“Diesel fuel prices are a key variable input cost embedded in the prices of American food and consumer goods, as these goods are primarily transported by rail and truck, particularly in what is known as the last mile to reach retail outlets and grocery chains,” said Brian Milne, editor and chief product officer at DTN.

Transport fuel

Most of the products used in the United States are transported by trucks and trains equipped with diesel engines, according to the US Energy Information Administration. Most construction, agricultural and military vehicles and equipment are also equipped with diesel engines.

“When fuel prices rise rapidly, our members take a big hit,” said Tiffany Wlazlowski Neuman, vice president of public affairs at NATSO, a national trade association representing U.S. travel centers and truck stops.

She pointed out that if diesel prices hit their all-time high, it would cost a truck driver $1,453.50 to buy 300 gallons to drive about 2,010 miles, she said.

Truck stop operators have to pay for fuel up front and are often unable to adjust prices to keep up with the purchase price, Neuman said. Yet, in times of high price volatility, NATSO members typically do not see a decline in customer numbers. They can buy less fuel, however, in the hope that prices will come down, she said.

Trucking companies can impose fuel charges on their deliveries, and that surcharge can be “slow to start and slow to finish,” she said. Ultimately, they are applied to every delivery and every item,” so the price of everything goes up.

The EIA estimates that the consumption of distilled fuel by the transportation sector in the United States – mostly diesel fuel – was 44.61 billion gallons, or an average of about 122 million gallons per day, in 2020. This represents approximately 27% of the country’s total transport energy consumption. sector.

Diesel prices have lagged so far in 2022, with crude oil prices rising more significantly, suggesting diesel prices will rise steadily for the rest of this year, said Craig Golinowski, managing partner. at Carbon Infrastructure Partners. Diesel users should expect fuel prices to rise by 25% to 35% in the coming weeks and months, he said.

In the futures market, the ultra-low sulfur diesel contract, also known as the heating oil contract, was trading at $4.347 per gallon on the New York Mercantile Exchange on Tuesday, and is expected to settle at a level record high, according to Dow Jones Market Data.

The rise of oil

Diesel prices rose along with US and global crude oil prices. In Tuesday’s trades, US benchmark West Texas Intermediate crude was trading at $127.92 a barrel and global Brent crude at $132.55. Both were likely to see their best result since July 2008, according to FactSet data.

The cost of crude oil is about 68% of the price of diesel fuel, Neuman said. Crude oil prices have soared on expectations that supplies from Russia, which is one of the world’s largest oil producers, will be disrupted as it continues its invasion of Ukraine, and that the United States and other countries apply sanctions against Moscow in retaliation.

US President Joe Biden announced a ban on Russian oil imports on Tuesday.

A ban on Russian oil exports “would be a shock to the global supply chain because there is limited new oil production that can be brought online quickly in what is called spare capacity to compensate for the loss. of those exports,” Milne said.

Rising oil prices also drove average U.S. retail gasoline prices to a record high. The AAA set prices for regular unleaded gasoline at $4.173 on Tuesday, topping the previous high of $4.114 from July 2008.

The current oil supply environment is “unprecedented,” said Carbon Infrastructure’s Golinowski. In previous oil shocks, “spare production capacity was available to limit price spikes over time,” he said. Today, however, “the world’s production reserve is ‘almost exhausted’ due to underinvestment in oil and natural gas production.

Destruction of the request

Diesel’s rise in many markets was four or five times that of reformulated gasoline on Monday, as demand destruction for diesel is unlikely even at much higher prices, wrote chief executive Tom Kloza. world of energy analysis at OPIS, in a note sent to customers on Monday.

Retail gasoline above $4, meanwhile, may have already reached that breaking point for consumers.

An “increase in consumer-to-home deliveries, which exploded in the early days of the pandemic, continues to support commercial demand for diesel fuel,” Milne said.

The market is approaching a price level that will trigger demand destruction, he said, pegging that price level at around $120 a barrel for crude oil.

“When coupled with rising inflation for homes, vehicles and food, consumers…will reduce discretionary spending and withdraw from major purchases,” he said. “This scenario will have a snowball effect and reduce fuel demand.”

Even so, “we may not see a significant decline in diesel fuel demand for some time, despite the surge in fuel prices, given the current global supply chain issues and backlogs” , Milne said.