Connect with us

Business

World’s Most-Crucial Fuel Heads for Shortage Touching Everything

News Agencies

Published

on

(Bloomberg) — No fuel is more essential to the global economy than diesel. It powers trucks, buses, ships and trains. It drives machinery for construction, manufacturing and farming. It’s burned for heating homes. And with the high price of natural gas, in some places it’s also being used to generate power.

Most Read from Bloomberg

Within the next few months, almost every region on the planet will face the danger of a diesel shortage at a time when supply crunches in nearly all the world’s energy markets have worsened inflation and stifled growth.

The toll could be enormous, feeding through into everything from the price of a Thanksgiving turkey to consumer bills for heating homes this winter. In the US alone, the surging diesel cost will mean a $100 billion hit to the economy, according to Mark Finley, an energy fellow at Rice University’s Baker Institute of Public Policy.

Advertisement

“Anything and everything that gets moved in our economy, diesel is there,” Finley said. “Moving stuff around is one thing. People potentially freezing to death is another.”

In the US, stockpiles of diesel and heating oil are at their lowest point ever for this time of year in data going back four decades. Northwest Europe is also facing a low buffer — inventories are forecast to hit a low this month and then tumble even more by March, shortly after sanctions come into play that will cut the region off from Russian seaborne supplies. Global export markets have gotten so tight that poorer countries like Pakistan are getting shut out, with suppliers failing to book enough cargoes to meet the nation’s domestic needs.

“It’s certainly the biggest diesel crisis that I have ever seen,” said Dario Scaffardi, the former chief executive officer of the Italian oil refiner Saras SpA who’s spent almost 40 years in the industry.

Advertisement

Diesel in the spot market of New York harbor, a key benchmark, is up roughly 50% this year. The price reached $4.90 a gallon in early November, about double year-ago levels.

Even more telling is the premium that diesel is commanding. Spreads for the fuel are widening both against crude oil, a sign of how tight refining capacity is, and in relation to supplies that are for later delivery, underscoring that traders are desperate to get their hands on the stuff now. In northwest Europe, diesel futures cost about $40 a barrel more than Brent, versus a five-year seasonal norm of just $12. New York diesel futures for December delivery are trading about 12 cents higher than those for January. That compares with a premium of less than a cent at this time last year.

Advertisement

What’s Causing the Shortage?

There are major constraints globally on refining capacity. Supplies of crude oil are already fairly tight. But the bottleneck is much more acute when it comes to turning that raw commodity into fuels like diesel and gasoline. That’s partly a function of the pandemic, after lockdowns destroyed demand and forced refiners to close some of their least profitable plants. But the looming transition away from fossil fuels has also dented investments in the sector. Since 2020, US refining capacity has shrunk by more than 1 million barrels per day. Meanwhile in Europe, shipping disruptions and worker strikes have also eaten into refinery production.

Things could get much more dramatic with the European Union’s looming pivot away from Russian supply. Europe relies more heavily on diesel than any other in the world. Roughly 500 million barrels a year get delivered by ship, with around half of that typically loaded at Russian ports, according to data from Vortexa Ltd. The US also has halted imports from Russia, which was a big supplier to the East Coast last winter.

Advertisement

Also churning in the background is a market structure known as backwardation, when premiums are higher for supplies with prompt deliveries than for longer-term ones. Not only has that spread been unusually large, but the backwardation has lasted unusually long. This backwardated market structure incentivizes suppliers to sell now instead of holding onto the product to build inventories.

Emergency Protocols

In the US, shortages along the East Coast already had suppliers rationing and initiating emergency protocols, and winter hasn’t even begun.

Advertisement

The Northeast, the most densely populated corner of the US where temperatures are often below freezing during a bitter winter, is also the most reliant on heating oil for keeping homes warm. (Diesel and heating oil are the same product in the US, just taxed differently.) Even in a best-case scenario, consumers there will be saddled with the highest energy bills in decades this winter. Already, the government has nearly doubled its estimate for the increase, projecting that families who rely on heating oil can expect to pay 45% more than last winter, up from an October estimate of 27%.

To be sure, prolonged, diesel shortages throughout the US are improbable since the country is a net exporter of the fuel. But localized outages and price spikes are likely to become more frequent, especially on the East Coast, where a dearth of pipelines creates huge bottlenecks. The region is heavily reliant on the Colonial pipeline that’s often full. A century-old shipping law, known as the Jones Act, further complicates the movement of domestic fuel and encourages producers on the Gulf Coast to favor exports over supplying the domestic market.

‘Big Dent’

Advertisement

From early February, EU sanctions will ban Russian seaborne deliveries. Those Russian barrels must somehow be replaced if the region’s economy is to keep running as it is today. How and whether that will happen is, so far, unclear.

Winter cold will also exacerbate problems in Europe. Across the northwest, inventories are expected to sink to 211.9 million barrels in March, the month after the EU sanctions kick in, according to consultancy Wood Mackenzie Ltd. That would be lowest level in records going back to 2011.

As the sanctions deadline rapidly approaches, Europe is still importing a huge amount of diesel from Russia. It is also pulling in vast quantities from Saudi Arabia, India and others. As a result, October waterborne imports hit their highest since at least the start of 2016, according to data from Vortexa compiled by Bloomberg.

Advertisement

Germany has already seen tightness, as low Rhine levels hampered deliveries and curbed production, while refineries in neighboring Hungary and Austria have also suffered significant disruption. French output was stifled by a spate of worker strikes over pay.

“If Russia is not a supplier anymore, that puts a big, big dent into the system, which is going to be really difficult to fix,” said Scaffardi, the former Saras CEO.

Poorer Countries Suffer

Advertisement

The global fuel squeeze has made it more profitable for exporters like China and India to send cargoes to countries in Europe that can pay big premiums. Overall fuel exports from China are expected to rise by 500,000 barrels a day to near 1.2 million barrels by year-end, according to industry consultant FGE.

It remains to be seen whether that will be enough to plug the global supply gap, and meanwhile poorer countries that can’t afford sky-rocketing prices are suffering.

Cash-strapped Sri Lanka is struggling to afford international fuel prices and is unable to secure enough supply, the country’s energy minister has said. Thailand has extended a tax cut on diesel in a bid to shield consumers from rising prices, with the government forecasting that the move will cost about $551 million in lost revenue. Vietnam is looking to enact emergency measures, including using its central bank to open up more loans for domestic fuel producers in order to boost supply.

Advertisement

The diesel crunch has been “damaging to the global economy,” said Amrita Sen, the head of research at Energy Aspects Ltd. “Resolving the diesel tightness ultimately needs new refining capacity.”

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.

Advertisement
Continue Reading
Advertisement

Advertisement

Breaking News

Editor Pick’s

Latest Entertainment

Entertainment30 mins ago

‘Velma’ angers viewers with ‘harmful’ sickle cell joke

“Velma” is an adult take on one of the characters from “Scooby-Doo.” (Photo: Courtesy HBO Max) HBO Max’s Velma only...

Entertainment2 hours ago

Chicago prosecutor dropping R. Kelly sex-abuse charges

CHICAGO (AP) — A Chicago prosecutor said Monday that she’s dropping sex-abuse charges against singer R. Kelly, following federal convictions...

Entertainment4 hours ago

T.J. Holmes and Amy Robach cuddle up after ‘GMA3’ exit as source says ‘they’re ready for a fresh start’

T.J. Holmes and Amy Robach spotted kissing and embracing on Friday, Jan. 27 hours after their exit from ABC News...

Entertainment4 hours ago

‘Wheel of Fortune’ contestant pushes back on unsolved puzzle — and even the show concedes he ‘has a point’

The puzzle is revealed to Ben, of California, on Wheel of Fortune. (Photo: Instagram) There are runners, who feel de-stressed...

Entertainment6 hours ago

Michael Jackson’s nephew Jaafar Jackson to play the King of Pop in Antoine Fuqua-directed biopic

The upcoming Michael Jackson biopic has found its King of Pop. Director Antoine Fuqua (Emancipation) revealed on Instagram Monday morning...

Entertainment6 hours ago

Adam Levine and Behati Prinsloo Welcome Their Third Baby Together

Behati Prinsloo and Adam Levine attend the Baby2Baby 10-Year Gala presented by Paul Mitchel Amy Sussman/Getty Behati Prinsloo and Adam...

Entertainment6 hours ago

Hilaria Baldwin speaks out for 1st time as Alec Baldwin faces involuntary manslaughter charge: ‘I don’t feel so strong’

U.S.Us Weekly Hilaria Baldwin Breaks Silence on Alec Baldwin’s ‘Rust’ Manslaughter Charges: Our Family ‘Would Crumble’ Without Fans Hilaria Baldwin...

Entertainment6 hours ago

Hilaria Baldwin speaks out for 1st time as husband Alec is expected to be formally charged with involuntary manslaughter

Hilaria Baldwin thanked fans for supporting her and Alec Baldwin through challenging times amid Rust criminal charges. (Photo: Reuters) Hilaria...

Advertisement

Latest Sports

Sports45 mins ago

Who will be the 49ers’ starting QB next season? | Yahoo Fantasy Football Forecast

After a fantastic season from third-string QB Brock Purdy, Yahoo Sports’ Scott Pianowski and Frank Schwab discuss who could be...

Sports1 hour ago

What’s a jabroni? Travis Kelce’s insult of Cincinnati Mayor Aftab Pureval was WWE ‘smack’

"Hey, I've got some wise words for that Cincinnati mayor," Travis Kelce said after the Chiefs' win. "Know your role...

Sports2 hours ago

NFL divorce that had an all-around happy ending

Chiefs coach Andy Reid spent 14 mostly successful seasons leading the Eagles. Now they meet again, having each won a...

Sports2 hours ago

Super Bowl 2023: Worst national anthems, ranked

Listen, "The Star-Spangled Banner" is a hard song to sing, and doing so in front of 100 million people requires...

Sports3 hours ago

George Kittle’s blunt two-word NSFW assessment of 49ers’ NFC Championship loss

George Kittle offered a brutally honest assessment of the 49ers' NFC Championship Game loss to the Eagles.

Sports3 hours ago

Andy Reid: When I came here, I was told Nick Sirianni was a really special coach

Just over a decade ago, Andy Reid became the Chiefs head coach after 14 years with the Eagles. And as...

Sports4 hours ago

49ers’ big offseason decisions start with scheduled unrestricted free agents

Here is a breakdown of the 49ers' scheduled free agents after the 2022 season comes to a close.

Sports4 hours ago

2023 NBA Mock Draft 5.0: First-round risers and full 2-round predictions

There will be plenty of movement throughout the remainder of the college season and into the draft on June 22....

Technology Hot News

Technology2 weeks ago

Led by "Amazon" and "Microsoft" .. the technology giants are planning to lay off 64,000 employees

After 10 years of driving the stock market bull run, big tech companies are racing to downsize staff to adapt...

Technology2 weeks ago

Apple introduces MacBooks with new M2 processors

Yesterday, Tuesday, Apple unveiled MacBooks powered by the new, faster “M2 Pro” and “M2 Max” processor chips, in a surprise...

Technology2 weeks ago

All you need to know about the upcoming Galaxy S23 phones from Samsung

Samsung has officially announced that the (Galaxy Unpacked 2023) event will be held this year on Wednesday, February 1, which...

Technology2 weeks ago

FTX Exchange Announces Hacking and Stolen $415 Million in Cryptocurrency

Bankrupt American cryptocurrency firm FTX announced today, Wednesday, that $415 million in cryptocurrency has been hacked and stolen from the...

Technology2 weeks ago

Because of a "fraudulent tweet"… Elon Musk's trial begins

Elon Musk's trial began Tuesday in San Francisco with the selection of jury members who will have to decide whether...

Technology2 weeks ago

An electric spoon replaces salt and spices, but with conditions

Experts have developed an electric spoon that is able to replace spices and flavors and affect the taste buds in...

Technology2 weeks ago

The biggest dangers of using tracking devices.. so you can escape?

If you spot an unknown Bluetooth tagging device, there are ways to disable the device so it can't track your...

Technology2 weeks ago

New Twitter.. For You tab to web version

The Twitter platform announced that it will bring the new tab (For You), which launched last Tuesday for iPhones and...

Advertisement