Diesel Crisis Looms as US Supplies Running on Fumes

Diesel Crisis Looms as US Supplies Running on Fumes
Storage tanks for crude oil, gasoline, diesel, and other refined petroleum products in Carson, Calif., on April 25, 2020. (Robyn Beck/AFP via Getty Images)

Diesel prices have spiraled out of control in energy markets this year.

According to the American Automobile Association (AAA), a gallon of diesel is $5.554, up 75 percent from a year ago. This is just short of the record high of $5.58 that was posted last week. Prices are even higher in the northeast. In New York, the average price of diesel is $6.515. In Rhode Island, it is $6.43.

East coast diesel inventories have plunged to their lowest levels in more than 30 years. Nationally, stockpiles are at a 17-year low.

This could prove devastating for the post-pandemic recovery since it is a crucial component of the economy as it fuels everything from farming machinery to construction equipment to cargo ships.

While demand has been surging across the United States, supply has failed to keep up in this economy.

What’s the Cause?

One of the contributing factors has been the growing number of retired refineries.

Over the last 15 years, the number of refineries on the east coast has been reduced to seven, compared to the 129 nationwide. With demand as high as it is, the several refineries that are in operation are unable to produce enough, leading to higher diesel prices. A year after an explosion in 2019, Philadelphia Energy Solutions shut down its refinery that had supplied the entire eastern seaboard.

The widespread closures have decreased the region’s oil processing capacity from 1.64 million barrels per day in 2009 to approximately 818,000 barrels a day this year. Since the sector’s capacities have been limited, the cost to produce petroleum products has risen exponentially, with refineries charging roughly $150 to refine a barrel of crude oil.

Javier Blas, Bloomberg columnist and co-author of “The World for Sale,” has been taken aback by warnings of shortages throughout the petroleum market.

“In many years covering the @IEA monthly market report, I rarely have seen such a strong warning about shortages of refined oil products, depleted inventories of diesel, gasoline and jet-fuel, and sky-high refinery margins driving up inflation,” he wrote on Twitter.

Kyle Bass, the chief investment officer at Hayman Capital Management, was blunt in his assessment of the situation, blaming today’s dire situation on environmental activists and organizations.

“@GretaThunberg and @Earthjustice will have contributed to children around the globe dying from lack of food availability because their climate shaming didn’t come with a complete understanding of proper, incremental energy transition policy,” Bass wrote on Twitter last week.

“When the East coast runs out of diesel this summer, maybe then we will have a few of the galaxy brains in DC think they might have mortal errors in their energy transition plans.”

It is not only American refineries that have closed their doors. Many Canadian refineries in British Columbia, Ontario, and the Maritimes have been shut down. A growing number of Russian refineries have either scaled back operations or retired completely amid overstocking, resulting in a significant increase in U.S. diesel exports to Europe.

Market analysts warn that it will prove to be challenging for the United States to satisfy domestic and foreign demand simultaneously.

“The current shortage in diesel and gasoline through the reduction in crude throughput in Europe and the potential ban on Russian products, will lead to very tight road-fuel markets,” wrote Bjørnar Tonhaugen, the head of oil market research at Rystad Energy, in a note this month.

Rationing or Relief?

Under current conditions, the diesel crisis might intensify into shortages that could cause rationing, warns billionaire John Catsimatidis, who owns a small oil refinery on the east coast and many gasoline stations.

“I wouldn’t be surprised to see diesel being rationed on the East Coast this summer,” Catsimatidis said in an interview with Bloomberg earlier this month. “Right now, inventories are low and we may see a shortage in coming months.”

The rising price of diesel is weighing on too many companies that are trying to seek efficiencies to withstand higher costs.

A truck driver and business owner in North Carolina revealed to NewsNation local affiliate WJZY that he has had to let go of some of his employees to maximize profit. This, he noted, is an industrywide trend that could result in fewer trucks on the road.

“A lot of these trucks you see now are not going to be here anymore. A lot of these trucks are a small company like myself that just can’t afford to pay these high prices,” Omar Edwards said.

This could be terrible news when 70 percent of the nation’s consumer goods and freight are transported by truck.

From the growers to the distributors, the entire supply chain is being decimated by rising energy costs. This could have lasting impacts that extend beyond fresh produce at the supermarket.

Anirban Basu, economist and CEO of Sage Policy Group, suggested to FreightWaves that the sky-high price of diesel “renders the chance of recession in 2023 much greater.”

Some experts are a bit more optimistic, pointing to the first build-in distillate stocks, which include diesel and heating oil. According to the Energy Information Administration (EIA), distillate inventories advanced by 1.235 million barrels in the week ending May 13. This was the first supply increase in more than a month.

Could the White House Intervene?

President Joe Biden could soon tap the nation’s emergency diesel reserve as part of the administration’s efforts to address a critical supply crunch, reports suggest.

U.S. officials are also reportedly drafting other policies in response to supply concerns.

“We have teed up this reserve option to stay ahead of the problem, and will not hesitate to use other levers at our disposal to support families and the recovery,” a White House official told Reuters.

However, the reserve only contains about 1 million barrels of diesel. Any release will likely have a minimal impact since the United States consumes 122 million gallons per day, which is equal to roughly 2.9 million barrels. This is estimated to provide a modicum of relief for a week.

Since 2000, the country’s diesel stockpiles have been touched only once. In 2012, following Hurricane Sandy, then-President Barack Obama had sent 24 million gallons of fuel to New York and New Jersey as part of the federal government’s recovery efforts.

From The Epoch Times

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