Here’s why you’re paying more for diesel

When it comes to the price of diesel, it can be a blessing or a curse, depending on your perspective. Whether you're the oil analyst. It's kind of a combination of the Super Bowl, the World Series, and the NBA Finals. It's just incredible. Or the guys filling up the truck. Of course it's bad, because it will increase everything. Right now, we are spending double. Diesel prices have skyrocketed. even as the amount of barrels of crude oil moving through the Middle East region returns to pre-war levels. But here's the thing. It's not a lack of crude oil problem. It's a refinery problem. Oil would be worthless. It has little value aside from refineries who buy that oil to turn it into something more meaningful. And that is where the bottleneck is. It's also a drone warfare problem. You could have a $10 billion refinery and you could knock it out with kind of the 21st century equivalent of bottle rockets. And a global supply problem. Diesel and refined products are now international commodities and they are traded internationally. And the impact is inescapable. More than gasoline, more than jet fuel. Without diesel, the economy stalls. The thing about diesel is it affects every other aspect of the community. The way your groceries are delivered, the way your furniture is delivered, the way that farmers grow things, mining. Okay, let's go over a couple of basics. Crude oil is delivered to refineries, which is then turned into diesel. But that's not all they do. Most refineries are set up to break crude oil into gasoline and diesel. They call it the 3-2-1 crack spread. Crack because much of what happens in a refinery is taking the long molecules in crude oil and cracking them into shorter molecules that can be used in gasoline. Now, it depends on the refinery, but roughly speaking, one barrel of crude gets processed into a lot of gasoline, some diesel, and some small amounts of other products like jet fuel and fuel oil. Then Ukraine started targeting Russian refineries. Russia traditionally is a producer of one out of every nine barrels of diesel globally, And so the attacks on the refineries that have caused them to cease exports of diesel since July have sent global diesel prices to new all-time records. Drone attacks on refineries and pipelines put billions of dollars of infrastructure offline. We lost about 3 million barrels a day in Russia, and that used to go to a great extent to Europe. We've lost about 2.5 million barrels a day of refined products output in the Persian Gulf, and maybe about 400,000 in the Red Sea. Okay, but what about all the diesel that's created in North America? We've got much more refining per person than any other continent on the planet. Both Canada and the U.S. have plenty of refineries. Even countries like Canada and the United States that are energy superproducers are still tied to very much a global market. With the high prices and eye-watering profits, refineries are running at close to capacity. To the degree they can, they are pushing as hard and as much diesel as they can. But there are limits to how refineries split gas and diesel from oil. And just because the market shifts dramatically doesn't mean your refinery has the flexibility to suddenly stop producing gasoline. Even as refineries delay typically planned fall maintenance. You're going to run your refineries. It's kind of like you're about to win the Daytona 500. you're not going to make a pit stop yet. You're going to make those pit stops next year when you think that maybe the profit margins won't be as substantial as they are now. And with the harvest season starting, diesel for tractors and other equipment will be in demand. We're coming into the winter, we're coming into the heating season, and refineries have to start producing enough heating oil. Okay, so what about the idea of some kind of export ban, which Trump has mused about? Canada and the U.S. produce enough. Could we keep it and lower prices? Well, that could create other unintended consequences. Absolutely not in Canadian interest for the European economy to go into recession. You might save 10 cents on your gas and your diesel here, but the world economy will be much worse. Look at that, isn't that nice? So the leaders try to look for quick fixes. There was the Trump executive order allowing the use of red dye diesel. Do you know what that is? I don't know what the hell it is, but whatever it is, it's supposed to be very good. Red dye diesel is the same as regular diesel, except it's sold tax-free for off-road vehicles and trucks. That is a trifle and a trickle. That may be something that helps some of the farmers, but it's not going to help create any more supply, not one molecule more. Or Trump's recent announcement that Russia would start supplying 300,000 tons of diesel fuel. Except, according to our experts, 300,000 tons of diesel is about 15 hours of U.S. consumption, a drop in the bucket. Some think Trump will have to follow the lead of previous presidents who, during the energy crisis of the 1970s, asked Americans to adapt. These steps include reductions in home heating, reductions in driving speeds. All of us must learn to waste less energy. It might take something like that to really change the landscape. Even if the landscape does change, let's say the Iran war ends, that diesel refining bottleneck and resulting higher prices will take time to come down. And this is not a situation the industry can build its way out of. It's a five to ten year challenge and billions of dollars of investment. And with many countries moving towards more green and environmental initiatives, It is an extremely risky bet for refineries or oil companies to invest billions of dollars in an asset that may be irrelevant in 10 or 20 years.