Diesel Shortage Threatens to Boost Global Inflation and Undercut Growth

The price of diesel fuel, which is used to power trucks, fuel machinery, and heat homes, has surged 50% this year.  Diesel prices threaten to move even higher, which may boost global inflation and undercut economic growth.  According to Rice University’s Baker Institute of Public Policy, the surging cost of diesel in the U.S. alone will mean a $100 billion hit to the economy.

Stockpiles of diesel and heating oil (HOZ22) in the U.S. are at their lowest point for this time of year in data going back 40 years.  Also, stockpiles of diesel will fall to a 12-year low in March in Northwest Europe, with the European Union set to cut off seaborne deliveries of Russian fuel in early February, according to Wood Mackenzie.  Europe imports roughly 500 million barrels a year by ship, with around half of that typically originating from Russian ports, according to Vortexa Ltd.

The price of diesel fuel in the spot market of New York harbor, a key benchmark, is up nearly 50% this year.  The price reached $4.90 a gallon earlier this month, about double year-ago levels. Also, the spreads for diesel are widening against crude oil, a sign of tight refining capacity.  In addition, diesel prices in relation to supplies that are for later delivery have widened, which underscores the strong current demand for the fuel. 

Supplies of diesel have been shrinking partly due to tighter global crude supplies and also the pandemic after lockdowns destroyed demand and forced refiners to close some of their least profitable plants.  Since 2020, U.S. refining capacity has shrunk by more than 1 million barrels per day (bpd).  Moreover, supplies of diesel in Europe could tighten even more dramatically with Europe’s pivot away from Russian supplies. 

Prolonged diesel shortages throughout the U.S. are improbable since the U.S. is a net exporter of diesel. U.S.-based diesel buyers can in theory simply offer to pay more than exporters for diesel, thus keeping the diesel supply in the U.S.

However, shortages may happen on the East Coast, where tight pipeline capacity creates supply bottlenecks. A 100-year-old shipping law, known as the Jones Act, also complicates the movement of domestic fuel and encourages producers on the Gulf Coast to favor diesel exports over supplying the domestic market.

Energy Aspects Ltd said the diesel crunch has been “damaging to the global economy, and resolving the tightness ultimately requires new refining capacity.”  However, that would be a years-long project with doubtful economics since regulations in the U.S. and Europe are slowly phasing out petroleum-based vehicles.  That means that any new refining capacity might have a limited future and a chance of becoming a stranded asset, just like many petroleum reserves around the world may become.

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