Diesel Fuel Shortages Are Worsening Inflation in the U.S.
Itt cost Carl Smith $999 to refill the 275-gallons fuel tank of his semi-trailer on Sunday for a run from Ohio to Wisconsin—and that’s just because his fuel credit card cuts off at $1,000. In the nearly 40 years he’s been driving, the price of diesel fuel has never been that high. “That’s the most it ever cost me to fill up, and I didn’t even get all the way filled,” he says.
The fuel surcharge he has added to his rates will allow him to withstand current diesel prices. But he knows all that means is he’s passing on those diesel costs to the average American, for whom the price of goods hauled by truckers like him to the local grocery store keep growing.
Although most motorists are not concerned with the expense of gasoline or the costs of filling their vehicles, they need to be concerned about diesel prices. Diesel is the engine of America’s economy. It’s what powers the container ships that bring goods from Asia and the trucks that collect goods from the ports and bring them to warehouses and then to your home. Diesel is used by the farmers to cultivate the food we eat and to power the trucks that transport the construction materials to our homes.
Diesel prices are the highest they’ve been in the U.S. since the government began tracking them, and will likely go even higher this summer as demand remains high and as forecasters predict this year will see an above-average number of hurricanes, which can idle refineries for days. In May, diesel prices soared to above $5.50 per gallon. This is a 70% rise over a year earlier. The diesel supply has been decreasing almost weekly since January. It could keep falling as more people travel, shop, and drive during the summer months and consume more petroleum products. “Unfortunately, I think there’s potential for another round of increases,” says Tom Kloza, global head of energy analysis for OPIS. “We’ve already seen the highest prices in our lifetimes, and it could go even higher.”
This will lead to higher prices on almost all products. Mattel stated in April it was considering price hikes, to go along with the ones that it had already announced last year. This is because ocean freight costs and raw material prices will rise from 2021. Carter’s, the maker of baby clothes, said recently that its freight costs would be 10% higher than last year, and that it has raised pricing to cover “higher-than-expected transportation costs.” The Vita Coco Company, which makes coconut water, said in May that the total costs of its goods increased 19%, mostly because of a “sharp increase of our transportation cost;” the company said it was embarking on its first price increase in years.
Target and Walmart both reported that diesel prices were affecting their profits, even though they have the ability to negotiate better rates with trucking and ocean carriers. Both companies saw a drop in profits during the third quarter due to increased freight and transportation costs. Target stated that it expects to pay $1 billion more in freight this year as a result of costs for the third quarter of 2015 which were hundreds of million dollars more than expected.
The high prices to move goods come at a time when many companies say they’re already having trouble finding truck drivers. Owner-operators might be discouraged from transporting as many goods, since freight brokers oppose increasing fuel surcharges. It could also lead to a decrease in truck drivers. “It’s just a matter of math—if you’re not getting paid as much to haul a load, there’s no reason to run that load,” says Rebecca Oyler, the president and CEO of the Pennsylvania Motor Truck Assn.
A shortage of diesel can also lead to higher food prices and lower food production. Ben Simons, a corn farmer near Utica in New York, claims that rising fuel costs and fertilizer have made corn growing more costly than it used to. In fact, it is now costing him $1000 per acre. This compares with $450 over the last few years. At the same time, tires have doubled in price—an increase related to high demand for petroleum products—as have the chemicals to grow his crops.
Simons and his wife Robin have decided not to plant their marginal land this year—extra acres where they sometimes grow crops—because of the added expense. If more farmers follow, he says, “you’re going to be seeing that in your grocery bill. Are people complaining? Just sit back and wait.”
Diesel isn’t the only petroleum-based product seeing surging demand at a time when global supplies are limited. Prices and demand are rising for jet fuel and gasoline, along with tires made from petroleum. The cycle of the demand-supply dynamic becomes more cyclical. Trucks have to go further, so they use more fuel. This means that trucks are using more gasoline and more tires.
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Refineries which convert crude oil into fuels like diesel are less common in America than they were in recent years. According to the U.S. Energy Information Association, there are only 124 operating now, down from two-thirds of those in 1980 and a mere 139 in 2016. Northeastern region has seven refineries, compared to 27 in 1982.
According to Patrick De Haan (head of petroleum analysis at GasBuddy), there are fewer oil refineries in the Northeast. This means that suppliers from other parts of the country can compete with South America and Europe for diesel supply. Refineries in the U.S. send diesel to South America, in part because they don’t have to meet renewable fuel standard requirements, he says, rather than to the Northeast. The Northeast competes with Europe for diesel, as Europe lost some of its supplies due to war in Ukraine.
Like most other aspects of the economy, the story behind fewer refineries is now being politicized. One explanation is that a lack of antitrust regulation in the U.S. allowed refinery mergers and acquisitions that might have been good for their bottom line but not for diesel supplies in the U.S. “We have been following petroleum refining for years—the amount of consolidation is just staggering,” says Diana L. Moss, the president of the American Antitrust Institute, a progressive nonprofit that advocates for more antitrust enforcement. According to her, the federal government failed to prevent refinery mergers. She also said that when companies consolidate in an industry, they can increase prices as customers have less options.
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Patrick De Haan of GasBuddy says the closing of refineries is more economic. In 2019, the Philadelphia Energy Solutions refinery was the biggest on the East Coast. It caught fire one year after it emerged from bankruptcy and eventually decided to close. After COVID-19 struck and the demand for oil dropped, several other refineries closed, one of which was owned by Royal Dutch Shell in Convent, La. Many others have been closed down over the years, as it is very costly to operate a refinery when there is less demand.
There’s little likelihood that refineries in the U.S. will be able to make more diesel, especially if demand for jet fuel and gasoline rise over the summer. Refineries in Northeast run at 95% capacity. In order for prices to fall, economists will need to see what they call demand destruction. When the cost of something is so high that no one wants it, demand destruction occurs. This eventually leads to lower prices and less demand.
Many businesses that increase fuel surcharges due to the high cost of diesel believe demand destruction will occur very soon. There are already signs it’s beginning. According to Stephanie Schmidt, president of Poole Anderson Construction in Pennsylvania, Poole Anderson Construction has seen its costs rise by up to 30% for some large projects due the high price of diesel and other supply chain problems. Some of their clients now prefer to wait until costs ease up before they start projects. Many businesses will give up if they are like these.
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