Biden overlooked diesel fuel inflation. Why that's extra bad for the economy.

For the last six months, President Biden and his top advisors have obsessed over gasoline prices, for obvious reasons. That's because no single price rattles consumers as much as the cost of gas, which crept up to a new record high of $5 per gallon in June. So it comes as no surprise that soaring gas prices corresponded directly with Biden's sinking approval rating.

Since then, gas prices have fallen by about $1.10 per gallon. Biden may have helped a little by releasing oil from the US strategic reserve. Market forces, tough, have been a bigger factor. Still, that hasn't stopped Biden from touting the drop in prices and claiming he deserves the credit.

But Biden has largely ignored another important type of fuel: diesel fuel, which is critical for the production and transportation of many everyday products. There's a reason for Biden's silence: Diesel prices remain uncomfortably high, and they're contributing to food inflation and other consumer pain points. Around the same time gas hit $5, diesel hit a record high of $5.81 per gallon. Gas prices are now 22% below their peak, but diesel is just 8% lower. On a year-over-year basis, gas prices are up 15% while diesel is up 43%.

High diesel prices are a kind of hidden inflation, because most consumers never buy diesel. But it’s an important input in the production and transportation and of many things, including food and consumer goods shipped around the country. Inflation, at 8.2%, is still uncomfortably high, a huge reason Biden’s approval rating is underwater and Democrats seem headed for resounding defeat in the midterms. A big part of the reason is rising input costs for everyday consumer products.

The American Farm Bureau Federation sent a letter to Biden on November 4 drawing attention to the problem. “Our nation’s food supply is driven by diesel,” Farm Bureau president Zippy Duvall wrote. “High diesel prices are severely impacting our farmers and ranchers, causing increased costs to consumers, and adding to food insecurity.” While the pace of gasoline inflation has moderated substantially in recent months, food inflation has generally gotten worse, and now stands at 13% year-over-year. Wages are only rising by around 5%, so it takes a bigger chunk of the family paycheck to fill the refrigerator.

The US energy market is complex and there’s no single cause for higher diesel prices. Part of the explanation is a 4% reduction in diesel refining capacity that began in 2020, when oil prices crashed and many producers lost money. There’s less refining capacity for gasoline, too, which is why the “spread” between the cost of oil and the cost of refined products has been higher than normal for most of this year—there’s a bottleneck in the conversion of crude oil into consumer products, which tends to push the cost of finished products up.

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After Russia invaded Ukraine on Feb. 24, Biden imposed a ban on US purchases of Russian oil and oil products. That barely affected the supply of raw crude, since only 3% of US oil imports came from Russia, and those have been easily replaced with oil from other sources. But Russia supplied 20% of America’s imported oil products, includes grades of oil and certain distillates ideal for conversion into diesel. The loss of those imports has created marginal shortages of the input fuel that becomes diesel, which is not really a problem for gasoline supplies.

Demand for diesel has also remained strong due to robust spending on goods shipped by truck during the Covid pandemic, which seems likely to hold up into this year’s holiday shopping season. Droughts have lowered water levels on rivers such as the Mississippi, moving some cargo off of barges onto trucks. There are also season factors that affect diesel prices, such as increased demand in the winter for heating oil, which is very similar to diesel. All of these things have left diesel prices sitting close to record highs.

Biden has tried to combat high gasoline prices by releasing nearly 200 million billion barrels of oil from the US reserve, which has probably brought down oil prices a bit, and kept both gasoline and diesel prices lower than they would be otherwise. But global energy markets remain tight, with sanctions on Russia diverting global flows of oil, oil products and natural gas and causing way more uncertainty than usual.

The energy war between Russia and the west is far from over. In early December, a European ban on purchases of Russian oil will got into effect, along with a corresponding US-led effort to impose a price ceiling on Russian oil. The goal is to reduce the oil revenue going into Russia’s coffers, which is its largest source of funding for the illegal war in Ukraine. But Russia won’t easily abide by the price caps and could seek ways to punish US and European energy consumers.

Nobody’s sure what will happen and one possibility is more turmoil that pushes prices up.

Biden's options have always been limited, and he could be more constrained going into 2023. The last of Biden’s oil releases from the strategic reserve should come in December. Biden could order another release, but the dwindling size of the reserve and the end of the midterm election season probably mean he won’t. The loss of that reserve oil could mean tighter supply and higher prices.

Biden could do other things to help encourage more US fossil-fuel capacity, such as speeding the federal permitting process and approving more drilling on federal territory. But he has been channeling progressive Democrats' antipathy toward the oil and gas industry and seems unlikely to change. It’s also true that the fossil-fuel industry is undergoing long-term retrenchment as the whole world shifts from oil and gas to greener forms of energy. Oil and gas firms are very reluctant to invest in new refineries or other types of expensive infrastructure, knowing that the future of the business is murky.

So keep an eye on diesel prices if you want to know where inflation is heading.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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