The global market for diesel, the fuel that powers much of the economy, has never been been under so much pressure. Wars in the Middle East and Ukraine have created a perfect storm, blocking shipments from regions that normally supply almost a third of the world’s diesel exports.
The crunch has sent prices surging in the U.S. and around the world, squeezing businesses, farmers and households. That has prompted the Trump administration to consider restrictions or an outright ban on exports to curb prices.
But U.S. export limits would have a potentially catastrophic impact on global supplies, analysts warn.
How did we get here?
Before the Iran war, the Middle East was the world’s top exporter of diesel, accounting for 19% of global exports last year, according to commodities-tracking service Kpler. North America had a 15% market share and Russia was the third biggest supplier at 11%.
But diesel shipments from Persian Gulf countries were at just a quarter of their prewar levels in August. Attacks by the Houthis on Saudi Arabia’s Red Sea refineries also hit exports. Meanwhile, Ukraine’s increasingly destructive attacks on Russian refineries have prompted the Kremlin to restrict exports sharply. By August, Russia’s diesel exports had plunged to about 20% of their May level.
U.S. refiners have stepped into the breach, boosting their exports sharply. But now they are operating at full capacity and are only able to make up for part of the shortfall.
The squeeze has pushed up prices around the world. In the U.S., they hit an all-time high of $6.52 a gallon last week. They’re at $6.39 currently, up around 70% since the start of the Iran war. Prices are even higher in the European Union, where the fuel is taxed more heavily: average prices across the bloc hit a record of $9.63 a gallon this week, according to Eurostat.
Why is diesel so important? And can’t refiners simply make more of it?
Diesel is heavier than gasoline and contains more energy per liter, and diesel engines tend to be more energy efficient. That is why diesel is more expensive than gasoline. It’s also why diesel is used to power heavier machines, such as trucks, tractors and even ships, where the energy density of the fuel matters more. That means economies around the world, including the U.S., rely on diesel to power them.
Making more of it isn’t as easy as turning a dial: refineries transform crude into various fuels at fixed proportions. In the U.S., refiners produce 11-13 gallons of diesel and 19-20 gallons of gasoline from every 42-gallon barrel of crude, according to the U.S. Energy Information Administration. The yields can be altered depending on the type of crude used and the configuration of the refinery, but not by much.
What would a U.S. export ban on diesel do?
It would cut off another crucial source of supply from the global market. Prices outside the U.S. would soar and analysts say outright shortages could appear, particularly in Latin America—which gets about 90% of its diesel imports from the U.S.—and Asia. Trucking would slow, shipping costs would rise sharply and heating homes would become more expensive.
A U.S. ban would also hit European countries hard. The region has increasingly turned to the U.S. for energy supplies, and nearly 40% of its diesel imports last month came from there.
The ban might lower prices temporarily in the U.S., particularly along the Gulf Coast, where most U.S. exports originate. But because diesel production is linked to the output of other refined products like gasoline, restricting its export could end up raising prices of all fuels. Refiners would need to cut back overall production if they run out of storage space for the diesel that they would have previously exported, meaning gasoline supplies would be constrained and prices would rise.
What would help bring prices down?
There are signs that diesel exports from the Middle East are recovering, which would go a long way toward easing the crunch. Exports from the region rose 30% in September from the previous month, but are still well below prewar levels. A halt to Ukrainian drone attacks on Russian refineries would also help, but Ukraine has refused to do that as long as Russia continues to attack its energy infrastructure.
The EU could also release fuel from its reserves. The bloc had 36 million tons of diesel in emergency stocks as of the end of June, equivalent to around two months of EU consumption, according to Eurostat.
China has spare refining capacity and its refiners sharply boosted exports in August and September, according to Kpler. That added nearly 800,000 additional metric tons a month to global supplies, but not enough to cover the shortfall from the Middle East, which stood at some four million tons last month.
This explanatory article may be periodically updated.
Write to Matthew Dalton at Matthew.Dalton@wsj.com