Commodities Corner: Diesel’s cost climb could hit consumers harder than record gasoline prices

As U.S. drivers try to recover from the shock of record-high gasoline prices, a rapid rise in the price of another fuel threatens to hurt the wallets of consumers around the nation, regardless of whether they’ve ever spent time behind the wheel.

Retail prices for diesel fuel, widely used to transport goods across the country, stand less than a dime below their all-time high. The national average price for diesel stood at $4.755 a gallon on Tuesday, up from $3.005 a year ago, according to AAA. Diesel’s highest recorded average was $4.845 from July 17, 2008.

“Diesel fuel prices are a key variable input cost embedded in prices for U.S. food and consumer goods, since those goods are chiefly moved by rail and truck, especially in what is referred to as the last mile in reaching retail outlets and grocery chains,” said Brian Milne, editor and product manager at DTN.

Transportation fuel

Most of the products used in the U.S. are transported by trucks and trains with diesel engines, according to the U.S. Energy Information Administration. Most construction, farming and military vehicles and equipment also have diesel engines.

“When the price of fuel rises quickly, our members take a significant hit to the bottom line,” said Tiffany Wlazlowski Neuman, vice president, public affairs at NATSO, a national trade association representing America’s travel plazas and truckstops.

She pointed out that if diesel prices climb to their record high, it would cost a truck driver $1,453.50 to buy 300 gallons to drive roughly 2,010 miles, she said.

Truckstop operators must pay for fuel up front and are often unable to adjust pricing to keep pace with the purchase price, Neuman said. Still, at times of high price volatility, NATSO’s members generally don’t see a decrease in customers. They may buy less fuel, however, in the hope that prices come down, she said.

Trucking companies may attach a fuel charge to their deliveries, and that surcharge may be “slow to get started and slow to end,” she said. Ultimately, they are applied to every delivery and every item,” so the price of everything rises.

The EIA estimates that distillate fuel consumption by the U.S. transportation sector — essentially diesel fuel — was at 44.61 billion gallons, or an average of about 122 million gallon per day, in 2020. That represents around 27% of total energy consumption by the nation’s transportation sector.

Diesel prices have lagged so far in 2022, with crude oil prices increasing more significantly — suggesting that diesel prices will increase steadily through the rest of this year, said Craig Golinowski, managing partner at Carbon Infrastructure Partners. Diesel users should expect fuel prices to increase by 25% to 35% in the coming weeks and months, he said.

On the futures market, the ultra-low sulfur diesel contract, also known as the heating oil contract, was trading Tuesday at $4.347 a gallon on the New York Mercantile Exchange, and likely to settle at an all-time high, according to Dow Jones Market Data.

Oil’s rise

Prices for diesel have climbed along with U.S. and global crude oil prices. In Tuesday dealings, U.S. benchmark West Texas Intermediate crude was trading at $127.92 a barrel, and global Brent crude traded at $132.55. Both were likely to see their highest finish since July 2008, FactSet data show.

The cost of crude-oil accounts for about 68% of the diesel fuel price, said Neuman. Crude oil prices have soared on expectations that supplies from Russia, which is among the world’s biggest oil producers, will be disrupted as it continues its invasion of Ukraine, and the U.S. and other nations implement sanctions on Moscow in retaliation.

U.S. President Joe Biden announced a ban on Russia oil imports on Tuesday.

A ban on Russian oil exports, “would be a shock to the world’s supply chain since there’s limited new oil production that can come online quickly in what is referred to as spare capacity to make up for the loss of those exports,” said Milne.

The climb in oil prices has also led average U.S. retail gasoline prices to a record high. AAA pegged gasoline prices for regular unleaded at $4.173 on Tuesday, topping the previous record of $4.114 from July 2008.

The current oil supply environment is “unprecedented,” said Carbon Infrastructure’s Golinowski. In previous oil price shocks, “spare productive capacity was available to limit upside price spikes over time,” he said. Today, however, “global spare productive a is “nearly exhausted” as a result of underinvestment into oil and natural-gas production.

Demand destruction

Diesel’s rise in many markets was four or five times the gains for reformulated gasoline on Monday, because demand destruction in diesel is unlikely even at much higher prices, Tom Kloza, global head of energy analysis at OPIS, wrote in a Monday note to clients.

Retail gasoline above $4, meanwhile, may have already reached that breaking point for consumers.

A “rise in consumer deliveries to homes, which exploded in the initial days of the pandemic, continues to underpin commercial demand for diesel fuel,” Milne said.

The market is approaching a price level that will trigger demand destruction, he said, pegging that price level at around $120 a barrel for crude oil.

“When joined with climbing inflation for homes, vehicles and food, consumers will…reduce discretionary spending and pull back from large purchases,” he said. “This scenario will have a snowball effect and reduce fuel demand.”

Even so, “we might not see a meaningful drop back in diesel fuel demand for quite some time, despite surging fuel costs,” considering the ongoing world supply chain problems and backlog orders,” said Milne.

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