A crisis that could paralyze the world… caused by the most important fuel for the economy!
Prices for diesel – which is used to power trucks, fuel machinery and heat homes – have risen nearly 50% due to dwindling supplies and a poor export market.
Diesel is the most important fuel for the global economy, as trucks, buses, ships and trains depend on it. It is also used in the operation of construction, manufacturing and agricultural machinery, as well as for heating homes and generating electricity after the high price of natural gas.
In the next few months, nearly every region on the planet will face diesel shortages at a time when a supply crisis in nearly all of the world’s energy markets has worsened inflation and stifled growth.
In the United States alone, the high price of diesel will cause economic damage estimated at $100 billion, Mark Finlay, an energy expert at the Baker Institute for Public Policy at Rice University, told Bloomberg, as seen by Al Arabiya.net.
Inventories of diesel and heating oil in the United States are at their lowest level for this time of year in four decades. Northwest Europe is also facing low supplies – stocks are expected to hit a low this month and then fall further by March, shortly after the start of sanctions that will cut off the region from supplies to the Russian navy.
It comes at a time when global export markets have become so crowded that poorer countries such as Pakistan are shut down and suppliers are unable to book enough shipments to meet the country’s domestic needs.
“This is definitely the biggest diesel crisis I’ve ever seen,” said Dario Scavardi, former CEO of Italian oil refiner Saras SpA, who has spent nearly 40 years in the industry.
The evolution of the price of diesel
Diesel on the New York Port spot market, a key benchmark, has risen by almost 50% this year. The price reached $4.90 a gallon in early November, double last year’s levels.
The fuel spread against crude also widened, a sign of weakness in refinery capacity and supplies to be delivered later. In northwest Europe, diesel futures are around $40 a barrel of Brent, compared to an average over the past 5 years of just $12. New York diesel futures for December delivery also traded about 12 cents higher than those for January.
What causes the deficiency?
And after the blockades destroyed demand and forced refiners to close some of their less profitable plants, the looming shift away from fossil fuels further reduced investment in the sector.
As of 2020, US refining capacity has decreased by more than 1 million barrels per day. Meanwhile, in Europe, shipping disruptions and labor strikes affected refinery production.
Things could become even more dramatic with the European Union’s impending move away from Russian supplies. Europe relies on diesel more than any other region in the world. Almost 500 million barrels are shipped annually, and about half of that is normally loaded in Russian ports, according to data from Vortex. The United States also halted imports from Russia, which was a major East Coast supplier last winter.
A prolonged diesel shortage across the United States is certainly unlikely since the country is a net exporter of the fuel. But local outages and price hikes are likely to become more common, especially on the East Coast, where pipeline shortages are creating huge bottlenecks. The region relies heavily on the Colonial Pipeline, which is often full. The century-old shipping law, known as the Jones Act, further complicates the movement of domestic fuels and encourages Gulf Coast producers to favor exports over supplying the domestic market.
Slowing supply to Europe
As the deadline for sanctions on Russia approaches, Europe continues to import massive amounts of diesel from Russia. It also pulls huge volumes from Saudi Arabia, India and others. As a result, seaborne imports for the month of October hit their highest level since at least the start of 2016, according to Vortex data compiled by Bloomberg.
Russia holds the scene
Germany has already experienced the squeeze, with lower Rhine levels disrupting supplies and cutting production, while refineries in neighboring Hungary and Austria have also suffered significant disruption. French production was stifled by a wave of labor strikes over wages.
“If Russia is no longer a supplier, it will have a big impact on the system and it will be difficult to fix,” said former CEO Sarasa Scavardi.
Poor countries suffer
Global fuel pressure has made it more profitable for exporters such as China and India to send shipments to countries in Europe that can pay large premiums. Total fuel exports from China are expected to rise by 500,000 barrels a day to nearly 1.2 million barrels by the end of the year, according to energy consultancy FGE.
It remains to be seen whether this will be enough to close the global supply gap, and in the meantime poorer countries that cannot afford higher prices suffer.
Sri Lanka’s cash-strapped energy minister said he was struggling to afford global fuel prices and was unable to secure adequate supplies. Thailand has extended diesel tax cuts in a bid to protect consumers from higher prices, with the government predicting the move will cost about $551 million in lost revenue. And Vietnam is looking to enact emergency measures, including using the central bank to open more loans to domestic fuel producers to boost supplies.