The oil crisis is now a diesel crisis

Prices at your local gas station are an unpleasant, visible reminder that the cost of oil has climbed higher. But if you turn your attention away from the unleaded options and glance over at the diesel pump, you’re in for a bigger shock.

AAA reported that the price of diesel hit $6.51 per gallon on Sunday, a new all-time high that stands far above the $3.69 that drivers were paying just a year ago. That’s bad news for everyone, even if you don’t drive a gas guzzler.

Pump pain means economic strain

You know by now that higher energy prices spur on higher inflation: The more it costs to transport goods, the more a company will charge consumers for those goods. But while CPI has risen from 2.9% in February to 3.4% last month, higher gas prices haven’t bitten as hard as they could thanks to buffers like strategic reserves and demand destruction thanks to fewer summer roadtrips.

Diesel is a different beast entirely. Agricultural production is fueled by diesel, as is the construction industry. Shipping depends on diesel at every level, from cargo ships to freight trains to last-mile delivery trucks dropping off your Amazon packages. And you can’t transport raw materials like coal, lumber, and iron ore without burning diesel.

Global gas inventory has cushioned the blow from higher gasoline prices this summer. But the closure of a key Saudi Arabian overland pipeline last week, coupled with Russia becoming likely to extend its ban on diesel exports, means there’s suddenly serious pressure on diesel prices—and soon, everyday Americans will begin to feel that pressure, too.

So, what happens next?

Last Friday, JPMorgan Chase analysts made an extraordinary announcement: They have no idea how to forecast future oil prices. “For the first time since the start of the Iran conflict, we don’t have a baseline view. We simply don’t know how to model the endgame,” wrote Natasha Kaneva, head of global commodities strategy.

Kaneva’s problem is that all the economic pain thresholds analysts thought the Trump administration wouldn’t cross are now firmly in the rearview mirror, including $100 per barrel of oil, $5 per gallon of gas, and a 5% 10-year Treasury yield. Yet here we are, seven months into a war that shows no signs of stopping.

Unfortunately, there’s no relief coming down the pipeline anytime soon. ExxonMobil wants to enter the Venezuelan oil industry, while Chevron is planning to expand its operations there, but ramping up production in Venezuela will take far too long to have an effect on domestic fuel prices.

Heads up: Higher fuel costs may hurt consumers, but there could be some benefits for investors. Oil industry insiders have been buying back their shares in bulk lately, preparing for a world where energy prices remain elevated and their companies get to reap the rewards. It’s also worth noting that, despite the surge in oil prices this year, energy stocks still look largely undervalued.

But that’s one of the very few upsides to record diesel prices among a lot of painful problems.—MR