The US is facing a diesel crunch just as demand increases ahead of winter – with only 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 “all options are on the table” to stabilize supply and reduce prices.
However, even as stockpiles have been depleted, the Biden administration appears to be left with few sustainable options for long-term relief.
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What causes the crunch?
Unlike gas and jet fuel, demand for diesel has recovered at a faster pace from the pandemic. Diesel is used for transporting goods as well as powering construction, agriculture and military vehicles and equipment.
In 2021, the US transportation sector alone will consume 46.82 billion gallons, or 1.11 billion barrels of distillate fuel (actually diesel fuel) – an average of about 128 million gallons a day.
With higher demand for this dirty fuel, traders pay more for immediate deliveries than for longer terms and they expect prices to drop in the future – a lower market structure that known as “backwardation.” It also means more profit for suppliers to sell now.
The market usually moves into “contango” – the opposite of backwardation, where demand is lower and suppliers build up inventory with the expectation of higher prices in the future – in the summer. However, strong domestic and international demand, reduced domestic refining capacity and sanctions on Russian petroleum imports kept the diesel market tight throughout the year.
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Stockpiles in New England are down to less than a third of their usual levels for this time of year, which is worrying because the state relies on the fuel for heating more than other parts of the country.
The national average diesel price on October 24 was $5.34 per gallon — $1.63 more than last year.
What are the government’s options?
If diesel inventory continues to decline without government intervention, the impact on transportation costs for merchandise could further increase inflation.
Deese added that the Fed has some tools to stabilize diesel supply, such as the Northeast Home Heating Oil Reserve, which has a million barrels of diesel in case of supply disruptions.
“We’re looking very closely at being ready to deploy if needed,” he said.
But The Washington Post reported that the demand for diesel is so high, that if one million barrels of diesel were delivered from the Northeast reserves, it would be used up in less than six hours.
The Biden administration also recently announced it would tap the nation’s emergency oil reserves to counter rising gas prices, despite concerns over long-term effectiveness.
White House officials have also not completely ruled out fuel export restrictions, but the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers sent a joint letter expressing their concerns in early October. .
“Banning or limiting the export of refined products is likely to reduce inventory levels, reduce domestic refining capacity, increase fuel price pressure on consumers and alienate US allies during of war,” the group wrote.
Setting minimum inventory levels can affect the amount of exports sent to foreign countries as well. And even if domestic supply sees some relief, it could push up prices around the world.
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This article provides information only and should not be considered advice. It is provided without warranty of any kind.
