US President Joe Biden is facing a very ugly dilemma ahead of next month’s midterm elections. Despite allocating all resources towards bringing down gasoline prices just long enough to get Democrats elected into Congress, stockpiles of diesel— the fuel that powers America’s workhorse— are still exceptionally low thanks to the ban on Russian energy imports. Biden’s hands will soon be tied because merely draining the SPR will not address the inherent problem, which is lack of domestic diesel production.
Unbeknownst to most, America’s diesel market has been in dire trouble for much of 2022. The alarmingly low inventories and subsequent price surges are the result of a number of factors, beginning with the faster-than-expected rebound in domestic demand. American demand for diesel has recovered substantially faster than gasoline and jet-fuel counterparts from the pandemic, while foreign demand for US diesel exports surged to unusually high levels during the same time.
Prior to the conflict in Ukraine, the US was importing a substantial amount of fuel oil from Russia, which was refined into diesel in the Gulf of Mexico. However, such trade came to an abrupt stop after the White House sanctioned all imports of Russian petroleum products. That caused inventories to plummet in April and May, sending prices soaring to record-highs. However, the crisis took a turn for the worse when the US failed to utilize the spring and summer low-demand seasons to rebuild distilate fuel supplies before the winter months.
Data from the Energy Information Administration showed that diesel supplies sat at just 106 million barrels as of October 21— the lowest for the seasonal period since 1982. With respect to consumption, stockpiles reached a record-low of 25 days demand for the month of October; compare that to July data, which showed reserves were at 30 days, the lowest monthly average on records dating back to 1945. Fuel distributor Mansfield Energy imposed emergency measures earlier this week to address the precarious diesel shortage, requesting that customers give at least 72 hours notice for fuel orders so carriers have adequate time to find supplies.
“In many areas, actual fuel prices are currently 30-80 cents higher than the posted market average because supply is tight,” Mansfield said in a statement. With low-cost suppliers running dangerously low on diesel supplies, distributers have no choice but to seek fuel from more expensive sources, creating an extraordinary wide spread in pricing. Shortly before Mansfield’s warning, US National Economic Council director Brian Deese warned that US diesel supplies were “unacceptably low,” and that the Biden administration is frantically mulling over “all options” to bring down fuel prices.
However, Deese noted that it remains unclear whether those options will actually deliver relief for the long term. According to Bloomberg, Deese suggested the White House may tap into the Northeast Home Heating Oil Reserve to help offset shortages, but given that diesel demand in the Northeast is so high, supplies would be depleted in under six hours. Joe Biden is also mulling restricting or outright banning refined fuel exports, but experts are warning that such a plan would end up backfiring.
“Banning or limiting the export of refined products would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate US allies during a time of war,” the American Petroleum Institute wrote in a letter to US Secretary of Energy Jennifer Granholm. The diesel shortages also threaten to send surging inflation even higher throughout the economy should there be an unexpected refinery breakdown, since vehicles such as 18-wheelers transport about 70% of all US freight tonnage.
Is the US doomed?
Information for this briefing was found via Bloomberg and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.