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Experts say diesel prices could lead us to the next recession

Experts told ABC News that although many Americans have noticed gasoline prices skyrocket, a lesser-known increase in diesel costs will push the US economy into recession.

According to the US Energy Information Administration (EIA), oil prices on Wednesday afternoon were $ 105 per barrel, and are likely to remain moderate to about $ 100 per barrel in November.

Experts say increased diesel prices may last longer due to increased demand for diesel than gasoline. Since almost all the products that people consume rely on trucks, trains and other forms of transportation using diesel fuel, the already high prices for many commodities make it difficult to recover from those high diesel costs, he said.

“Nobody pays attention to diesel prices in the US because it is really only used by industries,” said Damien Kourwalin, chief of fuel research and senior commodity strategist at Goldman Sachs. “But that diesel represents a piece of your plane ticket, a box of cereal … that price is folded into total inflation.”

The nationwide average price for a gallon of diesel is $ 5.81, indicating an 80% increase from $ 3.22 a gallon a year ago, according to AAA data. In California, the average cost of a gallon of diesel is less than $ 7 per gallon, AAA data shows.

‘Diesel is my biggest concern’

Experts say gasoline demand is likely to fall, while diesel demand is likely to increase. “We haven’t seen a drop in the demand for diesel in the way we’ve seen the gasoline drop in the epidemic because we’ve all ordered things off the Internet,” said Denton Cinquegrana, chief oil analyst at market research firm OPIS.

Experts say many factors in the US industry depend on the shipment of diesel fuel. Typically, overall consumer demand decreases during the recession. But diesel demand may remain high until the recession, especially in light of the spread of e-commerce and home delivery, experts said.

“Diesel, my biggest concern, is more than gasoline,” said Cinquegrana. “When it comes to gasoline, you can make behavioral changes – you can carpool to work. Some of us are able to work from home.”

But with diesel, higher costs increase daily commodity prices, as higher transportation costs are passed on to consumers. In turn, consumers restrict their spending habits in groceries and other retail stores, cut demand and exacerbate the economic downturn, experts say. Consumer spending accounts for about 70% of US gross domestic product.

“Those trucks will run on diesel, and those costs will be passed on to consumers – which is why the price of eggs, milk and beer will go up,” said Cinquegrana. “This is because diesel prices will eventually break the back of the economy.”

Photo: Shipping containers waiting to land at the Port of Los Angeles in Los Angeles on November 22, 2021.

Shipping containers await unloading on November 22, 2021, at the Port of Los Angeles, Los Angeles.

Mike Blake / Reuters, FILE

The refineries are near capacity

The fundamental problem behind the high prices of both gasoline and diesel: demand is high and supply is restricted. Currently, US refineries are producing about one million barrels a day less than pre-epidemic, according to the EIA.

In recent years, energy companies have slowed oil expansion in response to a call for financial discipline from shareholders. The rise of renewable energy alternatives poses a challenge to long-term investment in oil extraction.

As President Joe Biden prepares to travel to Saudi Arabia next month, the anticipated oil deal will not help the US in the short term.

“Their oil is on the ground,” said Kourwalin, head of energy research at Goldman Sachs. “None of us use it. We need refined oil – it has to go through the refining process to get what we consume.”

Last week, Biden sent a letter to major oil refineries, calling for “immediate steps” to be taken to boost production. The letter alleges that companies are taking advantage of the market environment to profit while Americans are struggling to get gas. It cited the possibility that Biden would invoke the Defense Production Act requiring companies to produce goods deemed necessary for national security.

But experts told ABC News that US refineries are already near full capacity and that it will take a long time to build new ones. The EIA says refineries are “very complex, highly regulated and very expensive to build.” “Building new refineries to increase capacity is not something that can be done in a shorter time frame.”

“You have to realize that until recently, nobody screamed for the most refining potential in the world,” said Bob McNally, president of Rapidon Energy Group, a consulting firm. “In fact, if anything, the ability to refine like horses in buggies made in 1908 began.”

Photo: Gas prices, including diesel fuel, are listed on the gas station sign in Los Angeles on June 16, 2022.

Gas prices, including diesel fuel, are listed on the gas station sign in Los Angeles on June 16, 2022.

Jay c. Hong / AP

Biden ‘to go forward’

The Biden administration’s short-term response to the crisis includes the release of oil from strategic reserves and the gas tax holiday. The long-term response is centered around the transition to clean or low-carbon energy, but Cinquegrana criticizes the proposal as “not appreciating how difficult the energy transition is.”

“What we really need is more investment – we’re talking about processing capacity: if there are none, I can’t increase the supply of gasoline,” said Courwalin. “At this point, policy has nothing to do with it.”

The Biden administration has called for a federal gas tax holiday that temporarily halts the federal gasoline tax of 18.4 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuel.

“On the one hand, yes, it will reduce prices at the pump,” Kourwalin said of the potential holiday. “But when you look at it from a commodity standpoint, we’re still not balancing. That means we’re subsidizing what’s depleting.”

American Petroleum sent its own 10-step proposal to the White House to alleviate supply shortages. Their recommendations range from removing federal restrictions on land and water to revising the NEPA permitting process.

“I will go further,” McNally commented in the letter, “reversing the ban on cross-border pipelines, eliminating the risk of serious regulation and investment by oil and gas companies, and until we have enacted appropriate climate change policy.”

Some major energy companies agree.

“In the short term, the US government may implement measures commonly used in emergency situations after hurricanes or other supply disruptions – such as the waiver of the Jones Act provisions and certain fuel specifications to increase supplies,” ExxonMobil indicated in a statement to ABC News.

“Long term, [the] The government can promote investment through a clear and consistent policy that supports US resource development, such as regular and predictable lease sales, as well as supporting infrastructure such as streamlined regulatory approval and pipelines, ”the company added.

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