Sylvie Willis
As of May 2022, the East Coast of the United States, particularly the Northeast, has been experiencing a diesel supply crunch. This has been attributed to various factors, including the ban on Russian imports, COVID-related refinery shutdowns, and the Jones Act, which prohibits foreign vessels from transporting goods between US ports. The situation has led to record-high diesel prices, with potential implications for the economy and inflation. While some experts believe that the East Coast diesel shortage is seasonal and manageable, others warn of a potential crisis during the high-demand winter months.
| Characteristics | Values |
|---|---|
| Date | May 16, 2022 |
| Diesel prices | Record highs of $5.62 per gallon, $5.90 on the East Coast |
| Reason | The ban on Russian imports, the Northeast relying on diesel from the Gulf region, the Colonial Pipeline shutdown, COVID, refineries scaling back during the pandemic |
| Impact | Inflation, higher prices of goods, potential slowdown of the U.S. economy |
| Solution | Waiving the Jones Act to allow foreign vessels to transport diesel between U.S. ports |
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What You'll Learn
The Colonial Pipeline
The East Coast, particularly the Northeast, has been facing a diesel supply shortage. The price per gallon of diesel reached a record high of $5.90 on the East Coast, up 63% from the beginning of 2022. The Northeast has become increasingly reliant on diesel from the Gulf Coast, with waterborne exports from the region hitting record highs. However, the Jones Act, or the Merchant Marine Act of 1920, prohibits foreign vessels from transporting goods between two US ports, making it difficult for the Northeast to receive diesel from the Gulf Coast.
The diesel shortage on the East Coast has been attributed to several factors, including the ban on Russian imports, which has blocked some of the oil and gas reserves the US previously relied on. COVID-19 has also played a role, as refineries on the East Coast scaled back operations during the pandemic due to staffing issues. The high price of diesel is expected to impact the price of goods, as diesel powers the nation's agriculture, industrial, and transportation networks.
While there are concerns about the potential impact of a diesel shortage, experts suggest that the situation is unlikely to result in a complete absence of diesel. The EIA specified that the number of days of diesel supply left in storage is not indicative of the total diesel supply, as it does not include the amount being produced at refineries or imported. Tom Kloza, the founder of OPIS, stated that while the low diesel inventories signal a crisis, a complete shortage is unlikely.
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Low diesel inventories
The US faced a diesel supply crunch in 2022, with inventories at their lowest level since 2008. This was due to a combination of factors, including the ban on Russian imports, which blocked some of the oil and gas reserves the US previously relied on, and staffing issues at refineries during the COVID-19 pandemic. The Northeast, in particular, was heavily affected, with prices on the East Coast reaching $5.90 per gallon, up 63% from the beginning of the year.
The high prices are the only way to attract more diesel into the Northeast, according to experts. The region relies on diesel from the Gulf Coast, which arrives through the Colonial Pipeline. However, it takes 18 days for oil to travel through this pipeline, making it financially risky for traders. As a result, the Northeast has faced a diesel supply crunch, with some predicting that diesel rationing would be required during the summer.
The Energy Information Administration (EIA) reported that the US had 25.4 days of diesel supply left as of 14 October 2022. While this has sparked fears of a potential shortage, analysts from OPIS have stated that it is unlikely the country will run out of diesel. However, they acknowledge that supplies are tight and that the situation could bring about economic slowdown and inflation.
The winter months are expected to be particularly challenging, as diesel demand is typically higher during this period. There are concerns that diesel supplies may be further strained if it is used as a substitute for heating oil or natural gas.
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Ban on Russian imports
In September 2023, Russia temporarily banned exports of gasoline and diesel to all countries outside a group of four ex-Soviet states: Belarus, Kazakhstan, Armenia, and Kyrgyzstan. The ban was implemented to stabilize the domestic market and reduce prices for consumers by addressing fuel shortages and weak rouble issues. This decision caused diesel prices in Europe to surge by 5%, surpassing $1,000 per tonne.
Prior to the ban, Russia had already reduced its seaborne diesel exports by nearly 30% in the first 20 days of September compared to August of the same year. This reduction was attributed to factors such as maintenance at oil refineries, bottlenecks on railways, and the weakness of the rouble.
In response to Russia's actions, the European Union and Britain imposed bans on Russian crude and oil product imports, including diesel, effective from December 5, 2022. However, due to challenges in tracking the origin of refined and blended diesel, Europe may still inadvertently import banned Russian diesel. Russian diesel could be rerouted through countries like India, Turkey, and the Middle East, making it difficult for regulators to trace its origin.
To address this issue, Dutch customs, UK enforcement authorities, and the Intercontinental Exchange are implementing measures to verify the origin of diesel imports. They are examining official certificates of origin, contractual agreements, invoices, and discharge certificates. Additionally, the UK and the EU have stipulated that any processing or blending of diesel outside Russia would still classify it as a Russian product if done solely to avoid sanctions.
Despite these efforts, the enforcement of sanctions relies heavily on the "good will" of importers and the willingness to comply with the regulations. The lack of effective tools to trace the origin of diesel once it has been refined or blended poses a significant challenge in ensuring the complete exclusion of Russian diesel from the European market.
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Record-high diesel prices
The US faced a diesel supply crunch in 2022, with the situation being particularly dire on the East Coast. The Northeast region, in particular, experienced a shortage of diesel, which powers the nation's agriculture, industrial, and transportation networks. The low inventories and high demand led to record-high diesel prices, with the price per gallon reaching $5.62, and even higher on the East Coast at $5.90, a 63% increase from the beginning of the year.
Several factors contributed to the diesel supply crunch and the subsequent price surge. One significant factor was the ban on Russian imports, which blocked access to oil and gas reserves that the US previously relied on. This forced the country to adjust its energy sources, impacting supply and prices. The COVID-19 pandemic also played a role, as refineries on the East Coast scaled back operations due to staffing issues, and it takes significant time and effort to restart shuttered refineries.
The Jones Act, or the Merchant Marine Act of 1920, further complicated the situation. This Act prohibits foreign vessels from transporting goods between two US ports, limiting the Northeast's ability to receive diesel from other countries or the Gulf Coast. The small number of US-owned and operated tankers available for energy transport drove up transportation costs, making it more expensive to bring diesel to the Northeast.
The high diesel prices had widespread implications for the economy. The trucking industry, which relies heavily on diesel fuel, faced increased costs, potentially leading to higher prices for consumers. The situation was especially concerning as the country approached the high-demand season during the colder months.
While some experts downplayed the likelihood of the US completely running out of diesel, the low inventories and record-high prices highlighted the fragile nature of the diesel market and the potential for disruptions in the supply chain.
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Northeast diesel supply
The Northeast has been facing a diesel supply crunch, with prices reaching record highs. As of May 2022, the price per gallon of diesel on the East Coast was $5.90, a 63% increase from the beginning of the year. The high prices are a result of low inventories, which have been impacted by several factors.
Firstly, the ban on Russian imports has blocked some of the oil and gas reserves the U.S. previously relied on. This has forced the country to adjust its energy sources, impacting diesel supplies. Additionally, COVID-19 has played a role, as refineries on the East Coast scaled back operations during the pandemic due to staffing issues. Restarting these refineries can take up to a year, contributing to the supply crunch.
The Northeast relies on diesel from the Gulf region, which is transported through the Colonial Pipeline. However, this pipeline has faced disruptions, including a ransomware attack in 2021 that shut it down for nearly a week. The Jones Act, or the Merchant Marine Act of 1920, further complicates diesel supply to the Northeast. This Act prohibits foreign vessels from transporting goods between two U.S. ports, limiting the number of tankers available for energy transport and driving up costs.
Despite the low inventories and supply challenges, experts suggest that a complete shortage of diesel is unlikely. However, high prices and supply deficits in the Northeast are expected to impact the economy, with the cost of goods likely to increase.
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Frequently asked questions
As of May 2022, the East Coast was experiencing a diesel supply shortage, with prices reaching record highs. However, this doesn't mean that the East Coast will completely run out of diesel fuel. While there may be a crisis, it is unlikely that the region will be left without any diesel.
There are several reasons for the diesel shortage on the East Coast:
- The ban on Russian imports has blocked some of the oil and gas reserves that the US previously relied on.
- The Jones Act prohibits foreign vessels from transporting goods between two US ports, limiting the number of tankers available for energy transport.
- COVID-19: refineries on the East Coast scaled back during the pandemic due to staffing issues.
The diesel shortage is likely to fuel inflation and could potentially slow down the US economy. Higher diesel prices mean the price of everything is liable to increase as diesel powers the nation's agriculture, industrial and transportation networks.
