The U.S. is facing a diesel crunch just as demand is surging 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 bolster supply and reduce prices.
However, even as the stockpiles are being drained, the Biden administration seems to be left with very few sustainable options for long-term relief.
Don’t miss
Worried your cash is trash? These are 4 simple ways to protect your money against white-hot inflation
A TikToker paid off $17,000 in credit card debt by cash stuffing – can it work for you?
What’s causing the crunch?
Unlike gas and jet fuel, demand for diesel recovered at a much faster pace from the pandemic. Diesel is used for transporting goods as well as powering construction, farming and military vehicles and equipment.
In 2021, the U.S. transportation sector alone consumed 46.82 billion gallons, or 1.11 billion barrels of distillate fuel (essentially diesel fuel) — at an average of about 128 million gallons a day.
With higher demand for this dirty fuel, traders are paying more for prompt deliveries than longer-term ones and they expect prices to drop in the future — a downward market structure known as “backwardation.” This also means it’s more profitable 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 future prices — in the summer. However, strong domestic and international demand, shrinking domestic refining capacity and sanctions on Russian petroleum imports have kept the diesel market tight throughout the year.
New England’s stockpiles have been depleted to less than a third of its usual levels for this time of year, which is concerning since those states rely on fuel for heating more than other parts of the country.
The national average price of diesel as of Oct. 24 is at $5.34 a gallon — $1.63 more than last year.
What are the government’s options?
If diesel inventory continues to run down without the government intervening, the impact on transportation costs for goods could drive inflation up even further.
Deese adds that the Fed has some tools to bolster diesel supply, like the Northeast Home Heating Oil Reserve, which houses one million barrels of diesel in case of a disruption in supplies.
“We have looked very carefully at being prepared to deploy as and when necessary,” he said.
But The Washington Post reports that diesel demand is so high, that if a 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 be tapping into the country’s emergency oil reserves to counter rising gas prices, despite concerns over the long-term efficacy.
White House officials haven’t completely ruled out fuel export restrictions either, but the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers sent out a joint letter expressing their concerns in early October.
“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 U.S. allies during a time of war,” the group wrote.
Setting minimum inventory levels could affect the number of exports being sent out to foreign countries as well. And even if domestic supply sees some relief, this could push up prices around the rest of the world.
What to read next
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source: https://finance.yahoo.com/news/us-now-just-25-days-160000619.html