What’s causing the crunch?
Unlike gas and jet fuel, demand for diesel recovered at a much faster pace from the pandemic. Diesel is used for transporting goods as well as powering construction, farming and military vehicles and equipment.
In 2021, the U.S. transportation sector alone consumed 46.82 billion gallons, or 1.11 billion barrels of distillate fuel (essentially diesel fuel) — at an average of about 128 million gallons a day.
With higher demand for this dirty fuel, traders are paying more for prompt deliveries than longer-term ones and they expect prices to drop in the future — a downward market structure known as “backwardation.” This also means it’s more profitable for suppliers to sell now.
The market usually moves into “contango” — the opposite of backwardation, where demand is lower and suppliers build up inventory with the expectation of higher future prices — in the summer. However, strong domestic and international demand, shrinking domestic refining capacity and sanctions on Russian petroleum imports have kept the diesel market tight throughout the year.
New England’s stockpiles have been depleted to less than a third of its usual levels for this time of year, which is concerning since those states rely on fuel for heating more than other parts of the country.
The national average price of diesel as of Oct. 24 is at $5.34 a gallon — $1.63 more than last year.
What are the government’s options?
If diesel inventory continues to run down without the government intervening, the impact on transportation costs for goods could drive inflation up even further.
Deese adds that the Fed has some tools to bolster diesel supply, like the Northeast Home Heating Oil Reserve, which houses one million barrels of diesel in case of a disruption in supplies.
“We have looked very carefully at being prepared to deploy as and when necessary,” he said.
Experts have also pointed out that the current 25.8 days worth of diesel only represents what's in storage — and doesn't factor in the amount of distillate fuel being produced in the U.S. or imported here. Which means the country isn't guaranteed to run out of diesel within a month.
But The Washington Post reports that diesel demand is so high, that if a million barrels of diesel were delivered from the Northeast reserves, they would be depleted in less than six hours.
The Biden administration also recently announced it would be tapping into the country’s emergency oil reserves to counter rising gas prices, despite concerns over the long-term efficacy.
White House officials haven’t completely ruled out fuel export restrictions either, but the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers sent out a joint letter expressing their concerns in early October.
"Banning or limiting the export of refined products would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices and alienate U.S. allies during a time of war,” the group wrote.
Setting minimum inventory levels could affect the number of exports being sent out to foreign countries as well. And even if domestic supply sees some relief, this could push up prices around the rest of the world.
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