The U.S. is facing a diesel crisis as demand surges ahead of winter — with just 25 days of supply remaining, according to the Energy Information Administration.
Brian Dies, director of the National Economic Council, told Bloomberg TV that diesel inventories are “unacceptably low” and that “all options are on the table” to increase supply and lower prices.
However, even as reserves continue to drain, the Biden administration appears to have very few viable options left for long-term relief.
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What causes the crunch?
Unlike gas and jet fuel, diesel demand recovered from the pandemic at a much faster pace. Diesel is used to produce electricity for transportation of goods as well as construction, agricultural and military vehicles and equipment.
In 2021, the U.S. 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 high demand for this dirty fuel, traders are paying more for quick delivery than in the long-term and they expect prices to fall in the future – a “market structure known as backwardation”. This also means that it is more profitable for suppliers to sell now.
The market typically goes into “contango” — the opposite of backwardation, where demand is low and suppliers build inventory in anticipation of higher future prices — in the summer. However, strong domestic and international demand, declining domestic refining capacity and restrictions on Russian petroleum imports have kept the diesel market tight throughout the year.
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New England’s reserves are depleted to less than a third of their normal levels for this time of year, which is worrisome because those states rely on the fuel for heating more than other parts of the country.
The national average price for diesel as of Oct. 24 is $5.34 per gallon — $1.63 higher than last year.
What is the government’s alternative?
If diesel inventories continue to decline without government intervention, the impact on freight costs could further fuel inflation.
Deese adds that the Fed has some tools to shore up diesel supplies, such as the Northeast Home Heating Oil Reserve, which holds 1 million barrels of diesel in case of supply disruptions.
He said, ‘We have looked carefully at the preparations to be deployed when necessary.
But the Washington Post reports that demand for diesel is so high that if a million barrels of diesel were shipped from Northeast storage, it would run out in less than six hours.
The Biden administration also recently announced it would tap the country’s emergency oil reserves to deal with rising gas prices, despite concerns over long-term effectiveness.
Even White House officials have not ruled out a fuel export ban outright, but the American Petroleum Institute and American fuel and petrochemical producers sent a joint letter in early October expressing their concerns.
“Banning or limiting exports of refined products would reduce inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. allies in wartime,” the group wrote.
Setting minimum inventory levels can also affect the number of exports sent abroad. And even if domestic supply sees some relief, it could push up prices in the rest of the world.
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