Dealing with uncertainty and risks
There is concern that the price of diesel is still rising. This is particularly relevant to the economy since diesel is the engine that drives it. Experts have suggested, with good reason, that the Russian invasion of Ukraine has much to do with the prevailing fuel scarcity. However, this has been a difficult two years for the global economy. A series of intertwined events have ensured that the recovery since the dark days of Covid-19 still needs to be fully in place.
Consumers dealing with rising gas and fuel prices
In the past 12 months, the diesel prices have increased by over 40%. Gasoline prices have also risen, albeit by a smaller margin of 11%. This pattern occurred even though gasoline prices dropped as low as $1 per gallon since the beginning of summer. That drop had the effect of easing some of the financial strain that people were dealing with.
Diesel prices are problematic because they are used to power construction industries, tractors, ships, trains, and trucks. All these are associated with logistics in one way or another. Any change in their pricing is, therefore, eventually transmitted into inflationary pressures on many goods and services. By Thursday, a gallon of diesel was, on average, priced at $5.362, as reported by the AAA. This is a decline from a record high of $5.816 in June this year.
These diesel prices are well above the annual average of $3.642 recorded in 2021. In fact, a gallon of regular gasoline is above that average at $3.803. The political class and the public have generally ignored these increments in diesel costs. That is mainly due to the reality that most cars in the USA currently use gas and not diesel. Yet, diesel remains a significant driver of costs due to its impact on the transportation and logistics sectors.
Will there be economic distress and uncertainty?
Tom Kola of the Oil Price Information Service argues that diesel price increases have an insidious economic impact. This is because everything that moves from a logistics point of view is directly or indirectly powered by diesel. That means that diesel is an inflation accelerant. Consumers endure the resultant price differentials. Other experts seem to agree with this point of view.
A case in point is Sherri Garner Brumbaugh of Garner Trucking, based in Findlay, Ohio. As president of the company, she reported that the weekly costs of fueling a single heavy-duty track in her fleet during September 2022 came in at about $1300. This is a significant increase of more than 50% compared to the same month in 2020. Consequently, these costs are passed to customers as a fuel surcharge, hence an uptick in production costs and final prices.
The role of oil pricing
Any price variables in gasoline and diesel are fundamentally tied to the price of oil. This is often set at the global level based on market forces and the geopolitical dynamics of the context. When Russia invaded Ukraine, oil prices shot up, leading to alarm about the impact on the global economy. This was way back in February but continues to be an issue today. The unique aspect of this situation is the divergence of pricing patterns between diesel and gasoline despite being tied to oil pricing. Whereas the cost of diesel has increased by nearly 50% in some instances, gasoline is barely hovering above 10%.
The scarcity of diesel drives prices up. This is a problem that goes beyond the internal dynamics of the US economy. However, the USA case indicates the strains impacting global net exporters of oil and petroleum products of which it is a member. According to expert opinion, there is a shortage of refineries to meet the increasing demand for diesel. Russia has reduced the export of diesel due to its own internal economic struggles and geopolitical entanglements in Ukraine. It does not help much that the UK, USA, and many Western allies are shunning Russian fuel.
Inflation is proving to be a hard nut to crack
The inflationary pressures from oil, diesel, and gasoline are impacting consumer prices across the board. This is based on the notion that fuel is part of production costs and is typically passed to customers when it increases in price. For Americans, it means that the dollar is no longer going as far as it used to when they are shopping. Some of the goods and services that are affected may not even be oil products, including apparel, toys, furniture, and food. Because many of these are essentials of living, they impact virtually everyone in the economy.
Not all inflation is always bad. In fact, moderate inflation may help to spark economic growth and increase wages. However, when inflation rises too quickly and too high, it makes money lose its purchasing power. If wages are not artificially increased, then working people slide into effective poverty since they can access fewer goods and services with their wages. Governments typically engage in fiscal policies and other interventions to control inflation. However, it remains to be seen whether these solutions will work in the current circumstances.
Other events have a role to play
Whereas many blame the war in Ukraine, other factors could be at play. For example, the fire that broke out at the Philadelphia Energy Solutions in 2019 heralded a diesel shortage in the USA. The resultant shutdown of the refinery meant that one of the significant diesel producers in the North East was now out of action in the short run. Indeed, many refineries have been gradually closing in the USA. It is estimated that up to 5% of US refinery capacity has been lost. The figure for Europe is 6%.
Some refineries either scaled back their activities or closed when energy demand fell during the lockdowns that had been instigated to control the Covid-19 pandemic. Other older refineries were struggling under the weight of inefficiency and eventually closed. Wall Street investors were demanding no longer sustainable profits in this surprisingly vulnerable industry. The demand for biofuels also meant that some existing refineries were repurposed. These structural issues may require an overhaul of the entire energy industry.
Wrapping up
The prices of oil, diesel, and petroleum are rising. However, those increments are in differential phases, rates, and phases. Some analysts suggest that the war in Ukraine and the semi-embargo of Russian products are to blame. Others highlight structural problems such as the closure of oil refineries. Nevertheless, the consumer is thus faced with economic uncertainty and inflationary pressures.
