As a result of news that diesel reserves have been depleted and, if not replenished, may run out within a month, sparking fears of shortages and price hikes, the Biden administration says it’s closely monitoring the diesel situation. Which means we should all be worried.
The Energy Information Administration (EIA) revealed this week that distillate inventories were at their lowest level since 2008 when they were at their lowest. Diesel, jet fuel, and heating oil are the principal distillates.
In 2008, however, springtime distillate levels were low and are currently low, heading into October. This is far worse than in 2008.
In general, demand for distillates peaks in the spring, when farmers produce crops, and in the fall, when people begin purchasing fuel oil for the winter. Consequently, a low distillate inventory in late April 2008 is not as severe as in October 2022. In fact, October distillate inventories have never been this low since the EIA began tracking this data in 1982.
Low distillate supplies are why diesel prices are above $5.00 per gallon, even though the average price of gasoline has gone below $4.00 per gallon countrywide.
Why is diesel in short supply this year? There are four components, but only two of them are present each year. As indicated previously, the demand for distillates increases throughout this season. However, this occurs every year. This is also the season when refineries perform maintenance. Typically, spring and fall are the best times to do this since demand is lower and the weather is more cooperative. Consequently, capacity decreases during this time of yea
Thirdly, the U.S. refinery capacity has decreased in recent years due to the closure of several unproductive refineries. So, this is a factor that has emerged during the past few years.
However, the fundamental cause is the cessation of Russian shipments. Before Russia invaded Ukraine, about 700,000 barrels of crude oil and petroleum products were imported daily by the United States. Most of these imports were refined goods and inputs to refineries that increased distillate supplies in the United States.
As a result of the loss of these Russian imports, refineries are struggling to fill gaps in their product lineups. Refineries possess a minor degree of flexibility in switching from gasoline to diesel output. However, the amount is negligible. This also means that if refiners adjust production, gasoline market shortages are possible.
House Democrats from New England are asking President Biden to release some of the NEHHOR’s home heating oil reserves to help reduce home heating prices in the region this winter. Instead of producing more, the Democrats want to use up all the reserves. The NEHHOR holds approximately 1 million barrels of home heating oil. According to experts, home heating oil shortages are unlikely to go away any time soon.
Some diesel imports are on their way from Europe to the East Coast, bringing some respite. However, the distillate market will not likely return to normal until at least next summer.