metals and mining.

“Diesel is the fuel that drives the economy,” said Patrick De Haan, head of petroleum analysis at GasBuddy. Higher prices will “certainly translate into more expensive goods,” he said, as these higher fuel costs will be passed on to consumers. “Especially in the supermarket, the hardware store, wherever you shop.”

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

diesel surge

The price hike follows growing demand as economies around the world go back to work. This, in turn, has pushed stocks to historic lows. 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 oil is converted into products.

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

The fact that Europe is breaking away from its dependence on Russian energy is accelerating the rapid price rise. The block currently imports about 700,000 barrels of diesel per day from Russia, according to Stephen Brennock of brokerage PVM.

†[T]The global supply shortage will be exacerbated by the EU’s proposal to ban Russian oil imports,” he said. “If the ban is approved, it will have an excessive impact on product markets and especially diesel. … no more diesel.”

Energy consultancy Rystad reiterated this point, saying the loss of Russian refined products will make Europe’s diesel shortages “more acute”.

Refineries cannot simply ramp up production to meet rising demand, and capacity utilization is already above 90%. Refining capacity in the US has declined in recent years. The largest refining complex on the East Coast – Philadelphia Energy Solutions – was closed in June 2019 after a fire.

Several refineries are now being reconfigured to make biofuel, which has also reduced capacity.

Some refineries are also undergoing routine maintenance checks that were overdue after the pandemic. These facilities typically run at full capacity – 24 hours a day, seven days a week – so the machines need to be checked at some point.

The east coast relies heavily on other parts of the country for refined products, De Haan said. Now Europe is competing for the same fuels while turning its back on Russia.

‘Unmoored’ prices

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

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

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

“It’s unhinged, unhinged, a little bit unhinged. These are prices that we’re not used to seeing,” he said, adding that there are big price differentials in the U.S.

Kloza said diesel in the Port of New York now trades at around $5 a gallon, while jet fuel prices at the port, which usually reflect diesel prices, are around $6.72. That works out to about $282 a barrel.

“These are numbers that aren’t just off the charts, they’re from the walls, the building, and maybe the solar system,” he said.

Retail prices for diesel are also rising. On Friday, the national average for a gallon hit a record $5.51, according to AAA, after hitting a new record every day for the past week.

Higher diesel prices translate into higher profit margins for refineries, which are now incentivized to earn as much as possible. At some point, this could lead to a shortage of petrol in the petrol market, driving the high prices that consumers are already seeing at the pump.

Meanwhile, consumers can expect prices for goods to continue to rise.

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

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