The rapidly escalating price of diesel fuel is impacting your wallet—even if you don't buy diesel directly.
Largely ignored at the pump, diesel fuel helps move everyday goods to homes and workplaces. And nearly everyone pays for that whether their own vehicle runs on gasoline, battery or electricity.
Diesel retail pricing per gallon is up 70% year-over-year as of late May 2022, according to the United States Energy Information Administration, outdistancing the 53% gasoline cost increase for the same period. Though long considered a fuel of choice due to its price advantage and use in fuel-efficient vehicles, diesel has recently cost consumers 20% to 35% more than gasoline.
And it's not just the size of the increases but the speed: It took 28 years for diesel to surpass $4 per gallon in mid-February 2022; however, pump prices exceeded $5 by mid-March, just one month later. That's the first 25% month-over-month leap, according to EIA records dating to 1994 when a gallon of diesel cost $1.10. As of May 30, the cost had risen to $5.53.
Why diesel prices are spiking
Like many products, diesel's price escalation is a case of demand exceeding supply. As a distillate of crude oil, diesel production is impacted by crude oil production variances.
According to many industry analysts, crude oil production is lagging demand by some 20 million barrels. At 42 gallons per barrel, supplies are 840 million gallons behind needs. And until that deficit narrows, prices for anything made from crude oil will remain high, said Dennis Kissler, trader at BOK Financial®, who provides frequent industry commentary.
The onset of the COVID-19 pandemic in March 2020 marked a turning point, Kissler said. Oil production plummeted when society shut down and the world stayed largely at home, decreasing oil demand. Reflecting that decline, diesel's retail price per gallon most of the year was often 20% below its $3 January 2020 gallon rate.
Meanwhile, idle oil workers left for jobs in other industries while consumers drove up fuel demand by spending money on nearly anything that could be delivered to their homes.
Kissler and industry experts also attribute the supply and production shortages to:
- Higher energy taxes and transport costs.
- Restricted supplies.
- Prohibitive production and transport costs.
- Limited new-facility construction, according to the EIA.
- Shortages of qualified workers. U.S. oil industry employment is down by about 100,000 workers from pre-pandemic levels, according to an April Reuter's story. Laid-off or otherwise idle workers turned to other industries, like construction, to make a living and have not returned. Production has also been slowed by sluggish hiring and training of new workers, remote work locations, undesirable conditions and attrition.
What's driving the demand for diesel?
Consumers' growing appetite for consumption and convenience is part of the story, fueling demand and the subsequent prices. From groceries to clothing to vehicles, all must travel from origin to destination—and often right to our doorsteps—typically by diesel-powered vehicles.
"High diesel prices bleed back to everything you use because everything you use is transported," said Kissler.
Deliveries of consumers' orders by rail, tractor-trailers and vans quickly rose through 2020 and beyond, requiring millions of barrels of oil and diesel distillate that the energy industry could not adequately deliver—and still struggles to. Thus, the ongoing supply deficit and resulting high prices.
Amazon offers proof of the ripple effects of high product and fuel demand. It recently announced a 5% fuel and inflation surcharge to offset rising costs that include delivery. That news preceded its Q1 results, where the retail and delivery giant announced a nearly $12 billion year-over-year financial performance reversal ($8 billion net income to a nearly $4 billion loss) despite a 7% net sales increase to $116 billion.
When will diesel prices recede?
According to Kissler, there's no clear answer, but the supply/demand ratio must narrow greatly, something he feels could be up to 24 months away. He also believes that high fuel prices are not represented in announced inflation rates, which he suspects are understated by several percentage points.
Other factors stalling a fuel price recovery include fallout from the ongoing Russia-Ukraine conflict and the Fed's stated goal of slowing inflation through interest rate hikes. Another factor: Consumers' desire for travel is driving energy demand.
According to the U.S. Department of Transportation, airline fuel consumption had almost returned to pre-pandemic levels at the end of the first quarter. And with more than 80% of Americans surveyed planning to take a road trip this summer, demand is likely to continue outpacing supply for the foreseeable future.