A diesel pump at a gas station
Source: Getty

U.S. East Coast Faces a Diesel Shortage, Prices Hit Record Highs

Mohit Oberoi, CFA - Author
By

May 6 2022, Published 8:32 a.m. ET

Consumers globally have been grappling with shortages of daily-use goods. The global supply chain crisis is now into its third year and has gotten worse amid the COVID-19 outbreak in China and the Russia-Ukraine war. Russia’s invasion of Ukraine has led to a spike in energy prices, which is reflected in high gas and diesel prices.

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Gas and diesel are refined from crude oil and higher crude oil prices eventually lead to a rise in gas and diesel prices as well. Apart from crude oil prices, the crack margin also impacts gas and diesel prices. The diesel crack margin is at record highs. While spot gas prices are slightly off their 2022 highs, diesel is running at record highs and hit a new record high of $5.473 per gallon on May 5, according to the American Automobile Association. Is there a diesel shortage in the U.S. as is reflected in record crack margins and prices?

Diesel is used in commercial vehicles.

Diesel is mostly used in commercial vehicles like trucks and freight trains. Higher diesel demand usually signals strong economic activity. Also, while higher gas prices have an impact on inflation, diesel is a bigger driver. High diesel prices lead to an increase in logistics and production costs for businesses.

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There has been a global diesel shortage.

There has been a global diesel shortage and apart from the U.S., parts of Europe and Africa have also reported a diesel shortage. In the U.S., the East Coast has been hit hard and the region's diesel inventories hit the lowest seasonally adjusted level in over 30 years, the Washington Post reported

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Why is there a diesel shortage in the U.S.?

Several factors have been contributing to the diesel shortage. First, domestic supply was hit after the Biden administration banned the imports of energy products from Russia. The East Coast refining capacity has fallen drastically since 2009, which is also putting pressure on the diesel supply in the region.

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While some of the refineries have increased their diesel production to capitalize on the record crack margin, some aren't able to scale up production. For example, PBF Energy, which owns the Paulsboro refinery near Philadelphia, said that it would struggle to increase production since it isn't able to import semi-refined oil from Russia.

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Overall, it has been a perfect storm for diesel. The demand has been high and supply has been weak. The supply situation got worse after Russia invaded Ukraine and the West responded with sanctions, including those targeting the country’s energy exports. Global diesel inventories were running low before the Russia-Ukraine war, and the supply-side turmoil caused by the conflict only added to the issues.

Will the Biden administration help?

The Biden administration announced a historic 180 million barrel crude oil release from the strategic oil reserves. The fuel will be released over six months and is expected to bring some stability to energy markets. Many are now banking on the administration to also release some diesel from the strategic reserve.

However, the global diesel and energy shortage might not get better soon. The EU is proposing a ban on Russian oil even though it isn't clear how the continent would meet its energy needs amid its overreliance on Russian oil and gas.

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