Record diesel prices, tight supplies could be the next hit to the US economy

Record diesel prices, tight supplies could be the next hit to the US economy

Even if you’ve never bought a gallon of diesel in your life, like most US drivers have, high diesel prices can hit your wallet – and the US economy – in a myriad of ways.

“The first impact of high diesel prices on the economy is that shipping becomes more expensive,” said Tom Kloza, global head of energy analysis at OPIS, which collects gas price data for AAA. “The second way is possible disruptions in the supply chain. None of that is good.”

Leading energy economist Phil Verleger fears that tight supply could push the average US diesel price to $10 a gallon by the end of the summer, from its current record average price of $5.56, according to AAA. Such high diesel prices could slow the US economy, he said.

“We had never seen anything like this before the invasion of Ukraine,” said Verleger. “The market is completely distorted. And we will likely see much slower economic activity as a result.”

Almost everything you buy will eventually be shipped on a diesel-powered truck. Hauliers charge their customers a fuel surcharge when prices rise, increasing the cost of everything they deliver. Entire supply chains can be paralyzed when trucks don’t have the fuel they need to run.
It is also vital for use in agriculture. Higher diesel Prices could force farmers to limit plantings or fertilization anyway scarce food and driving Increase food prices beyond the additional cost of transportation.

“A lot of truckers just won’t be able to operate,” Verleger said. “If you’re a farmer, you might have to leave a few acres fallow or you won’t fertilize as much. The macroeconomists do not understand this. It will come back and haunt us all.”

The current national diesel per gallon average is up more than 10% in the last month and is 77% higher than a year ago. Prices in the Northeast are all well over $6 a gallon, and half a dozen New England states and New York have more than doubled in the last year.

For comparison, the national average price of regular gasoline is also at a record high at $4.42 a gallon, up a little less than 50% over the same period.

Why diesel supplies are tight and prices are sky high

The reasons for the shortages are varied, but sanctions and reduced supply of Russian oil due to the invasion of Ukraine have played a major role.

Although very little Russian crude oil or diesel entered the US market before the war, Europe depends on it. Around half of all passenger cars in Europe run on diesel, along with trucks and freight trains. (Less than 5% of US passenger cars run on diesel.)

The average price of diesel has risen to $7.27-$8.95 a gallon in western European countries, and it’s not much cheaper in most eastern European countries.

These high prices have led to a huge increase in diesel exports to Europe from US and Canadian refiners, which would normally supply US truck stops and trucking companies. According to the US Energy Information Administration, US diesel exports to Europe have increased by 36% since early April compared to the same period last year.

Oil refineries make as much diesel and similarly expensive aviation fuel as they can with the oil they have, driving up the price of gasoline. But there is less refining capacity in the US and Canada today than before the pandemic, as some refineries have closed permanently and others are transitioning to refining renewable fuels rather than crude oil.

Why US gas prices are at record highs and why they will stay high for a long time

Diesel futures prices are more than $1 a gallon below the current spot price, which could give hope that prices could be trending lower in the coming months. But that has also discouraged diesel dealers and trucking companies from buying too much on the spot market. And Verleger said the current price of diesel means some companies cannot afford to buy as much stock as they have in the past because their credit lines are limited.

All these factors mean that the supply of diesel is very tight, especially in the North East, where said the EIA Inventories are at a record low based on data going back to 1990. Inventories are down 36% since the week of February 25, when Russia invaded Ukraine, and are almost 50% down from a year ago.

Autohof operators say they are making efforts to meet their customers’ diesel needs.

Brad Jenkins, senior vice president of supply and distribution at the Pilot Company, which operates more than 750 locations in the US and Canada, said that while diesel supplies are adequate in much of the country, In the eastern federal states there are “extremely low” inventories. In addition, he said refining problems are causing bottlenecks in the St. Louis and Indianapolis markets, and that Virginia and Georgia are also experiencing “scarce availability.”

Love’s Travel Stops, a chain of more than 500 truck stops nationwide, said there have been “minimal diesel outages” during off-peak hours at its East Coast locations and has “no plans to curb diesel purchases” at this time.

So far, the diesel shortage has taken the form of sky-high prices, not widespread outages or curbs on purchases, Kloza said. “But hang in there,” he warned.

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