For the past six months, President Biden and his top advisers have been obsessed with gasoline prices, for obvious reasons. That’s because no single price has alarmed consumers like the cost of gasoline, which hit a record high of $5 a gallon in June. So it’s no surprise that rising gas prices correlate 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 removing oil from US strategic reserves. Market forces, tough, have become a bigger factor. Still, that didn’t stop Biden from commenting on the price drop and admit he deserves credit.
But Biden largely ignores an important type of fuel: diesel fuel, which is essential for the production and transportation of many everyday products. There is a reason for Biden’s silence: Diesel prices remain unattractive, and they contribute to food inflation and other consumer pain points. Around the 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 only 8% lower. On a year-over-year basis, gas prices rose 15% while diesel rose 43%.
High diesel prices are a kind of hidden inflation, because most consumers never buy diesel. But it is an important input in the production and transportation of many things, including food and consumer goods that are shipped around the country. Inflation, at 8.2%, is still very unappealing, a big reason for Biden’s approval rating to be underwater and Democrats seem to be losing in the midterms. A big part of the reason is the rising cost of inputs 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 fueled by diesel,” Farm Bureau president Zippy Duvall wrote. “High diesel prices are adversely affecting our farmers and ranchers, causing increased costs to consumers, and adding to food insecurity.” While the rate of gasoline inflation has moderated substantially in recent months, food inflation in general has gotten worse, and now stands at 13% year-over-year. Wages are only going up about 5%, so it takes a huge amount of family paychecks to fill the fridge.
The US energy market is complex and there is no single reason for higher diesel prices. Part of the explanation is a 4% reduction in diesel refining capacity starting in 2020, when oil prices crashed and many producers lost money. Gasoline refining capacity is also less, which is why the “spread” between the cost of oil and the cost of refined products has increased. higher than normal for most of this year– There is a bottleneck in the conversion of crude oil into consumer products, which tends to push up the cost of finished products.
After Russia invaded Ukraine on February 24, Biden implemented a ban on US purchases of Russian oil and petroleum products. It has almost no effect on crude oil supplies, as only 3% of US oil imports come from Russia, and it is easily replaced by oil from other sources. But Russia supplies 20% of America’s imported oil products, including certain grades of oil and distillates ideal for conversion to diesel. The loss of imports has led to a shortage of diesel fuel, which is another problem for gasoline supplies.
Diesel demand also remains strong due to strong spending on goods shipped by truck during the Covid pandemic, which is likely to last into this year’s holiday shopping season. The drought has lowered water levels in rivers like the Mississippi, shifting some cargo from barges to trucks. There are also seasonal factors that affect diesel prices, such as increased demand in winter for heating oil, which is similar to diesel. All these things have left diesel prices close to record highs.
Biden has sought to combat high gasoline prices by removing nearly 200 million billion barrels of oil from US reserves, which seems to have reduced oil prices, and to keep gasoline and diesel prices lower than others. But global energy markets remain tight, with sanctions on Russia diverting global flows of oil, oil products and natural gas and causing more uncertainty than usual.
The energy war between Russia and the west is far from over. In early December, a European ban on buying Russian oil will be implemented, along with a US-led effort to impose a price ceiling on Russian oil. The aim is to reduce the oil revenue that goes into Russian coffers, which is the largest source of funding for the illegal war in Ukraine. But Russia will not easily abide by the price cap and may find ways to punish US and European energy consumers.
No one is sure what will happen and one possibility is more turmoil that pushes prices up.
Biden’s options are always limited, and he may be more constrained in 2023. Biden’s last oil release from the strategic reserve should come in December. Biden could have ordered another release, but a dwindling reserve size and the end of the midterm election season likely means he won’t. The loss of those oil reserves could mean tighter supplies and higher prices.
Biden could do other things to help increase US fossil fuel capacity, such as speeding up the federal permitting process and approving more drilling on federal territory. But he has channeled progressive Democrats’ antipathy to the oil and gas industry and that likely won’t change. It is also true that the fossil fuel industry is experiencing long-term retrenchment as the rest of the world switches 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 headed.