The US now has just 25 days of diesel supply — the lowest since 2008. Here’s why that’s more alarming than a dwindling ‘oil piggy bank’

The US currently only has a 25-day supply of diesel – the lowest level since 2008.  That's why it's more worrying than a dwindling 'oil piggy bank'.

The US currently only has a 25-day supply of diesel – the lowest level since 2008. That’s why it’s more worrying than a dwindling ‘oil piggy bank’.

According to the Energy Information Administration, the US is facing a diesel crisis as demand surges ahead of winter – with only 25 days of supply left.

National Economic Council Director Brian Deese told Bloomberg TV that diesel stocks are “unacceptably low” and that “all options are on the table” to support supply and lower prices.

However, even as stockpiles drain, the Biden administration appears left with few sustainable options for long-term relief.

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What caused the crisis?

Unlike gas and jet fuel, diesel demand has recovered much faster than the pandemic. Diesel is used to transport goods as well as power construction, agriculture and military vehicles and equipment.

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In 2021 alone, the U.S. transportation industry consumed 46.82 billion gallons, or 1.11 billion barrels, of distillate fuel (mainly diesel fuel), with an average of 128 million gallons per day.

With increased demand for this dirty fuel, traders are paying more for fast deliveries than long-term ones, and they expect prices to drop in the future – a bearish market structure known as “rollback”. This also means that it is more profitable for suppliers to sell now.

The market often transitions into “contango”, the opposite of backwards, during the summer months when demand is lower and suppliers build inventory in anticipation of higher prices in the future. However, strong domestic and international demand, shrinking domestic refining capacity and sanctions on Russia’s oil imports kept the diesel market tight throughout the year.

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New England’s stocks are depleted to less than a third of their normal level for this time of year, which is alarming as these states rely more on fuel for heating than other parts of the country.

As of October 24, the national average diesel price is $5.34 per gallon – $1.63 more than last year.

What are the government’s options?

If diesel inventory continues to decline without government intervention, the impact on shipping costs of goods could push inflation even further.

Deese adds that the Fed has some tools to support diesel supply, such as the Northeast Home Heating Oil Reserve, which holds one million barrels of diesel in the event of a supply disruption.

“We looked very carefully at being ready to deploy as and when needed,” he said.

But the Washington Post reported that diesel demand is so high that if one million barrels of diesel were delivered from Northeast reserves, it would run out in less than six hours.

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The Biden administration also recently announced that it will take advantage of the country’s emergency oil reserves to counter rising gas prices, despite concerns about long-term effectiveness.

White House officials have not completely lifted fuel export restrictions, either, but the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers sent a joint letter in early October expressing their concerns.

“Ban or limit exports of refined products will reduce stock levels, reduce local refining capacity, put upward pressure on consumer fuel prices and alienate US allies in wartime,” the group wrote.

Setting minimum stock levels can also affect the number of exports sent to foreign countries. And even if domestic supply sees some relief, that could push prices up in the rest of the world.

What to read next

This article provides information only and should not be construed as advice. It is provided without any warranty.

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