Diesel prices starting to settle down

Price relief can’t come soon enough to diesel buyers.

Essential to truck fleet operations and a costly drain on business profitability, the distillate fuel oil was selling for a historic high of $5.75 a gallon last summer – more than double the $2.40 level of two years earlier.

Prices have since moderated, declining to $5.21 late last year. And more relief is on the way, as the U.S. Energy Information Administration projects a price dip to $4.41 by the fall of 2023.

One reason for the price moderation is a decline in the panic buying that occurred in the initial months of the Russia-Ukraine war. Another is a move by refineries to retool their operations for greater diesel capacity. A third is a general deceleration in the global economy, which results in declining demand.

The costs of war

While diesel prices have moderated, they remain sky high by historic standards.

Price estimates for the fall of 2023 remain some 47 percent above typical pre-pandemic levels (see chart, page 62). And there’s no disagreement about the primary reason.

“Diesel prices are elevated right now largely because of the Russia-Ukraine war,” says Clark Williams-Derry, an analyst at the Institute for Energy Economics & Financial Analysis. “What’s happening in Russia is affecting global energy markets in a very deep and profound way.”

Russia produces about 10 percent of the oil from which the world refines diesel. Europe is especially dependent on Russia.

“The war has disrupted the European market, either completely eliminating it or dramatically reducing it,” says Allen Schaeffer, executive director of the Diesel Technology Forum. “That means folks in Europe and other countries that might have done business with Russia in the past now are scrambling to find fuel in other places.”

Spooked by disruptions in natural gas deliveries from Russia, Europe is also stockpiling diesel in case it’s needed for home heating this winter.

Europe’s increasing demand for diesel affects prices everywhere, given the commodity status of oil and its distillates.

“One nation’s demand affects everyone,” Schaeffer says. “We are seeing a whole trickle-down scenario as more people try to use a product that has become less available.”

The global nature of diesel is responsible for its elevated pricing in the U.S., despite the nation’s export of roughly 1 million barrels of the distillate every day.

“The U.S. is a net exporter of oil and petroleum products but is still as dependent and as vulnerable as ever to global market forces,” Williams-Derry says. “We don’t get a cheaper price just because we are producing more oil or because we have a lot of refinery capacity. We pay the same price as anyone else who is avoiding Russian oil.”

Upward pressures

While the Ukraine war is the major driver of higher diesel costs, it’s not the only one.

“A number of factors have put upward pressure on retail prices,” says Andrew Lipow, president of Houston-based Lipow Oil Associates. “One is the post-pandemic reopening of economies around the world.”

People are traveling more, and that means greater demand for the jet fuel which pulls from the same oil resources required for diesel. Plus, more fuel is needed for the greater number of trucks delivering capital goods and consumer merchandise.

The rebound in global demand is happening at a time when many refineries have cut back production or closed.

“We don’t have as much capacity to produce diesel fuel today as we did pre-pandemic,” Schaeffer says. “COVID caused a lot of layoffs at refineries around the world. It also caused a delay in the start-up of new refining capacity, which would have increased supply.”

The U.S. possesses some specific additional drivers of fuel prices.

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