Multiple military conflicts are battering global refining capacity, and the diesel supply crisis is now reaching consumers.
California diesel prices hit $7 per gallon again on Wednesday, up roughly 30 cents from a month ago and a staggering 37% increase year-over-year, translating to $1.89 more per gallon than last year. Simultaneously, the national average diesel price stood at $5.50 per gallon on Wednesday, a monthly climb of about 40 cents and $1.81 higher than the same period last year.
These supply shocks are rippling through the broader economy. Kevin Book, Managing Director at ClearView Energy Partners, noted on CNBC Monday that rising diesel costs are being passed on to consumers through higher grocery and merchandise bills, calling it "a fairly serious inflation concern."
Supply Gap: Two Conflicts Disrupt About 8% of Global Diesel Supply
Andy Lipow, President of Lipow Oil Associates, indicated that the conflicts in Ukraine and Iran have together disrupted roughly 8% of global diesel supply—a substantial shortfall when measured against worldwide demand of 28 million barrels per day.
Specifically, Ukrainian drone strikes on Russian refineries have forced Moscow to ban approximately 800,000 barrels per day of diesel exports. Meanwhile, restricted passage through the Strait of Hormuz is affecting around 1.2 million barrels per day of Middle Eastern diesel exports. Additionally, Houthi allies of Iran recently attacked Saudi Arabia's Jizan refinery on the Red Sea coast, taking that facility and its 200,000 barrels per day of capacity offline until at least the end of August.
In Asia, refiners are processing less crude, leading to reduced fuel exports. Dan Yergin, Vice Chairman of S&P Global, estimated on CNBC on July 31 that approximately 6 million barrels per day of global refining capacity is currently offline. "This is affecting the entire economy," Yergin stated.
Price Trajectory: Rebounding From Peak, Adding Pressure During Holiday Demand Season
California diesel prices have experienced significant volatility this year. In April, prices hit a record $7.75 per gallon as Iran tightened tanker passage through the Strait of Hormuz. They subsequently fell below $6.50 per gallon in July following a memorandum of understanding between Washington and Tehran that partially restored Hormuz exports.
However, prices are now climbing again—an especially ill-timed development ahead of the agricultural harvest season and rising freight demand during the holiday shopping period. Bob McNally, President of Rapidan Energy, emphasized on CNBC that diesel is the world's most critical fuel, powering transportation, heating, agriculture, and industry, calling it "the most important macro fuel to watch."
Refiner Windfall: Crack Spreads Exceed $100 Per Barrel
Under tight supply conditions, refiners are enjoying substantial profits. The crack spread—the margin from processing crude into diesel—has surged past $100 per barrel, surpassing the current trading price of US crude at approximately $85 per barrel.
Lipow pointed out that California diesel prices exceed those in the rest of the continental US partly because the state relies more heavily on costlier imported crude and requires specially formulated diesel. Environmental regulations, along with state-level excise and sales taxes, further inflate local fuel costs.
Kevin Book suggested that diesel prices are unlikely to drop meaningfully until damaged Russian refineries resume operations and Middle Eastern exports return to full volume. However, international sanctions will make it difficult for Moscow to procure materials needed for repairs, "which will prolong the outages," he said.
This means that until there is substantial easing in geopolitical tensions, supply pressures in the global diesel market are likely to persist, continuing to transmit through transportation and logistics costs into consumer prices.
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