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The U.S. is facing a diesel crunch just as demand is surging ahead of winter — with only 25 days of supply left, according to the Energy Information Administration.
National Economic Council Director Brian Deese told Bloomberg TV that diesel inventories are “unacceptably low” and “all options are on the table” to bolster supply and reduce prices.
However, even as the stockpiles are being drained, the Biden administration seems to be left with very few sustainable options for long-term relief.
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What’s causing the crunch?
Unlike gas and jet fuel, demand for diesel recovered at a much faster pace from the pandemic. Diesel is used for transporting goods as well as powering construction, farming and military vehicles and equipment.
In 2021, the U.S. transportation sector alone consumed 46.82 billion gallons, or 1.11 billion barrels of distillate fuel (essentially diesel fuel) — at an average of about 128 million gallons a day.
With higher demand for this dirty fuel, traders are paying more for prompt deliveries than longer-term ones and they expect prices to drop in the future — a downward market structure known as “backwardation.” This also means it’s more profitable for suppliers to sell now.
The market usually moves into “contango” — the opposite of backwardation, where demand is lower and suppliers build up inventory with the expectation of higher future prices — in the summer. However, strong domestic and international demand, shrinking domestic refining capacity and sanctions on Russian petroleum imports have kept the diesel market tight throughout the year.
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New England’s stockpiles have been depleted to less than a third of its usual levels for this time of year, which is concerning since those states rely on fuel for heating more than other parts of the country.
The national average price of diesel as of Oct. 24 is at $5.34 a gallon — $1.63 more than last year.
What are the government’s options?
If diesel inventory continues to run down without the government intervening, the impact on transportation costs for goods could drive inflation up even further.
Deese adds that the Fed has some tools to bolster diesel supply, like the Northeast Home Heating Oil Reserve, which houses one million barrels of diesel in case of a disruption in supplies.