Why diesel is soaring

Diesel used to be the unsexy cousin at the fuel pump — the one that smelled faintly of ferry docks, farm equipment, and long bus-rides to summer camp. No longer.

Here’s why diesel prices have now gone wild. 

First, diesel, you say? 

It’s what you get when you refine crude oil through a fractional distillation process. It’s thicker and less volatile than gasoline and requires a different motor to run – something you might’ve learned the hard way if you ever pumped the wrong gas.

You might think it’s just for old timey cars, but it’s critical for…

• heavy machinery

• 76% of all US trucking, and

• most US freight and passenger rail (plus ~20% of Europe’s rail traffic).

Or to put it another way, if it’s heavy and steady it’s probably got a diesel engine, which uses compression rather than a spark to get combustion going — that means more torque, power, and efficiency at lower revs, while requiring fewer repairs.

So diesel really keeps our economies running (albeit at low to moderate speeds) — construction, logistics, groceries, you name it. 

Then second, what’s the problem here? 

Congrats on not owning a Winnebago and therefore being unaware that diesel prices have soared.

And we’ve already explored one big price driver, which is just the general oil price, spiked by wars around Hormuz, Bab-el-Mandeb, and Russia.

But over the past 12 months, US diesel has specifically soared higher (+74%) than petrol (+41%). Ditto in the EU, where diesel is up 45% while petrol is up 29%.

Why is diesel faring worse?

First, thanks to multi-billion-dollar investments over the past decade (think Kuwait’s Al Zour, UAE’s Ruwais, Iraq’s Karbala), the pre-war Middle East was refining 15% of the world’s diesel, or a fifth of all global seaborne exports.

But Iran and its proxies have now struck not just tankers and pipes, but also key refineries, meaning net diesel exports from the Gulf are now barely a quarter of pre-war levels! Ukraine’s counterattacks on Putin’s refineries are also a driver, though the “missing” Russian diesel is maybe a third of what’s now offline in the Gulf.

Second, that’s all come at a time when refineries in the West were already working near capacity, with little buffer to absorb the Gulf’s jilted customers. That’s partly because the US and Europe haven’t built a major new refinery since the 70s!

Why? A mix of market forces and energy transition. Plus those older US refineries — optimised for the domestic passenger car market — now produce two barrels of petrol for every one barrel of diesel. You can’t just flick a switch back to diesel.

And the only country with any real meaningful spare refining capacity is… can you guess? Yes, China. But Beijing has kept those refineries on a short leash, to stabilise both its own diesel prices but also the massive local crude inventories feeding them.

Sure, you might wish China just unleashed its refineries (as it started doing from July-August), but total liberalisation would send those refineries right back out into international oil markets hoovering more crude, driving world prices even higher.

So guess who’s now mulling a diesel export ban instead? Yes! That bastion of free markets, the United States of America. Six weeks out from high-stakes midterms, a diesel export ban could initially curb pump prices and maybe slow President Trump’s polling slide, rest of the world be damned.

But longer term, an export ban could soon max out US storage, forcing refineries to curb their output and pause their investments, all risking another supply crunch.

So… why not just build more refineries? Even with political backing and streamlined approvals, you’re looking at five-to-seven years. Aka, there’s no quick cavalry coming.

Sound even smarter:

• The White House now denies it is preparing a flat diesel-export ban, with Energy Secretary Chris Wright saying the focus is on getting more diesel in.

• Diesel accounts for ~30% of total global demand for refined fuels.

• US refineries can (and do) tweak their ‘yield’ to produce more diesel or petrol, but this quickly hits hard chemical limits once you boost by ~3-5%.