Biden overlooked diesel fuel inflation.  Why it's very bad for the economy.

Biden overlooked diesel fuel inflation. Why it’s very bad for the economy.

For the past six months, President Biden and his top advisers have been obsessed with gas prices, for obvious reasons. That’s because no price rattles consumers quite like the cost of gasoline, which hit a new high of $5 a gallon in June. It’s no surprise, then, that soaring gas prices correlate directly with Biden’s declining approval rating.

Since then, gasoline prices have fallen about $1.10 per gallon. Biden may have helped a little by releasing oil from the US strategic reserve. Hard market forces were a bigger factor. Still, that hasn’t stopped Biden from touting the price drop and claiming he deserves the credit.

But Biden has largely ignored another important type of fuel: diesel fuel, which is essential for the production and transportation of many everyday products. There’s a reason for Biden’s silence: Diesel prices remain uncomfortably high, and they’re contributing to food inflation and other consumer issues. Around the same time, gasoline hit $5, diesel hit a record high of $5.81 a gallon. Gasoline prices are now 22% lower at their peak, but diesel is only 8% lower. On an annual basis, gasoline prices have increased by 15%, while diesel has increased by 43%.

High diesel prices are a kind of hidden inflation, because most consumers never buy diesel. But it is an important input into the production and transportation of many things, including food and consumer goods shipped across the country. Inflation, at 8.2%, is still uncomfortably high, a huge reason why Biden’s approval rating is underwater and Democrats appear headed for a resounding midterm defeat. A big part of the reason is rising input costs for everyday consumer products.

The American Farm Bureau Federation sent a letter to Biden on Nov. 4 drawing attention to the issue. “Our country’s food supply is fueled by diesel,” wrote Zippy Duvall, president of the Farm Bureau. “High diesel prices are having a serious impact on our farmers and herders, driving up costs for consumers and adding to food insecurity. While the pace of gasoline inflation has slowed considerably in recent months, food inflation has generally worsened and now stands at 13% year-on-year. Wages only increase by about 5%, so more of the family wage is needed to fill the refrigerator.

The US energy market is complex and there is no single cause for the rise in diesel prices. Part of the explanation is a 4% reduction in diesel refining capacity that began in 2020, when oil prices crashed and many producers lost money. There is also less refining capacity for gasoline, which is why the “spread” between the cost of oil and the cost of refined products has been higher than normal for most of this year – it there is a bottleneck in the conversion of crude oil into consumer products, which tends to drive up the cost of finished goods.

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After Russia invaded Ukraine on Feb. 24, Biden imposed a ban on U.S. purchases of Russian oil and petroleum products. This hardly affected the supply of crude oil, as only 3% of US oil imports came from Russia, and these were easily replaced by oil from other sources. But Russia supplied 20% of America’s imported petroleum products, including grades of oil and some distillates ideal for conversion to diesel. The loss of these imports has created marginal fuel shortages that become diesel, which is not really a problem for gasoline supply.

Diesel demand has also remained strong due to heavy spending on goods shipped by truck during the Covid pandemic, which looks likely to continue into this year’s holiday shopping season. Droughts have lowered water levels on rivers such as the Mississippi, shifting some cargo from barges to trucks. There are also seasonal factors that affect diesel prices, such as increased winter demand for fuel oil, which is very similar to diesel. All of these things have left diesel prices at record highs.

Biden tried to combat high gas prices by releasing nearly 200 trillion barrels of oil from the U.S. reserve, which likely lowered oil prices a bit and kept gas prices up. and diesel lower than they otherwise would be. But global energy markets remain tight, with sanctions on Russia diverting global flows of oil, petroleum products and natural gas and causing far more uncertainty than usual.

The energy war between Russia and the West is far from over. In early December, a European ban on Russian oil purchases will come into effect, along with a corresponding US-led effort to impose a price cap on Russian oil. The aim is to reduce the oil revenues flowing into the coffers of Russia, which is its main source of funding for the illegal war in Ukraine. But Russia will not easily meet price caps and may seek ways to punish US and European energy consumers.

Nobody knows what will happen and one possibility is another turmoil driving prices up.

Biden’s options have always been limited, and he may be more limited through 2023. The last of Biden’s oil releases from the strategic reserve is expected to come in December. Biden could order another release, but the shrinking size of the reserve and the end of the midterm election season likely mean he won’t. The loss of this oil reserve could mean tighter supply and higher prices.

Biden could do other things to help encourage more fossil fuel capacity in the United States, such as speeding up the federal permitting process and approving more drilling on federal land. But he has channeled progressive Democrats’ antipathy toward the oil and gas industry and he seems unlikely to change. It’s also true that the fossil fuel industry is undergoing a long-term downturn as the world shifts from oil and gas to greener forms of energy. Oil and gas companies are very reluctant to invest in new refineries or other types of expensive infrastructure, knowing that the future of the company is cloudy.

So keep an eye on diesel prices if you want to know where inflation is going.

Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman

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