Report above from WHAM Rochester New York.
Administration panicking about Diesel prices, but the reflexive remedy guaranteed to make things worse.
How come Democrats have to explain markets to Republicans?
Busy this AM, so will be quick, but a number of people (okay, three…) have asked me whether this idea of US export controls on our diesel exports, an idea that’s gaining traction, will help US diesel users with the historically high price of this pervasively important fuel. Mostly, no. Here’s why.
—The location problem. If we stop exporting diesel it will mostly be stuck where it is refined, around the US Gulf states. Why stuck? Because there are two ways to get refined product to where it’s needed: pipelines and ships. Well, the main pipeline (Colonial Pipeline) invariably runs at capacity and the Jones Act, which bans non-US commercial vessels from shipping goods between US ports, has meant that New England, where it’s about to get cold (diesel and heating oil are common distillates), directly imports diesel. Now, the Jones Act is currently waived, so that’s potentially helpful, but it’s been the law of the seas for decades and so far, US Gulf-to-east-coast waterborne shipments have gone up only slightly relative to pre-waiver.
In other words, shut in diesel might well sell at a discount on the Gulf Coast, while New England states pay more—possible a lot more—for imported product.
—The domestic refinery problem. US diesel refiners would lose money and would likely cut runs accordingly, especially if the above point holds and they end up with gluts in the southern region where they’re located. If so, the near-term increase in domestic supply would fade.
—Who gets the spread? If domestic diesel supply does go up, don’t assume consumers reap the full benefits. Again, refiners will be seeking to replace lose profits from exports, and thus will try to avoid passing through the full savings. Given that diesel is often inelastically demanded by many of its users—truckers with no other fuel options—full passthrough is unlikely.
—Our allies are already struggling with high energy prices, and have been so for longer than we have, since Russia invaded Ukraine. Obviously, Trump et al don’t care about that, but this will be another example of how the U.S. can’t be relied upon.
I’m not a newbie in this space and the following formula is very familiar to me: high-energy-price + approaching-election = fertile-ground-for-bad-ideas. In this case, 1 + 1 = 0.
Patrick De Haan/Gas Buddy on X:
A barrel of oil holds 42 gallons. At $95 a barrel, the crude oil in each gallon costs about $2.26. Diesel at $6.50/gal means more than $4 of every gallon has nothing to do with the price of oil. Taxes account for some of it, roughly 60 cents between federal and average state levies. The rest comes down to one thing: how hard it is right now to turn oil into diesel, and how many people around the world are fighting over getting it.
Here’s the easiest way I’ve found to explain it. Think of a barrel of oil like a steer. One steer gives you a lot of ground beef, but only so much brisket. If everyone suddenly wants brisket, brisket prices soar, even though cattle prices haven’t moved and ground beef is sitting in the cooler at a normal price. A barrel of oil works in basically the same way. Refineries get more gasoline out of each barrel than diesel. Roughly 45% of a barrel of oil is turned into gasoline, but only about 25% turns into diesel. So when the world is short diesel specifically, refiners can’t just crank out more of it. Diesel prices climb on their own, while gasoline and crude oil lag behind.
And the world is very tight on diesel right now. Russia normally supplies about one in nine barrels of diesel traded globally. After repeated attacks on its refineries, Russia banned diesel exports completely starting this past July. They’ve continued to extend it every month as continued hits on refineries have led to outages and downtime at their refineries. As a result, that extra diesel supply is simply gone.
Some of the world’s largest and newest export refineries sit in the Persian Gulf, and their diesel has to pass through the Strait of Hormuz. With flows restricted, those gallons are stuck too. China, normally a major fuel exporter in Asia, and the only country with more refining capacity than the U.S., told its refiners to stop exporting earlier this year and is only now slowly reopening the tap. All the potential normal relief valves are stuck closed or mostly shut. That’s why diesel has spiked significantly. Lose that much diesel at once and buyers everywhere go looking for a new source. Increasingly, that source is the USA.