Diesel in short supply as prices rise, here what that implies for inflation

Due to the fuel’s critical role in the American and global economies, diesel costs are rising, leading to inflationary headwinds. Diesel fuels tankers, trains, and trucks. Agriculture, manufacturing, metals, and mining are all businesses that use the fuel.

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

To put it another way, the effects will be felt throughout the economy.

Prices have risen in response to increased demand as economies around the world get back to work. As a result, inventories have dropped to historic lows. Middle distillates are products made from the middle of the boiling range when oil is transformed into goods, such as diesel, heating oil, and jet fuel.

Distillate inventories in the United States are at their lowest point in almost a decade. On the East Coast, where stockpiles are at their lowest since 1996, the trend is even more dramatic. According to UBS, diesel and jet fuel in New York harbour are now trading at much above $200 per barrel.

The European Union’s shift away from Russian energy is hastening the price increase. According to Stephen Brennock of brokerage PVM, the EU imports roughly 700,000 barrels of fuel each day from Russia.

″[T]he tightness in global supply will be exacerbated by the EU’s proposal to ban Russian oil imports,” he said.  “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.”

The energy firm Rystad agreed, stating that the loss of Russian refined goods will exacerbate fuel shortages in Europe.

Refineries can’t just increase output to meet rising demand, and utilisation rates are already far above 90%. Refining capacity in the United States has reduced in recent years. Philadelphia Energy Solutions, the East Coast’s largest refining complex, was forced to close in June 2019 due to a fire.

Several refineries are now being modified to create biofuel, reducing capacity.

Following the outbreak, some refineries are also getting routine maintenance assessments that were long overdue. Because these facilities normally operate 24 hours a day, seven days a week, the machinery must be inspected at some time.

According to De Haan, the East Coast is strongly reliant on other parts of the country for refined products. Now, as Europe moves away from Russia, it is vying for the same fuels.

“The cure for high prices is high prices,” as the saying goes in commodities markets. This time, though, that may not be the case. Distillate demand is less elastic than gasoline demand, according to UBS.

In other words, while high gas costs may deter consumers, a company that needs to transport goods from point A to point B will pay those higher rates.

According to Tom Kloza, head of global energy analysis at OPIS, a barrel of diesel used to sell for $10 more than a barrel of crude oil. That disparity, known as the crack spread, has now reached a new high of more than $70.

“It’s become untethered, unmoored, a little bit unhinged. These are prices we’re not used to seeing,” he said, adding that there are large price differences across the U.S.

According to Kloza, diesel costs in New York Harbor are currently approximately $5 per gallon, while jet fuel prices, which typically track diesel prices, are roughly $6.72. This works out to almost $282 per barrel.

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

Diesel costs at the pump are also rising. According to AAA, the national average for a gallon hit a new high of $5.51 on Friday, after setting a new high every day for the previous week.

Bigger diesel prices mean higher profit margins for refiners, who are now motivated to make as much money as possible. At some point, this could cause a shortage of gasoline, driving up the already high costs consumers are paying at the pump.

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

“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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