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Record diesel prices and tight supply could be the next blow to the US economy

Even if you’ve never bought a gallon of diesel in your life, as most U.S. drivers have, high diesel prices can hurt your wallet — and the U.S. economy — in a number of ways.

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

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

“Until the invasion of Ukraine, we had never seen anything like this,” Verleger said. “The market is totally distorted. And we’ll probably see much slower economic activity as a result.”

Virtually everything you buy is shipped at some point on a truck that runs on diesel. Trucking companies charge their customers a fuel surcharge when prices rise, which increases the cost of everything they deliver. Entire supply chains can be crippled if trucks don’t have the fuel they need to operate.
It is also essential for use in agriculture. Superior Diesel prices could force farmers to reduce plantings or fertilization, limiting the already limited food supply and driving increase food prices beyond the additional cost of transport.

“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 not fertilize as much. Macroeconomists don’t understand that. It’s going to come back and haunt us all.”

The current national average for a gallon of diesel has jumped more than 10% in the past month and is 77% higher than a year ago. Prices in the Northeast are all well over $6 a gallon, and in half a dozen New England states as well as New York, prices have more than doubled in the past year. .

By comparison, the national average price for regular gasoline, also at an all-time high, is $4.42 per gallon, up just under 50% over the same period.

Why diesel supplies are low and prices are skyrocketing

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

Although very little Russian crude oil or diesel made it to the US market before the war, Europe depends on it. About half of the cars in Europe run on diesel, in addition to trucks and freight trains. (Less than 5% of US passenger cars run on diesel.)

The average price of diesel has climbed between $7.27 and $8.95 per gallon in Western European countries, and it’s not much cheaper in most Eastern European countries.

These high prices caused a huge increase in diesel exports to Europe from US and Canadian refineries that would normally supply American truck stops and trucking companies. US diesel exports to Europe since early April are up 36% from the same period a year ago, according to the US Energy Information Administration.

Oil refineries make as much expensive diesel and jet fuel as possible with the oil they have, driving up the price of gasoline. But there is less refining capacity in the United States and Canada today than before the pandemic, as some refineries have closed permanently and others are converted to refine renewable fuels rather than crude oil.

Diesel futures prices are more than a dollar a gallon lower than the current spot price, which could give hope that prices could come down in the coming months. But it also discouraged diesel retailers and trucking companies from buying too much on the spot market. And Verleger said the current price of diesel means some companies can’t afford to buy as much supply as in the past due to limits on their credit lines.

All of these factors mean that diesel supplies are very tight, particularly in the Northeast, where the EIA said stocks are at an all-time high based on data dating back to 1990. Supplies have fallen 36% since the week of February 25, when Russia invaded Ukraine, and are nearly 50% below where they were from a year ago.

Truck stop operators say they are scrambling to supply the diesel their customers need.

Brad Jenkins, senior vice president of supply and distribution for Pilot Company, which operates more than 750 sites in the United States and Canada, said that while diesel inventories are adequate in much of the country , there are “extremely low” stocks in the eastern states. Additionally, he said refining issues are straining markets in St. Louis and Indianapolis, and Virginia and Georgia are also seeing “limited availability.”

Love’s Travel Stops, a chain of more than 500 truck stops across the country, said it had “minimal outages” of diesel during low traffic hours on the East Coast and currently has “no no plan to restrict diesel purchases”.

The diesel shortage has so far manifested itself in sky-high prices, not widespread outages or purchase limits, Kloza said. “But stay tuned,” he warned.

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