Soaring diesel prices add to inflationary pressures

The cost of a gallon of diesel fuel is soaring even as regular gas prices fall, putting new pressures on U.S. shipping and consumer prices.

The national average for diesel hit $4.54 this week, up nearly $1 from a year ago, according to the latest data from the Energy Information Administration (EIA). In California, where diesel averages a nation-high $5.44 a gallon, prices are up about 70 cents. 

By comparison, the EIA found regular gasoline hit $3.25 a gallon on Monday, down more than 3 cents from last year.

“Higher fuel prices absolutely mean higher costs for transportation, which increases the costs of consumer goods,” said Louis Campion, president of the Maryland Motor Truck Association, a trucking industry group.

Higher diesel prices mean a “one-two punch” of increased expenses and less business this year for the 91% of companies that operate six or fewer trucks, he added in an email.

“Spikes in gasoline and diesel prices ripple through the economy, impacting consumer budgets and business investments, creating a whole host of inflationary pressures that have serious impacts on the freight economy,” Mr. Campion said. “If people have to spend more on gas, they may begin spending less on other goods and services that will disrupt normal, seasonal freight patterns.”

Commercial trucks in the U.S. consume roughly 36 billion gallons of diesel fuel annually as they deliver everything from online shopping orders to frozen poultry for neighborhood markets.

Diesel prices have skyrocketed during the pandemic due partly to increased demand for winter shipping and farm equipment fuel, analysts say. At the same time, inventories are running short and U.S. refining capacity is down about 2 million barrels a day from pre-pandemic levels.

While President Biden tapped the strategic energy reserve to tamp down skyrocketing gas prices last year, the White House has not taken similar action to lower diesel costs.

“This large difference in diesel and gasoline prices is very unusual, especially for such a long period,” said Lucian Pugliaresi, president of the Washington, D.C.-based Energy Policy Research Foundation Inc.

Boycotts of Russian energy stemming from the invasion of Ukraine have led to a global substitution of diesel for natural gas in much of Europe and Asia, he added in an email.

And because of the war, Europe has received many diesel imports that would have otherwise gone to the U.S.

These conditions limit the ability of U.S. officials to manipulate diesel prices, as the White House did with gasoline last year.

“Being the fuel of work, diesel is more influenced by global demands for shipping, construction, etc. Gasoline markets are traditionally more locally determined,” said Allen Schaeffer, executive director of the nonprofit Diesel Technology Forum in Frederick, Maryland. 

According to the EIA, supplies of liquid fuels distilled from oil refining are at their lowest since the federal agency started tracking them in 1951.

The EIA estimates inventories of distillate fuel oil have been below a five-year low (2017–21) since the start of last year — and more than 20% below a five-year average. 

Diesel advocates blame the shortfalls on increased refinery maintenance, the COVID pandemic, labor shortages, slowed production and “green” pressure to convert the shipping industry to renewable energy.

“Production has been slowing due to refineries either closing or being reworked into biodiesel production as part of a politically based renewable energy agenda,” said Joe Trotter of the American Legislative Exchange Council, a network of conservative private investors and state legislators. “This hurts consumers because refineries can only turn out about half as much biodiesel compared to traditional refining.” 

High diesel taxes that penalize companies for relying on fossil fuels present another obstacle to equalizing gas and diesel prices, he added in an email.

The federal tax rate is 24.3 cents a gallon for diesel, compared to 18.3 cents for regular gasoline. At the state level, the average diesel tax is 7.55 cents higher than the average gas tax.

“Ultimately, this push affects the price of every product that requires shipping, especially agriculture products which are produced using machines that run on diesel,” Mr. Trotter said.

Some cyclical factors suggest diesel prices will cool on their own as recessionary pressures grow over the next few months.

Industry insiders point out that seasonal refinery maintenance has largely concluded, the harvest season is over and rising inflation and tightened credit access have slowed freight demand. 

And diesel engines of all kinds already use renewable biodiesel fuels. About 132,000 barrels a day of biodiesel and renewable diesel fuel poured into the U.S. market in 2021, according to the Diesel Technology Forum.

“The slowing U.S. economy will drive down demand for diesel, lowering prices and easing overhyped supply concerns,” said Mr. Schaeffer, the forum’s executive director.

Some businesses are also acting to lower diesel costs at the pump.

On Tuesday, convenience store chain Sheetz announced it would lower diesel fuel prices by 50 cents a gallon at its locations nationwide for the rest of this month. 

Company officials said the cut would save roughly “$10 for mid-size trucks, $12 for full-size trucks and $60 for semi-trailers” to top off an average fuel tank.

The surge in Americans shopping online during the pandemic has also kept demand high — and it shows no signs of slowing.

Diesel prices will keep rising “over several years” unless the Biden administration reverses some green energy policies, said Myron Ebell, an energy expert at the libertarian Competitive Enterprise Institute.

“The cost of every item in a store or delivered directly to your door goes up when delivery costs go up,” Mr. Ebell said in an email. “I think it’s fair to say a substantial part of the inflation we’ve seen is due to higher freight costs, and that’s mostly caused by higher diesel prices.”