Reporters and investors are focused on rising crude oil prices. How high will they go? WTI futures prices recently breached $91 bbl., the highest price this year and the highest since last November. 

Observers are concerned about the affect high oil prices may have on consumer spending and the health of the economy. Over the past 60 days, crude oil prices increased 21% while gasoline pump prices are only up 9%. What they should focus on is what is happening to diesel prices. 

Many people remember how diesel spot prices spiked when the Russia/Ukraine war broke out, but then collapsed between May 2022 and May 2023. Prices fell 50% as the European fuel crisis eased with warmer weather and assistance from global allies that supplied the continent with fuel. But since May diesel prices have climbed 50%. Although still below prices at this time last year, diesel prices are causing economic problems.

Global conditions may cause diesel prices to go much higher as we head into winter. Three forces are at work that could drive prices substantially higher. First are the production cutbacks by Saudi Arabia and Russia, which will last through the end of 2023. Those producers have chosen to concentrate their cuts on those oils that contain the most diesel.

Secondly, there is a shortage of global refinery capacity to produce diesel. During the pandemic, the oil industry shut down many small and unprofitable refineries or converted others to produce sustainable aviation fuels. New refineries have yet to start up, so global capacity is down just when demand is growing heading into winter.

Additionally, hot summer temperatures forced many European and North American refineries to run slower, thus diesel stockpiles failed to grow as normally occurs each year. Refiners were also pressured to emphasize the production of gasoline and jet fuel over diesel this summer, further limiting the growth of diesel inventories.

A final problem is Russia’s recent decision to use its diesel exports as an economic weapon. Russia announced a one million barrel a day embargo on diesel exports. They did it to help contain their domestic market prices and to cause further logistical challenges for European allies of Ukraine. Oil traders are not sure how much of the embargoed diesel will leak into international markets, but they believe a meaningful portion will make it. Depending on the veracity of this assumption, diesel prices might only climb higher rather than spike higher.

Diesel is the predominant fuel of the heavy-duty transportation sector – trucks and trains. That is how goods move from factories to stores. It is hard to think of any product not touched by diesel vehicles. Whether it is from planting and harvesting crops to processing and delivering products to market. Diesel powers the equipment that mines the raw materials for making our goods.

And we cannot forget how much the oil and gas industry relies on diesel to power rigs and support equipment. The list goes on. If oil is the economy, then diesel is the workhorse. Higher diesel prices will be passed on to consumers. It will spark more inflation, inflicting harm on our economy, businesses, and families. 

G. Allen Brooks is an energy analyst. In his over 50-year career in energy and investment, he has served as an energy security analyst, oil service company manager, and a member of the board of directors for several oilfield service companies.

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