Rajan Wilcox
There have been concerns about a potential diesel fuel shortage in the United States and globally. Rumors have been circulating that the US could run out of diesel fuel in the next year, with some claiming it could happen within 30 days. While the US had a 25-day stockpile of diesel fuel as of October 2022, the context of varying consumption rates is important. The post-pandemic surge in demand, the Russia-Ukraine conflict, and seasonal changes have all impacted the availability and price of diesel fuel. However, predictions of a true diesel shortage are unlikely due to ongoing oil production and adaptable markets.
| Characteristics | Values |
|---|---|
| Diesel fuel shortage | Real |
| Reason | Post-pandemic demand surge, Russia-Ukraine conflict, refinery outages, low distillate inventory, high demand for heating oil, seasonal refinery maintenance, sanctions on Russia |
| Impact | Higher prices, occasional unavailability in some cities, increased transportation costs, recession |
| Mitigation | Limiting fuel exports, diversifying sourcing and trucking fleet, emergency fleet cards, small bulk tanks |
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What You'll Learn
The impact of the pandemic
The COVID-19 pandemic has had a significant impact on the diesel fuel market and has been a key factor in the recent diesel fuel shortages.
During the pandemic, economic activity slowed or halted in many parts of the world, causing a sudden drop in demand for diesel fuel. In response to this, refineries began to idle, and some companies shut down their facilities. This was particularly true in the US, where, according to Patrick De Haan, head of petroleum analysis at GasBuddy, refineries started to shut down in 2020 as demand plummeted.
As the world began to recover from the pandemic, demand for diesel fuel surged. This was due to the rebound in economic activity and an increase in manufacturing and exports, which are positively correlated with diesel demand. However, the diesel fuel industry struggled to keep up with this increased demand for several reasons. Firstly, operations had been suspended during the pandemic, and it took time to restart them. Secondly, there were labour shortages as people were still recovering from COVID-19. Finally, oil drilling and refining to create diesel fuel is a complex and time-consuming process that cannot be rushed.
The pandemic also contributed to supply chain issues that continue to affect the diesel fuel market. These issues have been exacerbated by the war in Ukraine and the resulting sanctions on Russia, a major oil supplier.
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The Russia-Ukraine conflict
In December 2022, European countries imported a record-high 8.2 million tons of diesel, including significant last-minute purchases from Russia. Germany was the EU's biggest importer of Russian diesel, bringing in 604,000 tons in December, the most since May 2020. Imports also surged from the Middle East, as well as India and China, where low economic activity due to COVID-19 reduced domestic demand.
The ban on Russian petroleum products, including diesel, that came into effect on February 5, 2023, was one of the toughest sanctions imposed on Moscow. It aimed to target the fossil fuel revenues that Vladimir Putin uses to finance the war in Ukraine. While there were initial fears of a diesel supply crunch in the EU, particularly during the winter months, these concerns eased due to the increased imports from alternative sources. Europe has been able to replace most of the diesel it imported from Russia, although prices have remained high.
The impact of the conflict on diesel prices has been significant. In March 2022, wholesale prices skyrocketed, leaping to 800p per therm from just 45p at the same time the previous year. Diesel prices for Russian consumers have also been affected, rising almost 10% in a week. The cost of a tank of diesel for a Ford Focus in the UK reached £85, and both diesel and unleaded fuel prices were expected to hit £90 in March 2022.
The conflict has also led to a wave of Ukrainian drone strikes on Russian oil refineries, affecting Russia's ability to produce and export fuel. These strikes have contributed to rising diesel prices in Russia and tightened supply, forcing more facilities to suspend production. Western sanctions on Russian oil and gas have further impacted global diesel supplies and prices, with the US and UK banning Russian oil and gas, and the EU banning Russian seaborne crude imports. Despite these sanctions, Russia continues to make billions from fossil fuel exports, with data showing that Ukraine's Western allies have paid Russia more for its hydrocarbons than they have given Ukraine in aid.
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Refinery outages
Similarly, in 2022, the United States faced a diesel shortage exacerbated by a massive refinery shortage. Several refineries had shuttered during the pandemic-induced recession in 2020, and some had not resumed operations. This resulted in a significant loss of refining capacity, with refining capacity in the US being about a million barrels a day below pre-pandemic levels.
The shift from fossil fuels to renewable energy sources, such as renewable diesel and sustainable aviation fuel, has also influenced refinery operations. Some refiners have repurposed their facilities to produce renewable fuels, reducing the output of traditional fuels like gasoline and diesel.
The cutoff of Russian imports due to sanctions following the invasion of Ukraine has further impacted diesel supplies. Russian imports previously boosted distillate supplies in the US, and their loss has created challenges for refineries in filling holes in their product slates.
These refinery outages and capacity reductions have contributed to low inventories and higher prices for diesel fuel, affecting various industrial sectors and consumers.
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Demand and supply
The demand for diesel fuel has been affected by several factors, including the post-pandemic surge, seasonal variations, and the conflict between Russia and Ukraine. The post-pandemic era witnessed an increase in demand for diesel fuel, particularly in the manufacturing and export sectors. However, production lagged due to operational challenges and labour shortages caused by the COVID-19 recovery.
Seasonal variations also impact diesel demand, with spikes observed during spring planting and fall harvesting seasons. Additionally, as winter approaches, the demand for heating oil, which is similar to diesel, increases. The conflict between Russia and Ukraine has also played a role in the diesel fuel demand. With Russia being a major oil supplier, international sanctions have disrupted their ability to get oil to market in many countries, leading to reduced supply.
On the supply side, the world's production of diesel fuel has struggled to keep up with the demand. This has resulted in increased prices and impacted the cost of doing business. The cutoff of Russian imports has particularly affected the US, which imported nearly 700,000 barrels per day of petroleum products before the invasion of Ukraine. Refineries have struggled to fill the gap, and while there is some flexibility to shift to diesel production, it is relatively limited.
The diesel shortage has led to higher prices, with diesel prices in the US surging above $140, the highest ever for that time of year. The restricted supply has economic consequences, with higher transportation costs being passed on to businesses and consumers. The situation has been further exacerbated by refinery outages and strong demand from Europe as they seek to cut off Russian supplies.
While there are concerns about the diesel supply, it is important to note that the situation is manageable at the micro-level. Suppliers will work to fill in gaps in supply, and higher prices will make it economical to long-haul products from surrounding markets with available supplies. Additionally, retail consumers are not expected to witness widespread fuel station closures, as higher prices will be passed on to them.
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Economic consequences
The diesel fuel shortage is a very real concern, with economic consequences that are already being felt and will likely continue to be felt in the coming months and years.
The immediate and most obvious economic impact of the diesel shortage is the increase in prices. In 2022, diesel prices in the US were around 50% higher than the previous year, reaching over $5 per gallon. This has a knock-on effect on businesses and consumers, with higher prices being passed on to consumers, and businesses facing increased costs for fuel, transportation, and manufacturing. The price increase is particularly detrimental to businesses with poor miles per gallon and those who do not factor higher fuel costs into their bids and pricing. Some businesses may be forced to cut costs or even fail due to the increased financial strain.
The diesel shortage has been caused by a combination of factors, including the post-pandemic demand surge, reduced oil production, and the Russia-Ukraine conflict. The pandemic slowed oil production and diesel deliveries, and the subsequent increase in demand as economies recovered has outpaced production. Additionally, Russia's invasion of Ukraine has disrupted the market, as Russia is a major oil supplier, and international sanctions have prevented them from supplying oil to many countries. The war itself also requires a significant amount of oil, further reducing the available supply.
The economic consequences of the diesel shortage may also include shipping delays and supply chain disruptions. A shortage of diesel fuel can impact transportation and logistics, leading to delays in the delivery of goods and services. This can have a ripple effect on various industries, causing further economic disruptions.
The diesel shortage is expected to be "manageable" at the micro level, with suppliers rallying to fill in gaps in supply. However, at the macro level, the shortage will likely result in higher prices and reduced demand, impacting businesses and consumers alike. The US economy may experience a slowdown as consumers cut back on spending and businesses reduce costs to adjust to the increased fuel prices.
To mitigate the impact of the diesel shortage, businesses and consumers are advised to work closely with their fuel suppliers, monitor fuel inventories, and consider implementing backup plans, such as emergency fleet cards or bulk fuel tanks, to ensure access to fuel during shortages.
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Frequently asked questions
Yes, the diesel fuel shortage is real. The world’s oil refiners are proving powerless to make enough diesel, which is affecting industries and transport.
There are several factors contributing to the diesel fuel shortage. Firstly, the post-pandemic demand surge has increased the demand for diesel fuel, but production has struggled to keep up. Additionally, the cutoff of Russian imports due to the invasion of Ukraine has impacted the supply. The loss of these imports has caused refineries to struggle, as they try to fill holes in their product slates. Finally, there has been pressure on refineries to produce other fuels, such as jet fuel and gasoline, where demand has rebounded.
The diesel fuel shortage has resulted in higher prices, which have been passed on to businesses and consumers. This has increased transportation costs and could potentially undermine economic progress. Additionally, some cities might experience a true physical lack of diesel products, leading to occasional supply gaps. However, suppliers will work to fill these gaps, and higher prices may make it economical to long-haul products from surrounding markets with available supplies.
