Affected by the impact of the US-Iran war on the global oil and gas industry, the price of diesel in the United States broke through the record high in 2022 on Friday, and the average price in the United States soared to $5.85 per gallon for the first time.
As the “economic blood” that supports demand for freight, agriculture, and heating, diesel is deeply bound to the US economy, directly driving up the prices of various commodities, which in turn will affect the path of interest rate decision-making by the Federal Reserve.
Prices Soar Again
Diesel is widely used in freight transportation and various distribution systems, and the increase in the price of diesel means that the transportation cost of a large number of daily goods has risen.
Before the war between the United States and Israel against Iran in late February, the national average price of diesel in the United States was about 3.76 US dollars per gallon. After the war broke out, the price of crude oil as a diesel raw material soared, the Middle East supply chain was blocked, production was reduced, and there was a lot of congestion in the Strait of Hormuz. Diesel prices rose rapidly. Oil prices fell briefly earlier this summer, but resumed to rise as the conflict between the United States and Iran escalated again.
Notably, fuel supplies in the Middle East and Russia have been disrupted recently; this is compounded by a seasonal rise in demand driven by the autumn harvest. Meanwhile, there is a global shortage of spare capacity to make up for the lost diesel exports through the Strait of Hormuz and from Russia. As a result, the U.S. and global diesel markets have tightened sharply in recent weeks.
Diesel prices have long been higher than gasoline for decades, and diesel prices have tended to rise more in previous energy crises. The reason is that supply is tight and demand is rigid, and diesel is deeply bound to the global trading system. Household consumers can choose to drive less when gasoline prices rise; but there are few short-term alternatives to diesel in the global system of goods production and transportation.
Dean Crocker, principal analyst at freight data analytics firm DAT Freight & Analytics, said: “Diesel is arguably driving the US economy, and I think that”s the bigger problem.
With the U.S. midterm elections in November drawing closer, rising oil prices will further intensify the political pressure facing the Republican Party. Voters are already dissatisfied with the Trump administration’s performance in economic governance. Polls conducted this summer showed that two-thirds of Americans disapprove of Trump’s handling of the economy.
China Business News previously reported that Trump met with nearly a dozen refiners this week to discuss expanding refining capacity in order to lower end point oil prices. But the actual impact remains to be seen. Domestic refinery output has hit a new high, with refineries operating at 98% of their operating capacity last week. Some refineries are delaying equipment maintenance, increasing the risk of unexpected equipment shutdowns and further driving up oil prices. If a major hurricane hits the US Gulf Coast, where the vast majority of US refining capacity is concentrated, it will cause more supply disruptions and oil prices will rise more sharply.
Impact of Diesel Prices
Diesel prices hit a new high, which is likely to transmit to the whole economic chain, pushing up inflation and intensifying policy pressure on the Federal Reserve. Data released late last month showed that the Fed’s preferred PCE price index maintained year-on-year inflation at 3.7% in July, well above the Federal Reserve’s inflation target of 2%. Data released by the University of Michigan last week said that US consumer confidence fell in August as people expected inflation to remain high for the “foreseeable future”.
Some enterprises have already passed on costs to consumers: Amazon has imposed additional fees on some merchants, and the United States Postal Service has also raised postage. In the future, consumers will feel an increasingly obvious impact of price hikes on goods when shopping in supermarkets and malls.
Ajesh Kapoor, founder and chief executive of SemiCab, a trucking technology company, said the industry could adapt to higher diesel prices, but there were limits to how much it could afford. “Almost all modes of transport are directly affected by diesel prices.
Diesel runs through the entire food supply chain: farm machinery, fishing boats, and transshipment trucks all rely on diesel. Fresh fruits, vegetables, meat, and various perishable foods require high-frequency transportation and replenishment, and some agricultural harvesting equipment itself is also powered by diesel. The Alliance of Independent Grocers, a group of 7,500 supermarkets around the world, estimates that fuel accounts for 15-30% of the total cost of food.
However, there is a time lag in the transmission of energy shocks to food prices, but the increase in diesel prices is likely to eventually push up food prices. David Ortega, a professor of food economics and policy at Michigan State University, pointed out that cold chain transportation is often the first to increase prices.
It should be noted that the longer the high price of diesel continues, the price pressure may further spread. Next, a large number of goods such as clothing, cosmetics, furniture, etc. rely on diesel-powered trucks, trains, and ships to complete transportation, which will be affected.
The impact is not limited to the transportation of consumer goods: some public transport vehicles use diesel; diesel generators are an important backup power source in many areas, and even serve as the main power supply in some remote areas. Neil Atkinson, a senior researcher and energy analyst at the National Center for Energy Analysis, pointed out that the supply of refined oil products continues to tighten, and refined oil products such as diesel are becoming more expensive. “This is gradually evolving into a major crisis: not only are absolute prices high, but physical stocks of refined oil continue to be depleted, and the global refining system is under pressure. This situation cannot be maintained in the long term.
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