As the Biden administration continues to drain the United States Strategic Petroleum Reserve (SPR) in a dubious gamble to suppress gas prices and win votes before the midterm elections, another fuel crisis is brewing.
While gasoline prices have indeed come down from this summer’s highs, diesel prices remain stubbornly elevated, and, more worrying, U.S. inventories have fallen to perilously low levels.
According to the Energy Information Administration (EIA), U.S. average retail diesel prices are up more than 45 percent year over year, to $5.34 per gallon. Wholesale diesel prices have spiked in the last few weeks, to more than $200 per barrel, 92.5 percent above last year’s levels.
What is even more concerning is that just last week the EIA released data showing that the United States has only 25 days of diesel supply remaining systemwide. Inventories are at their lowest levels since 2008, and at their lowest level for October since the records have been kept. Note that this comes at a time when demand for diesel is at its highest level in two decades, and as a particularly difficult winter approaches. Inventories are unlikely to rebuild so long as the market remains in backwardation, i.e., when current deliveries are priced higher than future deliveries, indicative of shortages.
The diesel market matters because it’s the lifeblood of our economy. Lest we forget, while gasoline fuels consumer mobility, diesel powers trucks, tractors, and all kinds of heavy equipment, not to mention freight trains and ships, which in turn power and eventually supply everything that we have come to depend on in the modern world. Whether it’s the U.S. food supply chain, in which more than 70 percent of all final goods are transported by diesel-powered trucks, underlying agricultural production, where farm equipment also runs almost exclusively on diesel, or the mining, drilling, and construction sectors—our critical industries rely on diesel. Put simply, if diesel supply breaks down, the U.S. economy will break down.
Other Perils on the Horizon
While not explicitly linked to the diesel shortage, the United States is also at serious risk of a nationwide rail strike. If no deal is reached between the railroads and the unions by Nov. 19 and the system shuts down, it will cost the U.S. economy up to an estimated $2 billion per day, not to mention the inevitable shortages and supply-chain disruptions that would result.The United States produces and refines most of its own diesel fuel, but our ability to increase supply remains constrained by limited diesel-refining capacity. In fact, U.S. refining capacity hasn’t increased in decades due to onerous regulation. The United States is thus dependent on imports to supplement its energy needs. This seems particularly risky in the indeterminate environment of a European war and one in which European countries are facing their own severe energy crisis heading into winter. In the absence of sufficient supplies of natural gas, demand for diesel is likely to be elevated worldwide and countries loath to export what little they have.
While this article is mostly concerned with diesel supply, we must keep one eye on crude oil markets and gasoline prices. Global oil supply remains distressingly tight. The U.S. SPR is now at its lowest level in nearly 40 years. The Biden administration plans to continue to drain 1 million barrels a day, presumably through the midterms. And then what? The administration says it will restock the SPR when the price of oil reaches around $70 per barrel. But until then, we will have a dangerously low emergency supply, sitting at less than half capacity as winter approaches and as the European energy crisis (and ongoing war in Ukraine) moves into a more dangerous phase. If we think the Saudis and their friends in OPEC+ are treating the United States poorly now, wait until we’re really vulnerable. It’s only then that we’ll discover the true nature of the beast. Best case, we’ll be privileged to restock the SPR at prices much higher than what we sold them for. And for what? A few cents saved now, and a few votes bought in the midterms. Worst case? Well, let’s just hope that a real energy crisis doesn’t emerge in the meantime.
I will conclude with one basic point, which is that energy crises inevitably lead to food crises. This is a nearly immutable law. The tandem perils of a diesel shortage and a shutdown of our national railways pose a real threat to our food and other supply chains this winter. Note that all of this is coming on top of the current shutdown of parts of the Mississippi River, our most important transport waterway, where, as of just a few days ago, 700 barges laden with grains and other foodstuffs sat stranded and exposed due to drought-induced low water levels. Threats to the U.S. food supply chain are growing by the week. It’s time for Americans to sit up and pay attention, and begin to prepare themselves for a winter that may be unlike any they’ve lived through before.
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