The Political Economy of Diesel

As much as any other factor, the disproportionately high price of diesel is killing President Trump’s political support and by extension that of other Republicans. This particularly threatens Republicans in the Midwest, where farmers rely on diesel for tractors and harvesting, with close Senate races in Ohio, Iowa, Kansas, and Nebraska.

Since home heating oil is a variant of diesel, the high and rising prices also whack New England, a heavy heating oil user, with two very close Senate races in chilly Maine and New Hampshire. In Maine last night, Democrat Troy Jackson did a lot better than expected in the first of four debates against Republican incumbent Susan Collins, who ineptly tried to blame “Augusta,” the state capital where Jackson was state Senate president, for high prices made in Trump’s Washington.

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Vehicles used in construction also rely almost entirely on diesel, increasing those costs. High diesel prices are killing Trump and other Republicans with truck drivers, a demographic that was often supportive of Trump in elections past. A trucker with an 18-wheeler now pays just under $1,000 to fill a 150-gallon tank, compared to about $500 a year ago.

High diesel costs cycle into all consumer goods moved by truck. In general, it is laughable for Republicans to embrace the theme of affordability when the price of something this basic is going through the roof due to Republican war policies.

Diesel now retails for about $6.30 a gallon, compared to $4.37 for regular gasoline. Since the Iran war began, retail diesel prices increased by about 70 percent, compared to around 40 percent for gas. Since both are distilled from crude oil, why the disproportionate rise in diesel?

There are four basic explanations, all rooted in the Iran war. While we think of the Middle East as exporting mainly crude oil, in fact the Persian Gulf states have built lots of refinery capacity. Middle East refining capacity now stands at 13 million barrels per day, not far below the U.S. capacity of 18 million barrels. These exports of refined product are disproportionately diesel, since oil pumped in the Mideast tends to be heavier than U.S. crude oil. But the Iran war has drastically cut Mideast exports, including retaliatory attacks by Houthis on Saudi facilities.

Second, U.S. refining capacity is running at almost 100 percent, so there is little ability to shift from gasoline to produce more diesel. U.S. oil companies have not built a new refinery in three decades.

Third, Russia, a net exporter of diesel, has sharply cut exports, partly because of damage to refineries caused by Ukrainian drone attacks. Trump has placed a good deal of blame on the Russia-Ukraine war. But according to the International Energy Agency, cuts in Persian Gulf diesel exports are about three times that of reduced Russian exports.

Finally, there is what’s known as the crack spread. That’s the profit made by refineries, which is higher for diesel than for gasoline.

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Because of all these factors, diesel is now selling at around $200 a barrel, about double the price of crude oil. Trump, refusing to end the Iran war, the basic cause of all of these shortages, has resorted to symptomatic relief.

For starters, there is Trump’s red-dye diesel caper. That’s diesel used by farmers and off-road equipment. It’s exempt from the federal diesel tax of 24.4 cents a gallon. Except for the dye, used to differentiate it, the fuel is ordinary diesel.

On Monday, Trump signed an executive order while at a Nebraska campaign event, allowing red-dye diesel to be used by on-road vehicles. This will provide only trivial relief at the pump, and the gambit is already infuriating farmers who are concerned that increased demand will bid up the prices that they pay. Moreover, this is only a tax deferral, not a cut, since only Congress can alter the tax.

Trump has also pressured aides to draw down the U.S. Strategic Petroleum Reserve, which is now at its lowest level ever. This literally threatens the geological viability of the natural caves where the oil is stored, since their stability depends on not letting them go totally dry.

Trump also threatened to ban exports of U.S. diesel. His aides explained that this would also backfire, since U.S. diesel exports are actually part of a complex circular global system in which Mideast refiners ship to Asia and Europe, while U.S. refiners export diesel to Europe and European refiners export gasoline to the U.S. An export ban by the U.S. would lead other nations to follow suit, and further raise prices worldwide.

Trump then settled for pressuring Europe to release its own reserve stocks of diesel. European leaders appeared to agree, but France and Germany have just walked that back.

Bottom line: There is nothing Trump can do to cut diesel prices more than trivially, and his gimmicks could well backfire—unless of course he ends his Iran war. As ye sow, so shall ye reap.

The post appeared first on The American Prospect.