Diesel prices have spiraled out of control in energy markets this year.
A gallon of diesel on average costs $5.554, up 75 percent from a year ago and just short of the record high of $5.58 that was posted last week, according to AAA. Prices are trending higher in the U.S. Northeast. In New York, the average price of diesel is $6.52; in Rhode Island, it’s $6.43.
East Coast diesel inventories have dwindled to their lowest levels in more than 30 years. Nationally, stockpiles sit at a 17-year low.
Because diesel is a crucial component of the economy, fueling everything from farming machinery to construction equipment to cargo ships, further price increases or a disruption in supply could prove devastating for the post-pandemic recovery.
While demand has been surging across the United States, supply has failed to keep pace.
What’s the Cause?
One of the contributing factors has been the growing number of retired refineries.
Over the past 15 years, the number of refineries on the East Coast has been reduced to seven, compared to the 129 nationwide. With demand as high as it is, the refineries that are operating are unable to produce enough, leading to higher diesel prices. A year after an explosion in 2019, Philadelphia Energy Solutions shut down its refinery that had supplied the entire eastern seaboard.
The widespread closures have decreased the region’s oil processing capacity from 1.64 million barrels per day in 2009 to about 818,000 barrels per day this year. Since the sector’s capacity has been limited, the cost to produce petroleum products has risen exponentially, with refineries charging roughly $150 to refine a barrel of crude oil.
Javier Blas, Bloomberg columnist and co-author of “The World for Sale,” has been taken aback by warnings of shortages throughout the petroleum market.
“In many years covering the @IEA monthly market report, I rarely have seen such a strong warning about shortages of refined oil products, depleted inventories of diesel, gasoline, and jet fuel, and sky-high refinery margins driving up inflation,” he wrote on Twitter.
Kyle Bass, chief investment officer at Hayman Capital Management, was blunt in his assessment of the situation, blaming the current dire situation on environmental activists and organizations.
“@GretaThunberg and @Earthjustice will have contributed to children around the globe dying from lack of food availability because their climate shaming didn’t come with a complete understanding of proper, incremental energy transition policy,” Bass wrote on Twitter last week.
“When the East coast runs out of diesel this summer, maybe then we will have a few of the galaxy brains in DC think they might have mortal errors in their energy transition plans.”
It isn’t only U.S. refineries that have closed their doors. Many Canadian refineries in British Columbia, Ontario, and the Maritimes have been closed. A growing number of Russian refineries have either scaled back operations or retired completely amid overstocking, resulting in a significant increase in U.S. diesel exports to Europe.
Market analysts warn that it will be challenging for the United States to satisfy domestic and foreign demand simultaneously.
“The current shortage in diesel and gasoline through the reduction in crude throughput in Europe and the potential ban on Russian products, will lead to very tight road-fuel markets,” Bjørnar Tonhaugen, the head of oil market research at Rystad Energy, wrote in a note this month.
Rationing or Relief?
Under current conditions, the diesel crisis might intensify into shortages that could cause rationing, says billionaire John Catsimatidis, who owns a small oil refinery on the East Coast and many gasoline stations.
“I wouldn’t be surprised to see diesel being rationed on the East Coast this summer,” Catsimatidis warned in an interview with Bloomberg earlier this month. “Right now, inv…