Diesel prices have climbed so far out of normal territory that the unglamorous, steadfast fuel of cargo-carrying vehicles has become a top driving concern for every citizen in the country, and perhaps the world. What’s the top political and economic issue concerning U.S. voters now? Inflation. What’s driving inflation? In large part, diesel prices. What’s driving the economy as states and localities look to spend a record $1.2 trillion on infrastructure projects? That’s right, diesel.
With so much emphasis on taming inflation and hammering out supply chain kinks, politicians are on the move. The House last week passed the “Consumer Fuel Price Gouging Prevention Act,” which would among other provisions grant Biden the power to declare an “energy emergency proclamation,” and make it illegal to sell consumer fuels at an “excessive and exploitative price during on energy emergency” while also tasking the Federal Trade Commission and state attorneys general to go after fuel wholesalers and retailers for price gouging.
On Monday, a CNN report stated Biden might release 1 million barrels of diesel oil from the Northeast Home Heating Oil Reserve, part of the Strategic Petroleum Reserve his administration already tapped in April on an ongoing basis.
But despite oil and gas companies making record profits (as have some trucking fleets serving them, as recently reported in Overdrive's "Niche Hauls" series on oilfield trucking), and the government attempting to increase supply, the issues causing record diesel prices don’t currently present themselves as nails that can be hammered in with legislative or executive action.
Why is diesel so expensive now?
“In 2022, both low global distillate fuel inventories and high crude oil prices have been contributing to higher global distillate prices,” The U.S. Energy Information Administration wrote in a blog post on Monday. But crude prices, as of Tuesday, sat at around $110 per barrel, a sharp increase over the last few years but noticeably lower than the $150-and-more per-barrel rate seen during 2008 as the "Great Recession" era really got going.
Politicians have been quick to point to corporate greed as a driver of record diesel prices and vanishing inventory, but experts say that producers of diesel fuel have never been more incentivized to produce the fuel, and the real problem lies with a battered supply chain and an industry on the ropes.
The EIA explains the recent diesel shortage in the Northeast in part by noting that diesel refining capacity there fell 100,000 barrels per day with the 2019 permanent closure of the Philadelphia Energy Solutions refinery following an explosion there.
Imports of distillates increased by nearly 90K daily barrels between 2019 and 2021 to well more than 200,000 daily barrels, almost offsetting the PES refinery's loss. Yet "in the seven most recent weeks, distillate imports have decreased to an average of 76,000" barrels per day, EIA said.
With pricing as high as it's ever been, an executive at a major truck stop said that, currently, refiners have “no reason not to produce as much diesel as they can."
After the House moved on the bill seeking to end fuel price gouging, Committee on Energy & Commerce Chair Rep. Frank Pallone pointed to “9,000 approved but unused drilling permits that could be used for production today” as evidence of corporations dragging their feet on the fuel crisis, but the truck-stop executive disputed that notion.
“Their whole premise is that someone’s always got to be the bad guy,” the executive said, explaining the oil industry has “serious limitations on labor” thanks to the pandemic and that the wells take a long time to ramp up and then quickly dry up, often the case with shale-fracking operations.
Further complicating matters, the war in Ukraine has turned Russia, one of the world’s great exporters of crude, into a pariah both with official sanctions and corporate caution.
“The East Coast is more reliant on imports from Canada, Russia, and the Netherlands,” said Tracy Shuchart, global energy and materials strategist at Hedge Fund Telemetry Geopolitics. “As late as February, imports from Russia counted for 20% of that crude, but the U.S. oil embargo dropped that to zero." Complicating matters, "refineries in the Netherlands get input feedstocks back from Russian refineries. Europe hasn’t declared an outright embargo on Russian feedstocks, but refiners are shunning them, further exacerbating the diesel shortage.”
In short, the issue here doesn’t boil down to pure greed. Oil companies could make more money by refining and selling more diesel, but even with unheard-of price incentives, they aren’t.
“It's an issue of refining capacity,” said Shuchart. “Refineries are operating around 90%, which is ridiculously good, but there are a lot of aging refineries and the industry has been demonized so much that there hasn't been added refinery capacity." A similar dynamic, she suggested, happens around new well production, where a dearth of investment hampers production. "Same with refineries, which go offline a lot. If you look at the EIA website, refinery outages are increasing year over year.”
In April, CEOs from BP America, Chevron and ExxonMobil testified before Congress on the rapidly rising fuel prices, where elected officials questioned their patriotism and accused them of “ripping off Americans” by spending money on stock buybacks rather than new wells. In October of 2021, those same CEOs faced a “Big Tobacco Moment” as House members accused them of “paying lip service to renewable energy and climate change measures while they're investing in fossil fuels and signing contracts well into the future.”
Will fuel prices keep going up?
With oil companies stuck between a rock and a hard place during an energy transition away from fossil fuels that of course still demands plenty of fossil fuels, and adverse geopolitical factors not disappearing anytime soon, it’s unclear when prices might go back down.
The truck-stop executive offered some advice to owner-ops or other trucking professionals paying at the pump as the Northeast reaches diesel price parity with California: “The world is changing and getting a lot more volatile. Volatility is ramping up, with polar vortexes one month and hurricanes the next, so be cognizant of the Northeast and get in and out further to where you can buy cheaper.”
From Shuchart’s perspective, the worst may be yet to come.
“Obviously the war in Ukraine is not going to help, and my theory is it's going to get worse,” she said. Backlogs in China with ports on lockdown will eventually unlock and "flood the U.S. import market and require a lot of trucks to truck stuff. That's going to happen during the summer high demand season, when I expect travel to pick up" among everyday consumers and businesspeople. "Hotels are doing extremely well, sometimes above pre-COVID levels, and it’s not even summer yet.”
Unfortunately for those hoping for some light at the end of the tunnel, jet fuel competes with diesel as a derivative of crude oil, so an uptick in foreign travel also casts doubt on whether or not diesel supplies can recover enough to chip away at high pricing.