The U.S. is facing a diesel crunch – just 25 days of supply, just before winter hits a surge in demand, according to the Energy Information Administration.
National Economic Council Director Brian Diess told Bloomberg Television that diesel inventories are “unacceptably low” and that “all options are on the table” to increase supply and lower prices.
Yet even as stocks are running out, a Biden administration doesn’t appear to have many sustainable long-term relief options.
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What’s causing the crunch?
Unlike natural gas and jet fuel, diesel demand has recovered more quickly from the pandemic. Diesel is used to transport goods and to power construction, agricultural and military vehicles and equipment.
In 2021, the U.S. transportation sector alone will consume 46.82 billion gallons, or 1.11 billion barrels of distillate fuels (mostly diesel fuel)—about 128 million gallons per day on average.
As demand for the dirty fuel increases, traders pay more for just-in-time deliveries than long-term deliveries, and they expect prices to fall in the future – a downward market structure known as “scalping”. It also means that suppliers are now more profitable to sell.
Markets typically move into “contango” in the summer — the opposite of backwardation, where demand is low and suppliers build up inventories in anticipation of future price increases. However, strong domestic and foreign demand, shrinking domestic refining capacity and sanctions on Russian oil imports have tightened the diesel market throughout the year.
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Stockpiles in New England are already depleted to less than a third of their normal levels this time of year, a concern because these states rely more on fuel for heating than the rest of the country.
As of Oct. 24, the national average diesel price was $5.34 a gallon, $1.63 higher than last year.
What options does the government have?
If diesel inventories continue to fall without government intervention, the impact on the cost of transporting goods could push inflation further up.
Deese added that the Fed has tools to support diesel supplies, such as the Northeast Home Heating Oil Reserve, which can store 1 million barrels of diesel in case of supply disruptions.
“We’ve prepared very carefully to deploy if necessary,” he said.
But the Washington Post reports that diesel demand is so high that if 1 million barrels of diesel were delivered from the Northeast reserves, they would be depleted in less than six hours.
The Biden administration also recently announced it would tap the country’s emergency oil reserves to counter rising natural gas prices, despite concerns about its long-term efficacy.
White House officials have also not ruled out fuel export restrictions entirely, but the American Petroleum Institute and U.S. fuel and petrochemical makers issued a joint letter in early October expressing their concerns.
“Banning or restricting exports of refined products could 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 may also affect the volume exported abroad. That could push up prices in the rest of the world, even if domestic supplies ease.
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This article is for information only and should not be considered advice. It does not provide any kind of guarantee.