Should the Diesel and Heating Oil Shortage Keep you up at Night?

The cynical answer as to whether the shortage in diesel, heating oil, and jet fuel should keep you up at night is somewhat rhetorical.

This is a headline that plays well in the media across the country and globe to stoke your fears to visualize women and children in cold tenements with large woolen blankets covering them in a dreary winter setting.

Unfortunately, this is true for many Americans, but probably won’t be on account of heating oil shortages. My guess is the narrative will ramp up into the holidays and then be forgotten over more pressing issues like transgender bathrooms, Kanye West’s latest meltdown, and the like.

Cynicism aside, there actually is a fuel shortage going on according to the latest report from the Energy Information Administration (EIA), where they report that distillate inventories are at their lowest levels since the spring of 2008. 

If we look back at similar logistic issues where shortages have occurred we can put the diesel shortage in perspective. The pandemic left many of us wondering if we were going to have to use oak leaves or perhaps old socks for toilet paper as consumers faced a devastating shortage. Not to be outdone, the recent logistics shortage of baby formula left families in dire straits, worrying that they might not be able to feed their young.

While a distillate shortage is not life and death, it could be a fatal blow to businesses that don’t have enough in the ground to keep the doors open. For diesel specifically, the shortage will be painful at the macro level, but hopefully manageable at the micro level. A tight diesel supply will force prices to go up, which will eventually make it too expensive for some people. At the U.S. economic level, that means pain as consumers cut back and businesses slash costs.

At the local level, supply will still be available for those for whom diesel is a business-critical priority.

So what exactly is behind the current shortages?

It’s really all about market economics and tight inventories. Poor pipeline shipping economics and historically low diesel inventories are combining to cause shortages in various markets throughout the Southeast. As was the case in May of 2022, markets are now seeing extremely high prices in the Northeast along with supply outages along the Southeast.

On the supply side, fuel carriers are having to visit multiple terminals to find supply, which delays deliveries and strains local trucking capacity.

One such supplier, Mansfield Energy, is moving to Alert Level 4 to address market volatility. Mansfield is also moving the Southeast to Code Red, requesting 72-hour notice for deliveries when possible to ensure fuel and freight can be secured at economical levels. These low distillate inventories are why diesel prices are above $5.00 a gallon nationwide, even though the nationwide average price for gasoline has dropped below $4.00 a gallon. 

There are a couple of recurring themes each year that are always on the table regarding distillate prices. One is demand, which always spikes at this time of year. Also, U.S. refineries do maintenance in the spring and fall, which is factored into the market’s pricing. One thing that is different this year is that capacity is down as a result of a number of unprofitable refineries being shut down, thus causing supply to decrease.

These are known and are not game-breakers. However, the primary reason for angst currently that is novel is the cutoff of Russian imports. 

According to Robert Rapier, a chemical engineer in the energy industry, “The loss of those Russian imports have caused problems for refineries as they struggle to fill holes in their product slates.” He goes on to say, “That also means that if refiners do shift production, it potentially creates shortages in the gasoline market.”

With the U.S. midterm election days away, one has to ask about the politics involved in such a shortage. Top of the list is whether Biden can be blamed for the whole thing. Republican lawmakers, including Colorado Representative Lauren Boebert and Arkansas Senator Tom Cotton, have been blaming the low inventories of diesel on the President.

It really all comes down to capacity, and it will be argued on both sides what caused the supply to dwindle.

Was it the administration’s anti-fossil fuels agenda that led to a decline in capacity, or was it simply the economics of being non-profitable?

According to Patrick De Haan, GasBuddy’s head of petroleum analysis, “Biden is not to blame—this is due to lack of refining capacity, which has fallen 1 million barrels a day, primarily due to COVID-19 in 2020 curbing demand.” In addition, natural disasters like Hurricane Ida wiped out a refinery in 2021 and an explosion shut down a refinery in Pennsylvania in 2019. As mentioned, this has all been exacerbated by the war in Ukraine.

As analyst Rapier sees it, some relief is on the way, as some diesel imports are on the way from Europe to the East Coast. However, the distillate market won’t likely return to normal before next summer at the earliest.

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