Diesel Prices Surge Amid Deepest Inventory Slump on Record

The price of diesel and unleaded gas are displayed on a sign outside a BP petrol station in Wigan, northwest England, on June 8, 2022. Paul Ellis/AFP via Getty Images

The global diesel market is facing a crunch from lower production, undermining efforts by world economies to recover and increasing the fragility of markets on both sides of the Atlantic, while adding to already-high inflationary pressures.

In the United States, diesel price increases have overtaken those of gasoline.

“While #gasprices have seen a slight rise, the national average for diesel has surged some 30c/gal in the last week to $5.23/ga,” Patrick De Haan of GasBuddy noted in a tweet, while replying to a comment that “distillates remain very very challenged ahead of winter.”

The current average price for diesel in the country is $5.284 per gallon, an increase of almost 50 percent from 2021’s $3.538. Comparatively, gas prices have risen by more than 17 percent, a difference of 33 percentage points.

Diesel drives industry, from power generators and farm tractors to construction machines; trucks, trains, and ships are all powered by the distillate fuel. Diesel moves 90 percent of all freight in the country and worldwide. It’s dominant in machines used in critical industries such as mining and agriculture, and there’s a ripple effect across the economy when the price of diesel moves up.

The four main components that contribute to the real price of a gallon of diesel fuel are the cost of crude oil purchased by refineries, refinery margins, retail station margins, and taxes.

Diesel inventories have fallen in the United States with refineries closing down, while demand has picked up after the pandemic, resulting in higher prices at a time when heating costs are set to soar.

Shortages in Diesel Fuel

The U.S. inventories of distillate fuel oil have been reduced to 106 million barrels, as of Oct. 7, according to Reuters, the lowest seasonal level since the government began collecting weekly data in 1982.

With winter setting in, the country has just a 26-day supply of heating oil to draw on. This particularly affects the northeastern regions, where oil, rather than natural gas, is burned to keep homes warm.

Based on Bloomberg data, spot diesel prices in New York have spiked to a five-month high on the shortage data, while futures rallied to the highest level since June.

In Europe, distillate inventories were just 360 million barrels at the end of last month, the lowest since 2004, while Singapore’s mid-distillate inventories have gone down to 8 million barrels, the lowest in 15 years.

Refinery closures in the United States due to large-scale electric-vehicle adoption and the COVID-19 pandemic have resulted in insufficient capacity to meet domestic and international demand. In the 12 months that ended in July, the country produced an average of 4.9 million barrels per day of distillate fuel oil, a 5.77 percent decrease from the prior period’s 5.2 million barrels.

Europe is teetering on the edge of energy insecurity, and diesel prices are set to go up even more. Meanwhile, the Biden administration is reportedly pressing oil companies to curb exports to limit the depletion of national inventories.