Diesel prices rising after falling U.S. refinery capacity and loss of Russian imports

The Energy Information Administration recently reported that distillate inventories were at their lowest levels since 2008. (The primary distillates are diesel, jet fuel and heating oil.)

However, in 2008 distillate levels were low coming out of spring. Currently, they are low going into fall. That is far worse than the situation in 2008.

President Biden has done everything in his power to limit U.S. oil investment and is now furious because U.S. oil companies have not invested more into oil and natural gas production to bring down energy prices. Biden is miffed that companies are not using profits to increase production and refining.

But the Biden administration and the progressive climate lobby have been urging the opposite. Biden does not seem to believe oil companies should be allowed to make a profit or even cover marginal costs.

Keep in mind that oil companies endured steep losses in the pandemic. As oil prices plunged during the pandemic amid lockdowns, companies pared investments and shut-in wells. Demand for oil then bounced back much quicker than supply, which has driven up prices. That’s Econ 101.

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Distillate demand generally spikes in spring — when farmers are planting crops — and in fall, when they are harvesting those crops and people start buying fuel oil for winter. Thus, a low distillate inventory in late April 2008 is not quite as serious as a low inventory in October 2022. In fact, distillate inventories have not been this low in October since the EIA began reporting this data in 1982.

These low distillate inventories are why diesel prices are above $5 a gallon nationwide, even though the nationwide average price for gasoline has dropped below $4 a gallon.

Why is there a diesel shortage this year? There are four factors, but two of those factors are in play every year.

As mentioned above, distillate demand spikes at this time of year. But it does that every year.

This is also the time of year that refineries are doing maintenance. They tend to do that in the spring and fall, which is when demand is lower, and the weather is decent. So, refinery capacity drops at this time of year.

Third, U.S. refinery capacity has fallen in the past few years as the Biden administration has increased federal regulations resulting in the closure of several refineries. So, that is a new factor that has appeared in the past couple of years.

But the primary reason is the cutoff of Russian imports. Prior to Russia’s invasion of Ukraine, the U.S. was importing nearly 700,000 barrels per day of petroleum and petroleum products. Most of those imports were finished products and refinery inputs that boosted distillate supplies in the U.S.

The loss of those Russian imports has caused problems for refineries as they struggle to fill holes in their product slates. Refineries do have flexibility in shifting gasoline production to diesel production. But that also means that if refiners do shift production, it also potentially creates shortages in the gasoline market.

Some relief is on the way, as some diesel imports are on their way from Europe to the East Coast. But the distillate market will not likely return to normal before next summer at the earliest.

Edward Cross is the president of the Kansas Independent Oil & Gas Association.

This article originally appeared on Topeka Capital-Journal: Diesel prices rise from less refinery capacity, lack of Russia imports