Seriously low diesel supply threatens to worsen inflation

A seriously low U.S. and global diesel supply is likely to drive up fuel costs and worsen inflation, raising concerns as the cold weather months approach.  

“The national numbers for distillates are pretty tight,” said Patrick De Haan, head of petroleum analysis at GasBuddy.  

“It’s uncomfortable. That doesn’t mean that you’re going to see widespread outages, but if we get a bout of cold weather, things could be challenging.” 

Analysts say that a confluence of factors, long bubbling beneath the surface, are now coming to a head as colder temperatures bring more seasonal demand for diesel, a fuel that powers trucks and buses and is also used in heating.  

“This is the start of heating oil season. This is when demand really starts picking up as we enter the winter months,” said Debnil Chowdhury, the head of North and Latin American refining and marketing research at S&P Global Commodity Insights. 

The country has about 25 days worth of diesel left, a level that’s considered very low. De Haan said that normally, the country’s supply is closer to the “low to mid 30s” in terms of the number of days remaining.  

Much of the country’s attention has been focused on gasoline prices, which have fluctuated throughout the year. They have generally fallen in recent months following a peak of $5 per gallon in June.  

Gasoline and diesel are products made from oil, and oil prices soared after Russia’s invasion of Ukraine.  

A confluence of factors has also strained diesel markets.  

These factors include reduced refining capacity due to the pandemic, increased demand amid COVID-19 recovery and Chinese export quotas, Chowdhury said. 

“Diesel demand came back a lot faster than other products. There are refineries that shut down across the globe so the ability to supply was hindered,” he said. “And then finally, China, which is a larger diesel exporter … wasn’t able to export.”  

“All of those things combined led the world to really have low inventory,” he added, also mentioning a recent increase in demand for jet fuel, which may have to compete with diesel at the refinery.  

He added that the response to Russia’s invasion of Ukraine has also played a role in rerouting trade of the fuel as many European countries avoid Russian products, creating market inefficiencies.  

In addition to the long-term refinery closures, De Haan also highlighted some recent outages in the Midwest.  

“The refinery fire in Northwest Indiana and now the … shutdown of BP’s Toledo refinery, those are refineries that produce a lot of diesel fuel because they process a lot of heavy Canadian oil, so that is not helping the situation at all,” he said. 

Analysts say that this crunch is expected to worsen persistently high inflation not seen in the last four decades. High diesel prices may drive up shipping and heating costs.  

“The rising costs of diesel fuel therefore impacts everybody, as diesel prices affect direct manufacturing, transportation and heating costs. As diesel prices rise, so do the costs of goods which in general are passed onto consumers,” said Suzanne Danforth, an analyst with Wood Mackenzie, in a written statement to The Hill.  

Danforth added that this could also help push the country into recession, as rising prices could curb demand for products.  

“Higher diesel prices have the potential to create even stronger inflationary pressures especially if the current price spike is sustained, adding significant downside risk to demand and increasing the chances of a global recession,” she said.  

However, she also noted that if the economy slows, that could also help bring diesel prices down. 

But the impacts of heating costs may not impact Americans evenly. Heating oil is most commonly used in the Northeast, and that region may be hit hardest by large utility bills.  

The Biden administration for its part has sought to put pressure on industry to increase the supply of diesel.  

In a recent interview with Bloomberg, National Economic Council Director Brian Deese called the inventory levels “unacceptably low” and called on industry to build up its inventory.  

Energy Secretary Jennifer Granholm called on industry to cut back its exports of “refined products” which include diesel and gasoline, in recent weeks, arguing that the supply is needed stateside.  

The industry, however, has pushed back, arguing that exports are important for maintaining global supplies, especially amid disruptions caused by the conflict in Ukraine.  

“Reducing global supply by limiting U.S. exports to build region-specific inventory will only aggravate the global supply shortfall,” ExxonMobil’s CEO reportedly wrote to the Biden administration last month.  

Overall, Chowdhury said, there’s limited options to fix the problem. 

“This is a difficult crisis to get out of,” he said.