Diesel fuel is in short supply as prices rise – this is what it means for inflation

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

Frederic J Brown | AFP | Getty Images

Diesel prices are rising, contributing to inflationary headwinds due to the vital role of fuel in the American 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 oil analysis at GasBuddy. The higher prices “will certainly translate into more expensive goods,” he said, as these higher fuel costs will be passed on to consumers. “Especially at the supermarket, at the hardware store, wherever you shop.”

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

The surge of Diesel

The jump in prices comes in the wake of rising demand as economies around the world get back to work. This, in turn, has pushed inventories to all-time lows. Products such as diesel, heating oil and jet fuel are known as “middle distillates”, as they are made from the middle of the boiling range when the oil is made into products.

US spirits stocks are now at their lowest for over ten years. The move is even more extreme on the East Coast, where inventories are at their lowest since 1996. According to UBS, New York Harbor diesel and jet fuel are trading well over $ 200 a barrel.

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

“[T]The meager global supply will be exacerbated by the EU’s proposal to ban imports of Russian oil, “he said.” The ban, if approved, will have a huge impact on product markets and diesel in particular … Now there is growing anxiety that Europe may run out of diesel “.

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

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

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

Some refineries are also subject to routine maintenance checks that have expired following the pandemic. These facilities typically sell out at most – 24 hours a day, seven days a week – and so at some point the machinery needs to be checked.

The east coast relies heavily on other areas of the country for fine products, De Haan said. Now, Europe is competing for these same fuels as it moves away from Russia.

“Unmoored” prices.

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

In other words, while high prices at the pump might discourage consumers, if a business needs to get 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 past years a barrel of diesel was typically sold for $ 10 more than the price of crude oil. Today, that spread, known as the crack spread, rose to a record high above $ 70.

“It has become unconstrained, not moored, a little off-balance. These are prices we’re not used to seeing,” he said, adding that there are large price differences in the US.

Kloza said diesel in the Port of New York is now trading at around $ 5 per gallon, while jet fuel prices at the port, which usually mirror diesel prices, are around $ 6.72. This equates to around $ 282 per barrel.

“These are numbers that are not just off the scale. They are out of the walls, out of the building and possibly out of the solar system,” he said.

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

Rising diesel prices translate into higher profit margins for refineries, which now have an incentive to do as much as possible. At some point, this could lead to a strain in the gasoline market, driving up the high prices that consumers already see at the pump.

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

“It will be a double blow to consumers in the weeks and months to come, as these diesel prices come down to 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 price hike has yet to be felt.