High Input Costs—Part II: Diesel Prices

While on the topic of higher input costs, diesel fuel supplies and prices have been making headlines in past week. U.S. diesel stocks are at multiyear lows (Figure 2). Currently, the U.S. has just 106 million barrels of diesel and heating oil in stock. Agweb.com reports inventories typically are 30 percent higher at this time of the year. Most of the supply concerns center on the Northeast where distillates are used for heating and winter is just around the corner.

There are many factors behind the diesel shortages. Demand for diesel is at the highest level since 2007. Exports to Europe and Latin America have grown due to world supply disruptions and challenges and greater profits that can be gained in these markets. Higher oil prices, reduced imports from Europe, and the ban on Russian oil imports have also contributed. Much of imported Russian oil was refined into diesel fuel. Finally, refining capacity in the U.S., particularly in the Northeast, is lower now than in the past and has been further reduced by facilities being down for maintenance.

Figure 2. Diesel Inventories

Source: Ag Committee Senate GOP

Diesel is used widely in Nebraska agriculture, powering farm equipment, irrigation pumps, and transportation. Fortunately, product shortages have not been reported in the state. However, the market challenges are showing up in the form of higher prices. Diesel prices are well above levels seen over the past five years exceeding $5.25 per gallon earlier this year before retreating to less than $5.00 per gallon in August (Figure 3). Compared to last year at this time when prices were around $3.50 per gallon, prices this year are 43 percent higher.

Some observers expect the diesel supplies to improve. Refining capacity is coming back online and there are reports of ships with product bound for Europe being called back to the U.S. But, like other supply challenges, there are many underlying factors to be resolved before the situation improves markedly. In the meantime, expect price volatility and supply headaches.

Figure 3. Nebraska Weekly Diesel Prices

Source: Nebraska Department of Environment and Energy