Summer Blues: The Diesel Problem
As food prices surged again this week and gasoline prices once again hit record highs, it is vitally important for our country’s leaders to understand how bad policy is plunging America into an oncoming economic crisis.
One year ago, the average diesel cost per gallon was $3.17 per gallon, while regular gasoline cost $3.04 per gallon – only a 13-cent price difference. Regular gasoline reached a new all-time average record high of $4.59 per gallon, while diesel also reached a new record high of $5.58 per gallon. While commuters looking to fill their cars face sticker shock at the pump, those prices pale in comparison to the cost of the essential fuel responsible for powering nearly every facet of America’s agriculture industry.
Diesel powers not only the vast majority the country’s commercial trucking fleet, but also most of the heavy agriculture equipment used on our country’s farms. As a result, diesel is the single most important agricultural fuel, impacting all stages of food costs from before seeds are planted to the moment crops are put on shelves.
Why Are Prices High?
Like gasoline, the price of diesel is primarily driven by the cost of crude oil and refining. As discussed in previous articles, poor resource management, international instability, and a hostile presidential administration drove up the price of crude oil.
What is not discussed nearly as often is that America’s refining capacity is the lowest it has been in decades. During the height of the pandemic, demand for gasoline plummeted by 13% in 2020, resulting in refineries shuttering their operations, with a 4.5% drop in refining production in the United States. Refinery closures were not unique to the U.S., with other countries losing more than 10% of their refining capacity, the global supply chain significantly contracted.
As the pandemic subsided and Americans got back on the road, a new presidential administration and congressional leaders hostile to traditional fossil fuels took the seat of government, promising to upend the fuel industry. It did not take long for the Biden Administration to make good on its promise to block future crude oil development by hamstringing lease sales, which the administration is still doing to this day.
Faced with promises by our elected officials in Washington to end the country’s dependence on fossil fuels for everything from heating our homes to driving to work, the industry did not re-open previously closed refinery infrastructure. In some cases, those that did re-open did so only after being modified for refining renewables such as biofuels or hydrogen.
Between the high price of crude oil and reduced refining capacity, prices for refined products skyrocketed. Coupled with the increased demand for domestic shipping services and the relative immaturity of battery-based technology solutions, the price of diesel shot up well beyond that of gasoline.
What Does This Mean for Food Costs?
Most farm equipment operates using diesel engines, as do most methods of shipping, including both road and rail. Added to the global supply shortage of fertilizer and increased labor costs, nearly every aspect of food production is significantly more expensive than it was in previous years.
Those price increases are reflected on grocery store shelves, which, in turn, drive up inflation.
Other factors are driving up costs. In addition to fuel, fertilizer, and labor costs, avian influenza cut into the supply of poultry and eggs, while droughts are impacting regions throughout the world. As global commodities, foodstuffs are also subject to international price pressure. Russia’s unprovoked aggression in Ukraine significantly depleted Europe’s most fertile growing regions from contributing to this year’s crop.
What Comes Next?
Certain parts of the country, especially the northeast, are experiencing supply shortages. While producers are ramping up diesel production, the Administration is considering releasing stocks from strategic diesel reserves. This would not particularly impact prices so much as ensure there is some supply in affected regions.
In the meantime, it is possible, if not likely, that diesel will be rationed this summer.
State legislators should consider adopting policies that prohibit top-down fuel mandates. Free market solutions without government intervention could have helped prevent this burgeoning fuel crisis.