While concerns about gas prices are widespread, it's important to note that diesel is contributing more to inflation than you might realize.

• Despite the ongoing conflict between Russia and Ukraine, diesel fuel has been in short supply due to a decline in global refining capacity prior to the invasion.
• Due to sanctions on Moscow, Russia's fuel exports to Europe have decreased, resulting in a global competition for supply and driving prices to unprecedented heights.
• Distillate inventories are at eight-year lows, causing diesel to outpace crude rallying due to supply concerns, according to one analyst.

The global economy was already facing a fuel shortage before Russia invaded Ukraine.

Even if oil and gasoline prices decrease, some analysts predict that there could still be temporary shortages of diesel fuel and prices may remain high.

Those higher diesel fuel prices are also stoking inflation.

Tom Kloza, head of global energy research at OPIS, stated that he has started using the term "diesel crisis" to describe the current situation. He believes that it is a crisis that is happening before their eyes and that lines, shortages, and a $6 price may occur in places beyond California. However, he clarified that it is not yet a shortage in Europe, but they are headed in that direction.

If prices rise too high, demand may decrease, which could affect the outcome. The global loss of refining capacity due to Covid's impact on the oil industry has resulted in a low supply of diesel fuel.

The hardest hit part of the barrel is diesel, according to Kloza.

The price of oil has fluctuated wildly since Russia invaded Ukraine in February, with concerns about supply shortages driving it up to about $107 per barrel on Wednesday, after reaching a high of $130.50.

Diesel price rises more than gasoline

According to Matt Smith, lead oil analyst at Kpler, when you observe crude rallying, it is likely due to supply concerns, as diesel is currently outpacing it. We are currently at eight-year lows for distillate inventories.

Although there are concerns about the crude aspect, the real issue is the shortage of diesel in Europe, which requires imports, while gasoline exports remain unaffected.

Despite gasoline prices remaining constant, diesel prices increased by 8 cents per gallon, reaching a national average of $5.12 per gallon, while the national average for unleaded gasoline rose to $4.23 per gallon from $2.86 a year ago, according to AAA.

At this time last year, diesel was $2.03 per gallon cheaper, which can result in higher costs for anyone who buys anything that gets shipped, from food to home goods to automobiles, especially for trucks that fuel up with 125 gallons or more.

Contribution to inflation

Mark Zandi, the chief economist at Moody's Analytics, stated that the difference between diesel and motor fuel has never been greater, with diesel currently costing $1 per gallon, which is significantly higher than the average of 30 to 40 cents over the past few decades. This indicates how imbalanced the situation is. According to Zandi's calculations, one-tenth of the increase in consumer price inflation over the past year can be attributed to the rise in diesel prices.

That contribution to inflation includes related impacts.

Zandi stated that the farmer plowing the field and delivering food to the store shelf is similar to the cost of FedEx and UPS delivering products to the front porch, which have ancillary knock-on effects.

The contribution of diesel prices to inflation is even greater, with Zandi estimating that 17% of the acceleration of goods price inflation is due to higher diesel costs.

Diesel is used in farming, industry, and transportation. Francisco Blanch, global head of commodities and derivatives research at Bank of America, stated that diesel is used in a lot of machinery, construction, trucks, trains, and planes. However, Blanch believes that this reliance on diesel is problematic.

In 2020, marine fuel regulations prompted ships to switch to cleaner fuels, such as marine gasoil, a type of diesel fuel. Similarly, heating oil is also diesel fuel, and it is traded under the heating oil contract on the CME.

Prior to Russia's invasion of Ukraine, its daily crude exports were 5.5 million barrels, with 50% going to Europe. Additionally, Russia exported 2.4 million barrels of refined products, including 1.1 million barrels of diesel, with half of the refined products also going to Europe.

Due to the sanctions imposed on its financial system by the U.S. and its allies, Russia has faced challenges in unloading any waterborne oil or refined products, causing a worldwide diesel shortage in Europe as shipments change course.

Diesel consumption has a significant impact on various human activities, including transportation and manufacturing, with Europe being particularly reliant on diesel-powered vehicles.

Higher diesel prices, according to Zandi, lead to an inflation that negatively impacts the economy's growth potential.

Diesel is at record highs and has a significant impact on inflation, as it is the primary fuel used by the world's businesses.

Refinery issues

At present, some analysts predict that diesel may be more affordable than gasoline. However, there may only be limited shortages of diesel.

The oil complex is currently very tight due to a combination of factors, including the energy transition and low demand for diesel fuel, as stated by Kurt Barrow, vice president of oil and downstream at S&P Global Commodity Insights. He added that refinery shutdowns have contributed to this tightness.

The global refining industry has lost approximately 3.5 million barrels of refining capacity daily compared to pre-Covid levels, with 1 million barrels of that in the U.S. and another 0.6 million barrels in Europe, according to Barrow.

As the economy has reopened, diesel supplies were already tight.

Removing 600,000 barrels of Russian exports from a limited market increases pressure, according to Barrow.

In 2019, the U.S. consumed 9.3 million barrels of gasoline and 4.1 million barrels of diesel fuel, while Europe consumed 2.1 million barrels of gasoline and 6.8 million barrels of diesel fuel daily.

The cure to high prices may already be showing up.

In the U.S., diesel demand decreased by 700,000 barrels per day in the past week, from 4.5 million to 3.8 million, as reported by the Energy Information Administration.

John Kilduff, a partner at Again Capital, stated that the drop in diesel fuel demand is significant, with just a five to six dollar difference being enough to cause it.

The average price of gas per gallon varies across the country. While the national average is $5.12, prices in California are higher at $6.44, according to AAA. In New York, diesel costs an average $5.34 per gallon, while in Florida it's $5.17 and in Texas it's $4.86.

Kilduff said there may be more relief on the horizon.

Some refineries can alter the blend of fuels they manufacture and may boost diesel output, according to him.

But there are more complicated issues impacting refining.

The abrupt drop in oil and fuel demand during the 2020 Covid lockdowns caused imbalances in the refinery industry, with some refineries not fully recovering and two in the U.S. being repurposed as biofuel facilities.

Since just before Covid, North America has experienced the closure of approximately 1.2 million barrels per day of refining, resulting in a "gap year" for worldwide refiners, according to Kloza.

Repurposed refineries in California, North Dakota, Wyoming, and Newfoundland are producing renewable diesel and sustainable aviation fuels, according to the source.

According to Kloza, relief will be provided next year with the commencement of operation of large refineries in the Middle East, Southeast Asia, and West Africa. These refineries are specifically designed to optimize the production of fuels such as diesel and jet fuel.

The level of diesel storage in the U.S. is unusually low.

Diesel fuel storage has decreased by 29 million barrels in the past year and a half, reaching its lowest level since 2014, according to Kilduff. Currently, there are only 112 million barrels of diesel fuel in storage, compared to 141 million a year ago.

Inventories are 20% below the pre-pandemic five-year average, Kilduff added.

Blanch stated that the current shortage is in diesel, with reserves at their lowest point. He added that this could shift to gasoline as people prioritize diesel runs.