A perfect storm in global diesel markets is unfolding. Refining capacities are tight, and stockpiles are being depleted as the Northern Hemisphere cold season begins. Supply crunches could jeopardize critical transportation networks since the industrial fuel powers ships, trucks, and trains. The fuel is also used for heating homes and businesses, as well as a power generation source for utilities.
"Within months, almost every region on the planet will face a danger of a diesel shortage just as supply crunches in nearly all the world's markets have worsened inflation and hurt growth," Bloomberg warned.
The economic impact of soaring diesel prices and shortages worldwide could have devastating effects, such as an inflation accelerant that would burden households and businesses.
Both gasoline and diesel prices are linked to crude prices set on the global market. Due to supply constraints, diesel prices in many markets currently demand a hefty premium.
Mark Finley, an energy fellow at Rice University's Baker Institute of Public Policy, explained to Bloomberg that elevated diesel prices could cost the US economy $100 billion:
Anything and everything that gets moved in our economy, diesel is there.
"Moving stuff around is one thing. People potentially freezing to death is another."
Diesel inventories in the US had plunged to the lowest level since 1982 when the government began reporting data on the fuel. Supplies for this time of year are at the lowest levels ever.
According to the Energy Information Administration, the US now has just 25 days of diesel supply, the lowest since 2008; and while inventories are record low, the four-week rolling average of distillates supplied - a proxy for demand - increased to its highest seasonal level since 2007.
Reuters' senior market analyst John Kemp noted that diesel shortages will persist until a downturn in the economy.
Prices for US diesel in the spot market of New York harbor have risen more than 265% since President Biden took the oath of office in 2021. Prices reached $5.37 a gallon in the spring of 2022 and have since slumped to $3.51.
US Northeast markets are the tightest in the US, where oil refineries have been shuttered in the last several years. This has also complicated the picture of winter heating oil and jet fuel supplies in the region.
Last month, a major fuel supply logistics company initiated emergency protocols across the Northeast and Southeast about the dangers of supplies running low that might cause delivery delays for some customers.
"While Russia's war in Ukraine sent diesel prices soaring, the current situation is partly the result of an interconnected, slow-building series of events that extends across the globe. Some analysts trace the roots of the US diesel shortage to a fire at Philadelphia Energy Solutions in 2019, which forced the refinery to shut down, taking out one of the Northeast's important diesel producers," according to the NYTimes.
Besides the US, Northwest Europe is facing low diesel supplies. Inventories in Europe are expected to plunge further after Russian crude and crude products sanctions come into play in the coming months. Global export markets are so tight right now that emerging market countries are being squeezed out of purchasing industrial fuel, such as Pakistan.
"It's certainly the biggest diesel crisis that I have ever seen," Dario Scaffardi, a former chief executive officer of the Italian oil refiner Saras SpA who spent four decades in the industry, told Bloomberg.
The cause of the global diesel shortage is very clear:
That's partly a function of the pandemic, after lockdowns destroyed demand and forced refiners to close some of their least profitable plants. But the looming transition away from fossil fuels has also dented investments in the sector. Since 2020, US refining capacity has shrunk by more than 1 million barrels per day. Meanwhile in Europe, shipping disruptions and worker strikes have also eaten into refinery production. -Bloomberg
The ban on Russian crude to Europe in December could worsen the situation. Then a ban on Russian diesel in February could unleash even more chaos for the continent. Reuters said traders are panic-hoarding Russian oil products before the bans come into effect. Earlier this year, the US halted Russian diesel shipments, which last year, it was a major supplier to the East Coast.
"If Russia is not a supplier anymore, that puts a big, big dent into the system, which is going to be really difficult to fix," said Scaffardi, the former Saras CEO.
Speculation mounts that the Biden administration could halt diesel exports to boost domestic supplies, but that may not have the desired effects because diesel is a globally traded commodity. Any export ban from the US would cause unwanted market gyrations.
Labor strikes have also exacerbated diesel shortages across Europe at major refineries. French refineries experienced several labor actions this fall, and a large BP refinery in Rotterdam on Tuesday.
The diesel crunch has been "damaging to the global economy," said Amrita Sen, the head of research at Energy Aspects Ltd. She said the only way to "resolve diesel tightness ultimately needs new refining capacity."
And the bad news is that Chevron CEO Mike Wirth told Bloomberg TV this past summer that no new refineries will ever be built in the US.
Winter could exacerbate problems for the Northern Hemisphere as the worst diesel squeeze in a generation could wreak havoc on the already faltering global economy.