US diesel shortage weighs on farmers, homeowners and the White House

In the southeast, a major national diesel supplier, Mansfield Energy, recently declared a “code red”, warning that some terminals were running out of fuel, forcing refueling trucks to divert elsewhere. Industrial customers were asked to give three days’ notice before placing new orders. Home heating oil suppliers face similar challenges in New England.

“This is the lowest diesel inventory we’ve had at this time of year since 1951,” said Houston-based oil industry consultant Andrew Lipow. “That’s quite concerning, given that the demand is four times what it was at the time.”

Diesel is a workhorse of the economy, helping to power most major industries. Businesses depend on it to deliver their goods by truck, rail and ship, and almost 1 in 5 homes in the North East use diesel for oil heating. Price increases this season are overwhelming, in turn driving up the cost of food and other goods. The average price at the pump is $5.36 a gallon, according to AAA, up from $3.64 a year ago. In California, it’s nearly $1 more.

The cost of heating a home with diesel-based home heating oil is expected to increase 27% over last year, according to the U.S. Energy Information Agency’s winter forecast .

“The supply goes to the places that will pay the most money, and in New England we have to pay a big premium,” said Kate Childs, vice president of Tuxis-Ohr’s Fuel, a Connecticut supplier. It said some of its delivery trucks now had to drive from terminal to terminal before they could find enough fuel to fill their orders.

Crisis is driven by a confluence of issues. A surge in demand as the economy recovered from the pandemic coincided with a sudden drop in global supply created by sanctions on Russia, which were triggered by its invasion of Ukraine. The United States now finds itself increasingly in competition with Europe for fuel supplies.

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The challenge is compounded by the closure of old refineries in the United States in recent years, which has reduced the amount of diesel produced here by 1 million barrels per day, or about 6%.

New refineries are unlikely to take their place, industry officials say. Building and operating such infrastructure is expensive and usually only pays off if it operates for decades. Investors are wary of such projects at a time when the country is moving away from fossil fuels.

Now, with winter on its way and Europe poised to impose a full ban on imports of Russian petroleum products, the frenzy to lock in enough fuel for American businesses and consumers is driving sharp increases prices and particularly difficult market dynamics.

In October, two tankers loaded with diesel in the Middle East and on their way to deliver it across the Mediterranean to Europe were diverted to New York Harbor, according to tracking data reported by Reuters. Even at a time when Europe is paying exorbitant prices for fuel, American buyers were willing to pay more to avoid breakdowns. Such maneuvers maintain supply, but at a very high price.

The shortage was a politically powerful talking point for Republicans during the midterm campaign, with conservatives candidates and pundits such as Fox News’ Tucker Carlson suggesting gas stations were on the verge of running out of fuel completely. This has never been the case. But the price spike is real, wreaking havoc on the economy and dealing a painful financial blow to consumers.

The pressure on Biden isn’t just coming from Republicans. More … than 30 New England House and Senate lawmakers, mostly Democrats, are pushing the president to release fuel from the Northeast Home Heating Oil Reserve, which stores about 10 days of fuel available for emergencies . Their letters warn that families may not be able to keep their homes at safe temperatures this winter.

The administration has signaled that a release from the reserve is likely when winter arrives. It hasn’t been in operation since 2012, when it was used to provide fuel to emergency responders in the aftermath of Hurricane Sandy.

The administration met with governors to develop a strategy to protect fuel supplies. It is currently awaiting a release from the reserve so that a small amount of additional fuel will be available if conditions worsen with cold weather or an acute supply chain emergency.

The heating oil shortage hits at the same time as New England power companies that rely on natural gas face their own crisis. Boston-based Eversource Energy, which serves 4 million customers, warned the administration in an Oct. 27 letter that gas supplies are so tight that power outages are possible this winter.

Biden has few options at his disposal to quickly increase those fuel supplies. A proposal the White House has put on the table: limit exports of domestically produced diesel and natural gas, a move the industry says would create chaos in energy markets while other countries would retaliate.

Oil industry officials were bracing for Biden to make such a move in an election in which Democrats campaigned on voter anger over oil company windfall profits.

“If they were going to take drastic measures to change the market by limiting exports, it would have made more sense for them to try to do it before the election,” said Stephen Brown of RBJ Strategies, a consultant to energy companies.

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Administration officials say nothing has been taken off the table, and the White House is growing increasingly frustrated with oil executives’ refusal to voluntarily increase their national stockpiles.

“For months we have been calling on oil companies to address low inventory levels on the East Coast, and their continued inaction – at a time when they are posting record profits – is unacceptable,” the House spokesperson said. White, Abdullah Hasan. “We are monitoring the situation closely and will continue to use every tool at our disposal to reduce costs and protect American consumers.”

Biden signaled just days before the election that he would demand oil companies take a more active role in lowering prices, promising that a “come unto the Lord” speech would take place “soon”.

A simpler route to lower oil prices would be to revoke a law that only allows US ships to transport oil or gas from the Gulf Coast to other domestic ports. Foreign ships, Lipow said, are more readily available and charge significantly lower rates. But there is insufficient support from Congress for weakening the rule, called the Jones Act, which is strongly backed by unions and shipbuilders.

“They need to change the Jones Act now,” said Chris Herb, president of the Connecticut Energy Marketers Association. “But it’s very political inside DC, and the interest groups are winning.”

Inventories are so tight right now that even the smallest supply chain hitch, like a refinery fire, threatens a major disruption. Mike Steenhoek, executive director of the Soy Transportation Coalition, describes it as being on the ring road during rush hour, when there is so little open road that a minor accident or a flat tire can stall traffic for miles.

The farmers he works with in the Midwest are particularly affected. Unlike large retailers like Walmart or delivery companies like FedEx, farmers cannot simply pass on fuel surcharges to their customers. Their product prices are set by the Chicago Commodity Exchange.

At the same time, diesel prices are skyrocketing, farmers are burning more of it. Low water levels in the Mississippi River mean that the barges on which many of them normally load their produce are not in service, forcing farmers to travel long distances to other sites to deliver their crops.

This means having to buy even more diesel.

“Some industries are nimble and can pivot more easily in times like these,” Steenhoek said. “Agriculture, by its very nature, cannot. When we have these supply issues, it creates big problems.