Diesel Prices Smash Another Record — And the U.S. is Now One Hurricane Away from Running Out of Diesel

Diesel prices smashed another record Friday, with prices hitting $5.58 a gallon. With NOAA predicting an above-normal hurricane season, it’s not good news for crop production close to the Gulf Coast or for already short diesel supplies. 

The start to the hurricane season is underway. As of Friday, more than 10 million people in southern Florida, Cuba and the Bahamas were under a tropical storm warning for the weekend. 

If the tropical storm would track farther west, it could spell trouble for diesel supplies as experts say the U.S. is one hurricane away from a shortage this year. 

“We're probably one Category 3 storm away [from a shortage], and that Category 3 storm would have to take aim for an area roughly from the Mississippi river to Houston,” says Patrick De Haan, head of petroleum analysis, GasBuddy. “That's the really sensitive area. Not only could it affect refining, but it could affect offshore oil production.”

A Category 3 is the third-highest classification on the Saffir–Simpson hurricane wind scale, which brings tropical cyclones with at least 1-minute maximum sustained winds between 110 mph and 129 mph.

Just How Tight Are Supplies? 

Diesel supplies are vulnerable due to how tight supplies are today.

“This is the year we're running very low on inventory entering the summertime and any type of impact on refining capacity is really going to increase the chance of the shortage,” says Debnil Chowdhury, vice president, head of Americas Refining, S&P Global Commodity Insights

Why have diesel prices raced higher and fears of a diesel shortage sprouted? It’s largely due to a shortage of refining capacity, not a shortage of oil.

“The nation is dealing with about a million barrels a day less of capacity than we had just three years ago. That's the equivalent of about 5%,” De Haan says. “Not only is oil a problem with the sanctions on Russia’s oil, but turning that oil into something like gasoline and diesel is also now a choke point."

Hurdles in Increasing Production 

S&P Global Commodities is also watching the situation. At a time when the U.S. is typically building inventory, it seems hurdle after hurdle is making that more difficult.

“Refineries have less capacity; we have about 1.2 million barrels a day of less capacity because of shutdowns that occurred prior to the pandemic,” Chowdhury says. “Also during the pandemic, we've had some convergence to biofuels facilities as well as a refinery that was hit by a hurricane and damaged to the point where it can't really be run anymore.”

Still Recovering from Hurricane Ida 

Another issue is refineries hit by Hurricane Ida last fall that never came back online. That major hurricane, and the devastation it caused, was one of the initial dominoes to fall for diesel prices.

“This all actually started before the war. It began in October of last year, when natural gas prices in Europe started to rise,” Chowdhury says. “The cost of natural gas increased substantially in Europe and why that’s important to a Midwest farmer is because the cost of producing that diesel increased with it.”

There’s talk of the Biden administration tapping into diesel reserves to help ease supply concerns, but De Haan says not only will that move have a minimal impact, it’s also a question of timing.

“It's only a million barrels, so it's not a infinite amount of supply,” he says. “The worry is that if we release those barrels of diesel now from areas in the Northeast, we're also in the start of hurricane season. Now we do have some tropical activity. So when do you use the inventories? Do you use them now because of high prices? Or do you wait for a bigger potential issue later this summer?”

Diesel Price Pain to Last for Two Years? 

While a possible diesel shortage is looming, diesel prices aren’t forecast to see a dramatic drop anytime soon.

“These prices are not going to go back to the levels we had at the beginning of 2021, it's more likely that we'll see maybe, you know, a $5 to $10 decline in crude price, and that would equate to maybe 50¢ to 60¢ on the diesel price itself. We're not talking about a major relief,” Chowdhury says.

On the heels of diesel prices climbing higher again this week, anyone hoping for relief might have to look out beyond this year.

“It could take a couple of years, and keep in mind, the longer we go down this road that demand eclipses supply, the more catching up we're going to have to do,” De Haan says.