Looming Rail Strike Complicates Biden Options To Avoid A Winter Diesel Supply Crisis

• America already faces a potential diesel supply crisis, especially in the northeast, due to a variety of factors that have led to inadequate regional refining capacity to produce the most critical transportation fuel.
• Now, a potential strike of freight rail workers threatens to complicate the situation at the worst possible time.
• The two largest freight rail unions split their votes on the latest compromise offered by the Biden administration Monday, increasing the prospects for a nationwide strike just as winter sets in across the country.
• Such a strike could start as soon as December 5 unless a compromise is reached or steps are taken by federal officials to head such a work stoppage off.
• Historically, congress has acted to prevent general rail strikes as being contrary to the national interest, but no one can be certain that the highly polarized, divided congress of today would act similarly.

In the United States, diesel fuel is typically moved by pipelines from refineries to central distribution centers. From there, it is then moved by trucks, barges or rail to retailers or other market centers. A disruption of the significant rail transport portion of the equation would create severe stress on the other modes of moving the fuel, and likely exacerbate shortages that are already looming in the northeast and other parts of the country.

Indeed, in an upcoming interview on News Nation with host Leland Vittert, Transportation Secretary Pete Buttigieg characterized a rail strike as “a scenario that is not acceptable,” adding, “We don’t have enough trucks or barges or ships in this country to make up for the rail network.”

Supply and storage levels are already critically low in some areas for a variety of reasons, including heavy demand for diesel exports to Europe and a reduction of refining capacity in impacted areas in recent years. Tim Stewart, President of the U.S. Oil and Gas Association, told me in an email that much of that reduction in refining capacity can be attributed to government incentives that encourage the conversion of refineries to biofuels. “US refining capacity hit the lowest level in 8 years, which is the result of the large government subsidies to switch to biofuels,” he said.

Jesse Mercer, Sr. Director of Markets Macro Fundamentals at Enverus, points to a variety of factors that have resulted in the shortage, noting that the crisis is most severe in the Northeast and that the timing could not be worse. “The US Northeast is the epicenter, with diesel and heating oil inventories there at their lowest level since mid-2014,” Mercer told me. “But the last time Northeast inventories were this low was at the end of the 2014 heating oil demand season, and there was still time to restock before the next season.

“This time around we’re seeing low inventory levels at the very beginning of the heating oil demand season,” he continued. “Keep in mind that East Coast inventories never did fully recover after the Russia-linked cyber-attack that shut down of the Colonial Pipeline in 2021, and heavy maintenance at the Irving St. John refinery in September-October this year certainly didn’t help restocking efforts either.”

Bloomberg’s Javier Blas points out that loss of Northeast refining capacity in recent years is playing a key role in the resulting shortage. “In the past 15 years, the number of refineries on the U.S. East coast has halved to just seven. The closures have reduced the region’s oil processing capacity to just 818,000 barrels per day, down from 1.64 million barrels per day in 2009. Regional demand, however, is stronger.”

That, of course, is the key. It is a simple fact that the last high-capacity greenfield refinery to be built in the U.S. was in 1978, 44 years ago. Building a new one today would be at least a decade-long project requiring billions in new investments. As Stewart points out, “It doesn’t help when elected officials keep saying the refiners days are numbered. Refining is capital-intensive and it’s tough to make multi-billion-dollar investments when governments are telling everyone they want you to go out of business.”

Dan Kish, Senior Fellow at the Institute for Energy Research, was even more blunt in an email to me: “When you’re running an all-of-government war on affordable energy as Biden is, higher prices are a feature of the policy,” Kish said. “He could encourage the Virgin Islands refinery to start up, but instead his EPA forces it to apply for a New Source PSD permit. This started when he ordered his Secretary of Interior to revoke the goal of American Energy Independence. Everything he does makes it more expensive and harder to produce, transport, process and use energy. He flushes a cherry bomb down the toilet and then acts surprised when the explosion goes off.”

Mercer points out that the Biden administration does have some options available to it, though they are limited and come with political risk. “The Biden Administration has some policy options at its disposal,” Mercer told me. “For starters, there is the Northeast Home Heating Oil Reserve (NEHHOR) with its 1 MMbbl of ultra-low sulfur diesel designated for heating oil held across three sites in Massachusetts, New York, and Connecticut. The president can declare a “severe energy supply interruption” stemming from the war in Ukraine and begin drawing down those stockpiles. Additionally, the Biden Administration could help reduce the cost of shipping diesel and heating oil from the Gulf Coast to the East Coast by waiving some restrictions under the Jones Act.”

But should a general rail strike be called, that 1 MMbbl of low sulfur diesel would be depleted in a matter of weeks. As for the Jones Act, an arcane, Civil War-era law that mandates that only U.S.-flagged ships staffed by U.S.-based personnel can move cargoes from one domestic port to another, it is seen as a protector of union jobs now, and thus a hard thing for a Democratic president to suspend.

The President could also try to issue an executive order limiting U.S. exports of diesel to Europe and other international destinations, but such a move would be highly controversial and would undoubtedly upset international markets, likely resulting in more inflation-causing price spikes. Energy Secretary Jennifer Granholm recently took a more soft-gloved approach during an interview with Bloomberg, encouraging refiners to voluntarily limit exports on their own.

“It may not be a business choice that they make, but we’re asking, as the companies that are operating in America, to do what they are doing in other countries,” Granholm urged, noting that many importing countries maintain minimum fuel-storage requirements. “And that’s why the president is looking at that.”

Taking all these various factors into consideration, what America has brewing with diesel supply right now is a perfect storm of negative factors that are moving supplies and inventories of the fuel most used for the transport of all manner of goods into a shortage situation at the worst possible time of year. For the Biden administration, averting a general rail strike is just a first step in avoiding a highly complicated looming crisis.