First time in history! US diesel prices break through $6, economic “silent killer” stirs up midterm elections

The Zhitong Finance App learned that for the first time in history, the price of diesel in the US has broken through 6 US dollars per gallon. As the peak diesel demand season is approaching, this fuel, which is rarely directly perceived by American consumers but supports the global supply chain, is becoming a driver of inflation at the fastest rate in history.

According to the latest data from the American Automobile Association (AAA) on Friday, the average price of diesel in the US reached 6.0556 US dollars/gallon; in California, the average price was as high as 7.9827 US dollars/gallon. According to the AAA, the cost for truck drivers and farmers to fill up fuel tanks is about 63% higher than in the same period last year.

This unprecedented rise in diesel is due to multiple shocks to the global refining and shipping systems.

Ukrainian drones have continued to attack Russian refineries for several months, forcing Moscow to impose a ban on diesel exports. On the Middle East side, the US and Israel went to war against Iran. Meanwhile, Iran and the Houthis in Yemen attacked the refineries of America's Gulf allies. Shipping in the Strait of Hormuz and the Strait of Mande was disrupted. The attacks on oil tankers left fuel cargo far below pre-war levels. Before the war, the Strait of Hormuz was responsible for about one-fifth of the world's oil supply. Furthermore, China's fuel export restrictions have further tightened global diesel supply.

Gary Simmons, chief operating officer of US refiner Valero Energy (VLO.US), said that the war between Eastern Europe and the Middle East has led to the shutdown of refineries with production capacity of about 5 million barrels per day.

Andy Lipow, president of Lipow Oil Associates, estimated in a report on Wednesday that global diesel supply has lost nearly 8%, and there is very little idle refining capacity that can be used to make up for the gap. Helima Croft of RBC Capital Markets also pointed out that the US refinery operating rate has actually reached 98% — there is no idle capacity at all.

In addition to this, inventory and profit margin data are also sounding the alarm. According to data from the US Energy Information Administration (EIA), US diesel stocks are 106.3 million barrels, 13% lower than the five-year average; distillate stocks have been at a low level over the same period for decades.

The US diesel cracking spread, which measures refining margins, soared to a historical record of $112.17 per barrel on Thursday, according to LSEG data. Rapidan Energy's Linda Giesecke warned in this regard that as seasonal refinery maintenance begins, it is difficult to replenish stocks in the next two months, global diesel supply is tight, and diesel profit margins are expected to remain high and fluctuate until early next year.

Economic shock: From trucks to farms, inflationary pressure resumes

Diesel fuels trucks, trains, ships, and heavy equipment, and also drives agricultural machinery, power generation, and home heating. Meanwhile, demand for heating and agriculture rose in the fall, further amplifying the impact. As consumers are more sensitive to retail gasoline prices, the rise in diesel is often overlooked, but its impact is transmitted through layers of food, transportation, construction, and commodity prices.

Crude oil was the biggest driver of fuel prices during this period. As the conflict between the US and Iran intensified, the benchmark crude oil futures returned to $100. As of press release, international oil prices have declined somewhat, but they are still at a high level. Brent crude oil futures are reported at about 105 US dollars/barrel, and WTI crude oil is reported at about 100 US dollars/barrel; since September, WTI crude oil has accumulated a cumulative increase of about 16%, and since the US and Israel attacked Iran at the end of February, US diesel prices have risen by nearly 60%.

Bob McNally, president of Rapidan Energy, said that diesel is “a more hidden, more expensive, and more influential fuel” and is the true lifeblood of the economy.

“Every truck, every delivery, every package, and every purchase is getting more expensive,” GasBuddy analyst Patrick De Haan warned on social media X. Americans now spend about $700 million more on gasoline and diesel every day than a year ago. Record diesel prices will affect every shipment, every shipment, and may reignite inflation throughout the supply chain. He also said that diesel prices are at current levels and will become the “silent killer” of the economy.

“The price of diesel more than doubled in five months, which impacted our cash flow,” said Alex Ryan, director of energy at Oasis Energy. “There will definitely be a tipping point; I just don't know when or where it will arrive.”

Arthur Erickson, CEO of agricultural drone company Hylio, lamented that farmers and ranchers have had little to rest after experiencing a series of cost shocks, and many are facing increasing financial pressure as production costs soar and crop prices fall.

Political consequences: White House options limited before midterm elections

This made soaring energy costs a major political challenge for Trump and the Republican Party before the November midterm elections. Currently, the US is only 50 days away from the election, and the Republican Party is trying to maintain a weak majority in Congress in the November midterm elections.

According to a poll last month, the Democratic Party is 8 percentage points ahead of the Republican Party on the question of which political party has a better solution to the cost of living issue. High diesel prices particularly affect Maine — which has the highest percentage of households using heating oil in the country — and agricultural states such as Ohio, Kansas, and Iowa.

White House spokesman Taylor Rogers said in this regard that Trump is still focused on expanding US refining capacity and reducing energy costs, adding that oil and gas prices will fall as the US maintains control over the Strait of Hormuz. However, Trump acknowledged on Wednesday that the relief brought about by soaring oil prices may not be until after the election.

In fact, there aren't many policy tools at the White House's disposal other than further releasing strategic oil reserves or imposing export bans. When asked about diesel export controls, US Secretary of the Interior Doug Burgum previously said that all ideas are being considered, but acknowledged that such export control measures have boosted prices in the past. RBC's Croft said the rise in diesel prices is a “huge challenge” for the Trump administration.

Market participants generally believe that as long as the conflict between Russia, Ukraine, the US and Iran continues to suppress oil refining and shipping, it will be difficult for global diesel supply to recover quickly. Peak demand in the fall combined with low inventories means that diesel prices and the inflationary pressure they cause may continue to dominate the US economy and political agenda in the coming months.