Prices have gone up diesel – used to power trucks, fuel machines and heat homes – by about 50% amid shrinking stocks and a strained export market.
Diesel is the most important fuel for the global economy, as trucks, buses, ships and trains depend on it. It is also used in the operation of construction, manufacturing and agricultural machinery, as well as heating homes and generating electricity after the high price of natural gas.
Within the next few months, nearly every region on the planet will face a diesel shortage at a time when a supply crisis in nearly all of the world’s energy markets has exacerbated inflation and stifled growth.
In the United States alone, the high cost of diesel will cause economic damage estimated at $100 billion, according to Mark Finlay, an energy fellow at the Baker Institute for Public Policy at Rice University, to Bloomberg, which was seen by Al Arabiya.net.
Inventories of diesel and heating oil in the United States are at an all-time low for this time of year in data going back four decades. Northwestern Europe is also facing low inventories – stocks are expected to reach a low level this month and then fall further by March, shortly after the start of sanctions that will cut off the region from Russian naval supplies.
It comes as global export markets have become so overcrowded that poorer countries such as Pakistan have become shut down, with suppliers failing to book enough shipments to meet the country’s domestic needs.
“It’s definitely the biggest diesel crisis I’ve ever seen,” said Dario Scavardi, former CEO of Italian oil refiner Saras SpA, who has spent nearly 40 years in the industry.
Evolution of the cost of diesel
Diesel in the New York Harbor spot market, a key benchmark, is up nearly 50% this year. The price reached $4.90 a gallon in early November, about double last year’s levels.
Fuel spreads against crude oil have also widened, a sign of how poor refining capacity is and in terms of supplies to be delivered later. In northwest Europe, diesel futures cost about $40 a barrel over Brent, compared to the last 5-year average of just $12. New York diesel futures for December delivery are also trading about 12 cents higher than those for January.
What causes the deficiency?
And after lockdowns have devastated demand and forced refiners to close some of their less profitable plants, looming shifts away from fossil fuels have further dampened investment in the sector.
Since 2020, US refining capacity has shrunk by more than one million barrels per day. Meanwhile in Europe, shipping disruptions and labor strikes affected refinery output.
Things could get even more dramatic with the European Union’s looming shift away from Russian supplies. Europe relies on diesel more than any other region in the world. Nearly 500 million barrels a year are delivered by ship, and about half of that is normally loaded at Russian ports, according to data from Vortexa. The United States also halted imports from Russia, which was a big supplier to the East Coast last winter.
A prolonged diesel shortage across the United States is certainly unlikely since the country is a net exporter of the fuel. But local outages and price hikes are likely to become more frequent, especially on the East Coast, where pipeline scarcity is creating massive bottlenecks. The region relies heavily on the Colonial Pipeline, which is often full. A century-old shipping law, known as the Jones Act, further complicates the movement of domestic fuels and encourages Gulf Coast producers to prefer exports over supplying the domestic market.
Slowing supplies to Europe
As the deadline for sanctions on Russia approaches, Europe still imports a huge amount of diesel from Russia. It also withdraws huge amounts from Saudi Arabia, India and others. As a result, seaborne imports for the month of October hit their highest levels since at least the beginning of 2016, according to data from Vortexa compiled by Bloomberg.
Russia holds the scene
Germany was already experiencing tightness, with lower Rhine levels hampering deliveries and curtailing production, while refineries in neighboring Hungary and Austria also suffered significant disruption. French production was choked by a wave of workers’ strikes over wages.
“If Russia is not a supplier anymore, that will put a huge impact on the system and it will be difficult to fix,” said former Saras CEO Scavardi.
Poor countries suffer
Global fuel pressure has made it more profitable for exporters such as China and India to send shipments to countries in Europe that can pay hefty premiums. Overall fuel exports from China are expected to rise by 500,000 barrels per day to nearly 1.2 million barrels by the end of the year, according to energy consulting firm FGE.
It remains to be seen whether this will be enough to close the global supply gap, meanwhile the poorer countries that cannot afford higher prices suffer.
The energy minister of cash-strapped Sri Lanka said it was struggling to afford global fuel prices and was unable to secure adequate supplies. Thailand has extended a diesel tax cut in a bid to protect consumers from higher prices, with the government predicting the move will cost about $551 million in lost revenue. And Vietnam is looking to enact emergency measures, including using its central bank to open more loans to domestic fuel producers in order to boost supplies.