Diesel Fuel Is Scarce as Prices Rise – Here’s What That Means for Inflation

Gasoline and diesel prices above $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 fuel’s vital role in the US and global economy. Tankers, trains, trucks and planes all run on diesel. The fuel is also used in all industries including agriculture, manufacturing, metals and mining.

“Diesel is the fuel that powers the economy,” said Patrick De Haan, head of petroleum analysis at GasBuddy. Higher prices “are definitely going to translate into more expensive goods,” he said, as those higher fuel costs will be passed on to consumers. “Especially at the grocery store, hardware store, wherever you shop.”

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

The push of diesel

The price hike follows growing demand as economies around the world get back to business. This, in turn, pushed stocks to historic lows. Products like diesel, fuel oil, and jet fuel are known as “middle distillates” because they are made from the middle of the boiling range when petroleum is turned into products.

Distillate inventories in the United States are now at their lowest in more than a decade. The decision is even more extreme on the East Coast, where inventories are at their lowest since 1996. Diesel and jet fuel at New York Harbor are now trading well above $200 a barrel, according to UBS.

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

“[T]Tightening global supply will be exacerbated by the EU’s proposal to ban imports of Russian oil,” he said. “The ban, if approved, will have an outsized impact on product markets and in particular on diesel…. out of fuel.”

Energy consultancy Rystad echoed the point, saying the loss of Russian refined products will worsen diesel shortages in Europe.

Refiners cannot simply increase production to meet growing demand, and utilization rates are already over 90%. In the United States, refining capacity has declined in recent years. The largest refining complex on the East Coast – Philadelphia Energy Solutions – closed following a fire in June 2019.

Several refiners are currently being reconfigured to produce biofuel, which has also reduced their capacity.

Some refiners are also undergoing routine maintenance checks that were overdue following the pandemic. These facilities are usually running full blast – 24 hours a day, seven days a week – and so at some point the machines need to be checked.

The East Coast relies heavily on other parts of the country for refined products, De Haan said. Today, Europe is competing for these same fuels by turning away from Russia.

Rates ‘not moored’

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

In other words, although high prices at the pump may deter consumers, if a business needs to move goods from point A to point B, it will pay those higher prices.

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

“It’s become untethered, unmoored, a bit unbalanced. These are prices we’re not used to seeing,” he said, adding that there are big price differences at across the United States.

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

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

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

Rising diesel prices mean higher profit margins for refiners, who now have an incentive to do as much as possible. At some point, this could lead to a tighter gasoline market, driving up the high prices consumers are already seeing at the pumps.

In the meantime, consumers can expect the prices of goods to continue to climb.

“It’s going to be a double whammy for consumers in the weeks and months to come, as these diesel prices will affect the cost of goods – another element of inflation that will hit consumers,” De Haan said. from GasBuddy, adding that the full impact of the recent price spike has yet to be felt.