A diesel crunch is threatening the US just as demand is rising ahead of winter – with just 25 days of supply left, according to the Energy Information Administration.
National Economic Council Director Brian Deese told Bloomberg TV that diesel inventories are “unacceptably low” and that “all options are on the table” to boost supply and reduce prices.
However, even as the stockpiles are drained, the Biden administration appears to have few sustainable options left for long-term relief.
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What is causing the crisis?
Unlike gas and jet fuel, demand for diesel recovered at a much faster pace from the pandemic. Diesel is used to transport goods and to drive construction, farming and military vehicles and equipment.
In 2021, the US transportation sector alone consumed 46.82 billion gallons, or 1.11 billion barrels of distillate fuel (essentially diesel fuel) — an average of about 128 million gallons per day.
With higher demand for this dirty fuel, traders are paying more for prompt deliveries than longer-term ones and expect prices to fall in the future – a downward market structure known as a “reverse”. This also means that it is now more profitable for suppliers to sell.
The market typically shifts into “contango” — the opposite, where demand is lower and suppliers build inventory in anticipation of higher prices in the future — during 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.
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New England’s stockpiles have been depleted to less than a third of their normal levels for this time of year, which is a concern because those states rely on the fuel for heating more than other parts of the country.
The national average diesel price as of October 24 is $5.34 a gallon – $1.63 more than last year.
What are the government’s options?
If diesel inventory continues to deteriorate without government intervention, the impact on goods transport costs could raise inflation even more.
Deese says the Fed has several tools to shore up diesel supply, such as the Northeast Domestic Heating Oil Reserve, which holds a million barrels of diesel in case of supply disruptions.
“We have looked very carefully at being ready to deploy as needed,” he said.
But the Washington Post reports that demand for diesel is so high that if a million barrels of diesel were delivered from the Northeast’s reserves, they would be consumed in less than six hours.
The Biden administration also recently announced it would tap the country’s emergency oil reserves to combat rising gas prices, despite concerns about long-term effectiveness.
White House officials have not completely ruled out fuel export restrictions either, but the American Petroleum Institute and the Fuel and Petrochemical Manufacturers of America sent a joint letter expressing their concerns in early October.
“Banning or restricting the export of refined products would likely reduce inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices and alienate US wartime allies,” the group wrote.
It may also affect the number of exports sent to foreign countries by setting minimum inventory levels. And even if domestic supply sees some relief, this could push prices up around the world.
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