Record High Diesel Prices Will Ripple Across The Economy

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Yves here. We’ve warned for some time that high energy prices will propagate through the prices of goods and services generally, just as they did in the 1970s oil shock. This is why what could have been transitory inflation (had the Administration also been competent in alleviating supply shortages, when we know that competence is seldom to be found inside the Beltway) is now looking very much baked in. We were also early to point out that was already under supply pressure even before Russian sanctions came into play.

So it’s useful to see someone take a stab at what the fallout might look like.

However, as we have stressed, interest rates are a poor tool for curbing commodities-driven inflation. Contrary to popular perception, energy prices had started falling in 1979, before Paul Volcker famously drove interest rates to the moon and backed off only because he was pushing banks like Citibank with a lot of Latin American debt to the brink. Warren Mosler argues that inflation would have substantially abated without Fed action, meaning the central bank could have made a later and less damaging intervention after the impact of cooling oil prices had cycled through the economy. But since Volcker was explicitly interested in breaking labor bargaining power, it’s highly unlikely the Volcker Fed would have acted on that opportunity even if they had seen it.

By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at OilPrice

  • Diesel prices have hit record highs due to very tight domestic inventories and a global supply shortage.
  • A combination of spiking demand as the world recovers from Covid and falling supply due to Russia’s invasion of Ukraine has hit diesel markets hard.
  • Not only are diesel prices at record highs, but they are also at their largest differential to gasoline in history.

The highest inflation in the U.S. in four decades is set to persist and even increase in the coming months as the price of diesel is at record highs amid very tight domestic inventories and a global shortage of supply.   Diesel is used in every part of the industrial activity and supply chain, from goods transportation to manufacturing and agriculture; it fuels America’s economy. Diesel prices have soared to record highs in recent months, adding further upward pressure on U.S. inflation figures. The exceptionally tight diesel market at home and abroad is unlikely to ease any time soon, considering the post-COVID demand from industry and for leisure and travel, as well as the reduced supply of diesel, other fuels, and crude oil from Russia following the invasion of Ukraine and the bans on Russian imports or self-sanctioning of buyers in the West to buy Russian energy goods.

“Inflation Is Much Too High”

The national average U.S. diesel prices were at a record $5.540 per gallon on Monday, per AAA data, more than $1.20 a gallon over the average gasoline price, and up from $3.111 at this time of the year in 2021.

“Not only are diesel prices at a record high, they are at their largest differential to gasoline on record, surpassing the 98-cent difference in 2008 and currently standing at a $1.20 per gallon premium. While motorists filling with gasoline have seen a slight rise in prices, diesel’s surge will be a double whammy as diesel prices will soon be passed along to retail channels, further pushing up the cost of goods,” Patrick De Haan, head of petroleum analysis at GasBuddy, said in a weekly commentary on Monday.

A week earlier, De Haan commented that “For now, the rising cost of diesel will surely be felt in the grocery store, hardware store or on your next flight as jet fuel prices accelerate, leading to a continued rise in inflation likely to ripple across the economy.”

The Fed is seeking to curb the rampant inflation, announcing last week the single largest interest rate hike in more than two decades, when it raised the key rate by 0.50 percentage point.

“Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Fed Chair Jerome Powell said at the press conference following the monetary policy decision.

“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Powell added.

In the Financial Stability Report published this week, the Fed noted that “inflation has been higher and more persistent than expected, even before the invasion of Ukraine, and uncertainty over the inflation outlook poses risks to financial conditions and economic activity.”

“Further adverse surprises in inflation and interest rates, particularly if accompanied by a decline in economic activity, could negatively affect the financial system,” the Fed warned, adding that this combination could weaken the finances of both households and businesses, “leading to an increase in delinquencies, bankruptcies, and other forms of financial distress.”

Diesel Price Surge “Maybe Out of the Solar System”  

As diesel prices impact every part of the economy, the fight against inflation becomes more complicated for monetary policymakers, as steeper interest rate hikes could lead to the deterioration of economic activity and household spending and, ultimately, recession.

However, there is no short-term cure to the record diesel prices in the United States. Demand is going up, while inventories are at multi-year lows and at a record low on the U.S. East Coast.

Distillate fuel inventories fell by 2.3 million barrels in the last week of April and are about 22% below the five-year average for this time of year, the EIA said in its latest weekly inventory report. At 105 million barrels, distillate inventories—which include diesel—are at their lowest since 2008. On the East Coast, there are at their lowest ever, as the refinery capacity in the region has halved over the past decade to just 818,000 barrels per day now.

So, instead of focusing on boosting the production of gasoline in the summer driving season, this year U.S. refiners could be looking to raise diesel and jet fuel runs, as the global market of distillates is very tight following the Russian war in Ukraine and supports high refinery margins for those products.

U.S. inventories are “very, very tight, especially tight for diesel,” Gary Simmons, Executive Vice President and Chief Commercial Officer at Valero Energy, said on the Q1 earnings call at the end of April.

Valero Energy saw its highest-ever March refining margins this year, led by diesel, Simmons added.

The global diesel crunch is expected to worsen if the EU reaches some kind of a compromise on banning Russian crude and oil product imports. This will keep diesel prices elevated, impacting every economic activity in the U.S. and elsewhere, and ultimately hitting consumers.

Currently, diesel at New York harbor is trading at around $5 per gallon, which is well above $200 per barrel, Tom Kloza, head of global energy research at OPIS, told CNBC’s Pippa Stevens.

“These are numbers that are not just off the charts. They’re off the walls, out of the building, and maybe out of the solar system,” Kloza told CNBC.

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35 comments

  1. DanB

    One of the ripples will be ambulances; some private ambulance companies in Pittsburgh in 2008, when diesel hit $5 a gallon, were on the verge of bankruptcy. School busses will also be disrupted; all sorts of “adaptations” to come.

    Reply
    1. Adam1

      I grew up in a small rural school district and one of the largest line items on the budget was transportation and the bulk of that was fuel. I knew kids who’s school bus ride was 45 minutes one way. Few rural districts are what we would call wealthy. This will bit them hard.

      Reply
  2. .human

    Not one word concerning home heating fuel. My cost has doubled! Is there no relief for fixed-income individuals? I have zero respect for current leadership and the quagmires they have plunged us into.

    And don’t get me started with the cost-of-living increase in my monthly SS payment that was more than offset by the increased medical coverage cost.

    Reply
    1. Ancient 1

      I am in the same situation. My SS payment now does not cover my basic expenses and my medical costs are increasing. This Administration has failed not only the over 65 age group but ordinary working people. Our future is bleak, but Biden’s War marches on. Look at the payments to Ukraine passed by Congress and signed into law yesterday. My future looks bleak as a lot of our people. So sad.

      Reply
  3. Colonel Smithers

    Thank you, Yves.

    In mid Buckinghamshire, I notice diesel running out quickly and pumps out of action for days.

    Farmers, who began sharing equipment some years ago, appear to be minimising the use of vehicles. This includes the aristocrat estates.

    This said, as these farms have been struggling with labour supply since 2017, activity has been scaling back since before the invasion and pandemic.

    Reply
    1. InThePines

      Thank you, Colonel.

      Labor shortages in agriculture here in the Rio Grande Valley in the last five or ten years have driven farmers into more hay production, for domestic and export dairy feed. Vegetables rely on minimally-paid migrant laborers, many of whom have found much better situations than 12 hour days in sweltering heat for $80-$120.

      The alfalfa fields can be cut up to five times each year with a swather, a rake, and a baler passing over every bit of the field in succession- drawn by tractors dating as far back as to the Carter administration in my neighbor’s Case. The local paper interviewed a farmer a few months back who howled about off-road dyed diesel at $4 a gallon. We’re pushing $6 now.

      It’s water that will run out first this year. Minimal snowpack in the mountains portends a halt to irrigation weeks before the solstice. Already the river is a braided stream. Maybe two cuts of hay unless there’s a great monsoon.

      The mountains above the real Las Vegas are charring as fires march back and forth. It’s been a month and still they’re massive and threatening. I believe our Mr. Moon Pie referred to the situation in Mora County a few days ago; many of the people there run cattle in alpine meadows and forested federal lands. Those herds won’t all be making it to Dalhart this year.

      As a sidenote, the executive quoted above is having trouble supplying the heavier distillate. Three days in a row now his company has delivered zero (0) gallons of the stuff to our dusty shores.

      Reply
      1. MichaelSF

        My mother lives in a small town on the Rio Grande about 20 miles south of Albuquerque and leases her 30-some acres to a guy who raises hay on it. She told me that the local water agency has told growers to not to bother to plant this year as they’ll not be able to supply enough water to them.

        Reply
    2. Ludus57

      Thanks to Yves, and thanks to you also, Colonel.
      Things are just as bad here in the urban areas of Lancashire.
      Ee! It’s grim up (“Oop”) North!

      Reply
  4. VietnamVet

    Diesel Fuel delivers the goods and food. It propels markets. Without it there is no economy, just bytes in the Ethernet, until electricity cuts out with too few working electricians and components on hand to repair the grid. Rising interest rates will acerbate the impact of shortages caused by the logistic failures and missing workers. There is no wage inflation. Self-serving managers are making it worse. Resource depletion, the Russia sanctions, Ukraine’s canceled wheat harvest, and the heat waves in India and North America’s Plains are unsolvable in the short term.

    The fundamental problem comes from the ruling Western ideology that only money has value. War, coronavirus pandemic, and shortages are shocks that allow for profiteering and privatization. The western system does not work anymore. It is incapable of rationing food or energy. It cannot even mandate wearing masks. Jimmy Carter’s Malaise has returned in spades but without a functional government to address them this time.

    The corporate-state simply does not care how many people die from a nuclear war, pestilence, or famine. They are worthless.

    Reply
  5. Chas

    There is a short term cure for high diesel prices. Stop the sanctions on Iranian, Venezuelan, and Russian oil. This story didn’t even mention the sanctions. We are led to believe that the cause of the problem is the Russian-Ukrainian war and the end of the pandemic. Venezuela and Iran produce heavy oil which is the best for making diesel. The diesel shortage in the USA is the direct result of official government foreign policy.

    Reply
    1. The Rev Kev

      Several weeks ago Biden asked Brazil’s state-run oil company Petrobras whether it could increase crude output. Short answer? Nah! Long answer-

      ‘Officials at Petrobras, formally Petroleo Brasileiro SA, said output levels were a function of business strategy rather than diplomacy and also that a significant short-term production boost would not be logistically possible, the sources said.’

      https://www.reuters.com/business/energy/exclusive-us-asked-brazils-petrobras-if-it-could-raise-oil-output-it-said-no-2022-05-10/

      Reply
    2. Alyosha

      The Biden admin has tried two out of three. POTUS must be shocked that these nations we’ve sanctioned in an attempt to destroy them aren’t particularly keen on saving the US from itself. I imagine WH conversations over take out Chinese about how ungrateful the Venezuelans and Iranians are and what might be done to punish them for their lack of support for the administration.

      Reply
  6. Doc

    I know it is painful, but less consumption of material crap will benefit all of us that live on Earth. The sooner we can get to a sustainable economy that doesn’t rely on oil and growth for its own sake, the better. I love that the countries you mentioned are putting the US in its place. We need to start acting like a small country and spend of our “wealth” at home. Projecting power is just that, a projection and the rest of world sees how the US is crumbling.

    Reply
    1. Otis B Driftwood

      Maybe so, Doc, but it would be better if this wasn’t the unintended consequence of disastrous foreign and domestic policy decisions of our so-called leaders.

      Would that we had a system where leaders would face the cimate problem head on.

      In the meantime, those farthest removed from the halls of power, and the most vulnerable, will suffer.

      Reply
    2. TimH

      less consumption of material crap will benefit all of us that live on Earth

      True, but this hits not those deciding whether or not to go on a day trip by car, but those who can’t afford the fuel for their second job and choose heat or food.

      The federal EV rebate refunded the people who could afford a brand new car (whether electric or not)… which ain’t the poors. Ditto cash for clunkers.

      Reply
    3. Randall Flagg

      Well, with the rising cost of food, fuel and trying to keep a roof over one’s family, there won’t be much left over to buy “crap”.
      But let’s blow 40 billion out the door to Ukraine.
      I probably am tripping but it sure seems like our government is actively trying to hurt the lower classes of citizens through intentional inaction. Or at least “unintended” consequences.
      I don’t know.

      Reply
    4. Lee

      That’s certainly alright for some, but not so much for those whose entire income is required to be spent on the basics. I suppose the problem will solve itself as those already just getting by on modest means have their lives cut short as the cost of living surpassed their ability to pay thus reducing demand pressure on prices.

      Reply
  7. NotTimothyGeithner

    Is this a good time to give thanks to Obama for his pro fossil fuel policies instead of taking alternative energy, infrastructure (not must highways), and so forth seriously?

    Reply
    1. ambrit

      I hear you and do so pledge to take a pilgramidge to the Chicago Pyramid and do obesiance to the graven image of the G– Emperor Obama. Of course, I do expect such a long trip, taken under conditions best recounted by the Holy Saint Miller in his compendium, “A Canticle for Leibowitz,” to take at least two seasons. We must always budget in the time which will be required of us, when passing through fertile regions, for forced agricultural labour. ‘Climate Corvee’ covers it best. Thus, a trip that would normally take one season will take two to accomplish now.
      What is truly frightening is that, at the present state of our world politics, the dystopian ‘futures’ of the most doom adjacent science fiction writers of the ‘Olde Dayes’ look to be the odds on favourite outcome.
      Stay Ye adjacent to safety!

      Reply
  8. jackiebass63

    I don’t understand why this even has to be published. Unless you live in a bubble you should know trucks deliver most of our goods. It isn’t a mystery that increased costs are passed on to consumers in most cases. So if the price of diesel increases it will raise the price of food and consumer goods. Actually I can remember when diesel was cheaper than gasoline. It wasn’t that long ago. On another note, low interest rates have in effect help keep prices down. With rate going up, prices will also go up.If people would consume less it would help drive down prices. The average worker is usually the loser. Pay increases almost never cover the increase in prices.

    Reply
    1. tegnost

      Thanks, yes, and the post includes this SMH howler…

      “It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Powell added.

      of course that’s double speak…I think he means strong labor market conditions that benefit all of the right people, not laborers

      Reply
    2. ambrit

      Social Security never keeps up with the true rate of inflation either. For many of us, lower consumption will mean real hardships, and I do not mean not going to the Disney World next year.
      Over the years, I have noticed that the “average” person on the street does not think about the components of the supply chain until said supply chain stops working optimally.
      “You don’t know what you have until it’s gone.”

      Reply
  9. Wukchumni

    Read that Cali residents increased their usage of dwindling water supplies by 19% in March, that’ll show our winter of missed content!

    Just ordered some stuff from REI and if you spend over $50, shipping is free-which has become a common trend among online sellers, but how much longer will that go on as truckers pass on the increases on diesel sure to come, with the odd possibility of the gas shortage of 1979 reversing itself…

    A diesel VW Rabbit was the most coveted car that year, as gasoline was rationed or simply not available, while you could always get diesel and there was no controls on it.

    Reply
    1. Carolinian

      But did it leak oil like the gasoline Rabbit?

      Here in SC gas prices are back on the upswing and over $4. Biden has stopped tapping the SPR? Diesel has been over $5 for some time. Of course a lot of car driving is discretionary and avoiding it perhaps even virtuous whereas trucks full of food (not to mention freight trains) must have their diesel.

      Apparently the Bidenista plan through this whole mess has been for Russia to collapse quickly, Putin get the boot, things back to normal in short order. Now that we are already on plan B–Russian tar baby–the approach to the above crisis is Alfred E. Newman (“What me worry?”). I always knew those Mad Magazines weren’t a waste of time.

      Reply
  10. lance ringquist

    there simply cannot be any serious discussion about this as long as we free trade. flying chickens and fish to china to be processed under horrendous human and environmental degradation to save a few pennies a pound for financial parasites.

    the amount of fossil fuels and emissions created selling cash crops, hay shipped to the middle east, commodities shipped all over the world taking advantage of human and environmental degradation has driven the economies of the world, let alone the environment to the brink.

    https://theconversation.com/why-you-cant-have-free-trade-and-save-the-planet-94128

    “So here is the impasse of modern civilization: the free trade promoted by most economists and politicians continues to drive a substantial part of the greenhouse gas emissions that they want to reduce, and yet the sustainable technologies they propose to cut emissions are in themselves dependent on economic growth, international trade, and the use of more and more natural resources.

    So how to break this impasse? Economists could start by recognising that the economy is not insulated from nature, just as engineering is not insulated from world society. Global challenges of sustainability, justice and resilience all demand much more integrated thinking.

    This will involve confronting conventional ideologies of technological progress and free trade. Rather than nervously safeguarding world trade with its escalating greenhouse gas emissions, we have every reason to reconsider what might be perceived as true human progress and quality of life. Instead of economic policies maximising economic growth and resource use, humankind needs to develop an economy that is aligned with the constraints of our fragile biosphere – and a science of engineering that takes account of global inequalities.”

    Reply
    1. .human

      It’s only “free trade” if you exclude the multitude of externalities that are conveniently glossed over/swept under the rug/foisted on others.

      Reply
  11. TroyIA

    Yikes. Forget about high prices because the NE is about to experience pockets of no diesel available at any price.

    Craig Fuller

    Major truckstop chains Loves and Pilot warning about imminent diesel shortages in the eastern half of the US
    9:02 AM · May 11, 2022

    Reply
    1. Polar Socialist

      Meanwhile, in Russia diesel has dropped from $2.94 in February to $2.87 in May. I guess they have more of it now for the domestic consumption.

      Might be why their latest inflation numbers are lower than in EU or US, at least for now.

      Reply
  12. Jeremy Grimm

    As the Corona flu is a test of our readiness for a future plague, so the present diesel shortages test our readiness for the impacts of peak oil. The present circumstances have created a step change in the availability of diesel fuel, but similar step changes have been predicted in the analyses by Gail Tyverson. The diesel shortage also highlights that petroleum is a source for numerous products and product inputs whose availability differs in the petroleum from different sources.

    Reply
    1. Pwelder

      I think you mean Gail Tverberg?

      Gail the Actuary is to energy as Susan is to political finance. A good read any time, and indispensable when we’ve stumbled into a crisis.

      And it’s a crisis, for sure. Governments brought it forward a few years with feckless energy policies , but it was always in the cards.

      Reply

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