What About Banning Diesel Exports?

Watching the Trump Administration in action sometimes reminds me of the popular arcade game Whack-A-Mole. In the game, players use a mallet to hit mechanical toy moles as they randomly pop up. Similarly, the Administration implements a policy which creates unintended consequences; implements another policy to address consequences stemming from the first policy; which leads to further consequences and policy changes; and so forth and so on — just like the moles keep popping up in the game. The latest example is the ban on diesel exports being bandied about. The goal of the ban would be to reduce diesel prices which have risen due to the closing of the Strait of Hormuz and a global shortage of diesel. The idea of a export ban was floated by elected officials from agricultural states, notably Sen. Chuck Grassley, who are no doubt hearing from producers on the record prices.  

With harvest beginning, the price surge comes at a bad time for farmers. Kansas State University farm management specialist Gregg Ibendahl estimates that the higher diesel costs could raise expenses to grow corn around $10 per acre this year. And while fuel isn’t the largest expense for farms (fuel costs range from 3-6% of total farm production expenditures according to the U.S. Department of Agriculture Economic Research Service) the additional costs impact the bottom line. Many farmers prepurchase their fuel needs. Those who did should avoid the worst of the price pain this year unless they need to purchase more to fill their harvest needs. They will feel it when purchasing next year’s needs. Producers who purchase diesel on an as-needed basis will feel the greatest pinch this year.  

Analysts say that an export ban would lead to lower prices in the near-term but any relief would be short-lived. Moreover, Midwest farmers probably won’t see the relief. That’s because nearly all U.S. diesel exports originate from refineries and facilities on the Gulf Coast and there isn’t the pipeline infrastructure to move significant quantities from the coast to the Midwest. Midwest needs are largely filled by refineries in the region. Nebraska’s usage is supplied by refineries in Kansas, Illinois, and Wyoming. Without being able to move product, storage in the Gulf would quickly reach capacity and refineries would have to slow down production. Some refineries might use the opportunity to shut down for maintenance, also reducing supplies. Other refineries could cut production in response to lower prices, all of which negate any benefit of a ban. Over the long-term, a ban could exacerbate already tight supplies and cause prices to rise even higher.

Other consequences for agriculture could flow from a ban. A ban would signal to countries that the U.S. is not a reliable trade partner. Customers of U.S. diesel, like Mexico and countries in Latin America, would probably seek to diversify their diesel supplies. The effort at diversification could spill over into agriculture goods. Mexico is Nebraska’s largest export market. If a ban does result in lower diesel prices, it would weigh on renewable diesel prices, which would consequently pressure soybean prices. Finally, a ban could set the table for other export bans. Could export bans on soybeans or corn be possible the next time their prices move higher? It’s not so farfetched. Rumors were in the air recently of an export ban on beef in an attempt to lower beef prices.  

With elections a little over a month away, there are obviously politics involved in the consideration of a ban. But what makes good politics rarely makes good economics. When governments meddle in markets, there are consequences. In this case, the consequences could be many. Any short-term gain would evaporate in the long-term as underlying supply issues will not disappear with a ban. Ibendahl says he expects diesel prices to remain elevated for a year or more unless global tensions ease and there’s a resumption of normal fuel flows from major producing regions. In the meantime, there’s more moles to be whacked.