I saw $8 per gallon diesel in Sequim yesterday. This will have a Macro impact on inflation.
In the chart below, $HOIL is a proxy for diesel because they both use the same fraction of refined petroleum.
The last chart shows the ratio of the price of gasoline to oil which is a measure of the cost of refining. When refining capacity is constrained relative to the supply of oil this ratio rises.
Wendy
I still think $12\gal diesel is a good bet by November.
Iran hasn’t “dropped the hammer” yet in terms of throttling supply.
intercst
I’m trying to understand the rationale. The bulk of US diesel is produced domestically. The bulk of what we do import in heavy crude is from Canada. Further, we are adding Venezuela crude, which also tends to be heavy. Shouldn’t then diesel be less sensitive to what is happening in the Middle East?
The bulk of refined products on the West Coast come from the Middle East.
There’s no refined products pipeline across the Rocky Mountains, and it would be very expensive to try to send Gulf Coast products West in a diesel fueled tanker on the Interstate highways.
intercst
But isn’t the bulk of heavy crude coming from Canada? Isn’t what we get from the Middle East mostly light sweet crude?
The dollar is appreciating. That is becoming much less likely.
There aren’t many refineries on the West Coast. That’s why crude oil from Canada or Venezuela doesn’t have much effect on the West Coast diesel price. Now that the Alaska oil has dried up (and the refineries for Alaska crude were closed), the cheapest source of product is in the Middle East.
Don’t forget that for years Americans on the West Coast got Alaska crude, even though it was more expensive than other sources. That was because we prohibited the export of Alaska crude, even though it makes more sense economically to ship it to Asia, since it was already half-way there.
intercst
If I understand, this is a loss of refined crude for diesel purposes that impacts the west coast. So much so, it’s likely to cause another 50-60% jump in price?
There’s a difference between crude oil, diesel and gasoline. Crude oil is the raw material. Diesel and gasoline are “refined products”. The crude has to pass through a refinery to get any gasoline or diesel.
“Light crudes” yield more gasoline when refined. “Sweet crudes” have low sulfur content which is very corrosive to a refinery.
Venezuelan crude has a high sulfur content and is much more expensive to refine. I remember working on one job in Corpus Christi, TX where the pile of sulfur that had been removed from the crude was almost as tall at the distillation column.
intercst
The price at the gas or diesel pump is based on where the last gallon of product was sourced. If Iran starts lobbing missiles or drones at tankers in the Strait of Hormuz or Red Sea 2 or 3 weeks before the election, The insurance companies will stop selling maritime policies and bring everything to a stop.
You don’t have to destroy everything. Just enough to prevent the insurers from selling policies.
intercst
Trump is throwing everyone off their game. The Iranians are not going to be on their game going into the election. Unlike Carter who would not go to war, the regime needs to check themselves. The other echo chamber is trying to score points out of things that do not exist.
I personally don’t think the price of diesel will rise significantly in the next few months, especially if the administration bans diesel exports. However, if that happens it is very likely the price of gasoline will rise.
Out of each a barrel of oil a refinery produces X gallons of diesel, Y gallons of gasoline, and Z gallons of other products. Refiners have some ability to change those ratios but not a huge amount.
The US produces far more diesel than we consume, hence the robust export market. If exports are banned logically the price will drop, which presumably will increase demand. But there is an upper bound there. There are only so many trucks and farm equipment burning diesel. That means the diesel will have to be stored. There is an upper bound there, too. As available storage space decreases, refiners will be forced to cut production, which means less gasoline. And ultimately of course less diesel too.
The plan appears to be to bring the price down enough to buy some cover during the midterms and then let the damage fall where it may. We live in interesting times.
Via Panama canal by diesel powered ships?
The Captain
I thought something similar as well but @intercst makes some interesting points.
There’s always some gamesmanship going on. Biden did several releases of Strategic reserves to ease prices temporarily and at times that might benefit them politically. If anything, Trump has tended to do what is most likely to harm his party during the midterms. He’s hardly a team player in that respect. Besides, the damage is probably done in terms of the likely outcome at the ballot box. Voters tend to have short memories. They forget the sky high prices under the last administration, essentially self induced, as they tried to redirect consumer behavior and limit oil production.
I don’t know how to define significantly in this context but it is likely to go up as home heating oil demand starts to go up and as entities start switching to winter diesel - which is more expensive.
You’re not going to be building a ship in the next 5 weeks. And all the refined product carriers are currently deployed elsewhere. Nobody has a fleet of working ships that you can dispatch to a trouble spot like a taxicab.
That’s why even small disruptions to the global oil market can cause very large spikes in a local market. Even if you were willing to pay for $12/gal diesel, you might have difficulty delivering it to a West Coast terminal.
intercst
The scuttlebutt is stopping all exports of heating oil for 90 days.
Again, he has knocked everyone off their rhetorical game. We are in a game of margins going into November.
Isn’t heating oil and diesel mostly the same thing, especially for export?
I am expecting an “October surprise”. Iran made an overture in their otherwise fiery UN speech (and the US delegation walked out during…
But the price of gas/diesel is the #1 concern for the upcoming election, and I expect the GOP to try a Hail Mary, even though it will be too late to actually bring prices back to where they were, it will provide some happy headlines, and hopefully convince the flock to turn out.
I also fully expect any deal will be worse than the one that was torn up, but that won’t matter (any more than the Greenland deal charade) because “that’s just details”.
If I was a predicting kind of guy, I expect Iran to “have the right to a peaceful nuclear program”, to “exert control over the Strait”, and “to get a bunch of frozen funds” from the US, probably delivered on “pallets of cash” 
Iran said it has told Donald Trump it is willing to open the strait of Hormuz in six days, and to start talks on its nuclear program the day after, so long as the US lifts sanctions on Iran’s oil exports in return, ends the war on all fronts – including in Lebanon – and releases some of Iran’s frozen assets.
4 hours ago