Why diesel prices are soaring and what it means for Europe

I’d mentioned in yesterdays report that diesel is very expensive in Europe, so expect to see more fuel theft.. like what happened outside of the Fairford base. And, other problems.

Read below

DW

Where will diesel prices go from here?

Prolonged fighting in the Middle East or Russia could add to the problems for Europe and other diesel users. US export restrictions could make this situation even worse.

US diesel exports to Europe are up around 37% since last year and now account for about 8% of European demand, says York. This makes the country an important alternative to diesel from Russia and the Persian Gulf.

If the US blocks exports, it would be a big shock and mean even higher diesel prices, said Zachmann. The question is whether the EU would retaliate and export less gasoline to the US “making both sides worse off” by pushing up both US gasoline prices and EU diesel prices.

Additionally, winter is just around the corner for the Northern Hemisphere. Refineries may struggle to meet demand for both heating oil and diesel, further tightening supplies.

A wave of refinery closures in Europe and the US since 2019 has made the diesel market vulnerable, said York, and this has hit the buffer of spare refining capacity that used to absorb shocks.

“Essentially, the market has fewer ‘extra barrels’ standing by,” he underscored. “So, the loss of any barrel hits supply much more directly than it used to.”

Europe is especially vulnerable to diesel shocks

For Europe, more expensive diesel could have dramatic consequences.

“Decades of policy incentives, such as tax advantages, left Europe’s vehicle fleet far more diesel-heavy than regions like the US,” said Georg Zachmann, a senior fellow at Brussels-based Bruegel think tank.

“As a result, the EU is structurally long on gasoline, which it exports, and short on diesel, which it must import,” added Zachmann, who specializes in energy and climate policies.

Check the link to DW for an interesting graph that shows the increase in diesel prices so far.

In the EU, just over 38% of passenger cars are diesel and road transport, including freight, makes up 77% of total diesel and gas oil consumption, according to a briefing published by Transport & Environment, a Brussels-based advocacy group.

This reliance on diesel-powered transport “leaves drivers and businesses particularly exposed to oil and fuel price shocks,” wrote Juliette Egal, the briefing’s lead author.

The NGO calculated that EU drivers are paying €30 more for a 50-liter tank of diesel on average since the start of the war in Iran. An average German long-haul truck driver is paying an extra €236 a week.

Increased fuel costs for EU road transport add up to €270 million a day — of that, €203 million is for diesel, according to the briefing. Overall, the EU economy has seen additional costs of €40 billion from road diesel since the beginning of the war. 

Why are diesel prices climbing faster than oil?

In the near term, Russia’s crude oil processing volumes are the single fastest-moving lever, said Skip York, a nonresident fellow at Rice University’s Center for Energy Studies in Houston, Texas.

“Each new wave of Ukrainian strikes shows up in diesel prices within days, unlike Hormuz, which has been running at a depressed but relatively stable flow rate for months,” he added. 

Now refinery disruptions matter most, he said, because “both the Ukraine drone campaign and the Hormuz conflict are knocking out working refining capacity faster than anyone can replace it.” 

Still, the Strait of Hormuz “is the bigger structural risk” for diesel prices in the long term.

Globally, refinery capacity has “dropped substantially, and diesel is particularly affected,” agreed Zachmann.

Where will diesel prices go from here?

Prolonged fighting in the Middle East or Russia could add to the problems for Europe and other diesel users. US export restrictions could make this situation even worse.

US diesel exports to Europe are up around 37% since last year and now account for about 8% of European demand, says York. This makes the country an important alternative to diesel from Russia and the Persian Gulf.

If the US blocks exports, it would be a big shock and mean even higher diesel prices, said Zachmann. The question is whether the EU would retaliate and export less gasoline to the US "making both sides worse off" by pushing up both US gasoline prices and EU diesel prices.

Additionally, winter is just around the corner for the Northern Hemisphere. Refineries may struggle to meet demand for both heating oil and diesel, further tightening supplies.

A wave of refinery closures in Europe and the US since 2019 has made the diesel market vulnerable, said York, and this has hit the buffer of spare refining capacity that used to absorb shocks.

“Essentially, the market has fewer ‘extra barrels’ standing by,” he underscored. “So, the loss of any barrel hits supply much more directly than it used to.”

So, the Usrael attack on Iran is the biggest driver in increased diesel prices. Yes, there are other factors, but, the Straits of Hormuz being closed is the biggest driver in price increases. And inflation.