The energy market is sending a message: Don't expect prices at the pump to come down anytime soon
Cash-strapped consumers will feel the ripple effect of higher gas and diesel prices.
The margin that oil refiners demand for producing fuels like gasoline, heating oil and diesel has climbed to some of the highest levels in history, putting more upward pressure on prices of petroleum products that American consumers and companies depend on - even as the price of oil seesaws around $90 a barrel.
That promises to heap more pressure on an already strapped public - even if the full economic impact of higher energy prices might take a while to fully trickle down to the U.S. economy. Prices at the pump are already marching higher, and future winter heating bills could be steeper as well, as talks between the U.S. and Iran stall.
Energy traders refer to this margin as the "crack spread." It captures the difference between the price of one barrel of crude oil and the price of the refined products made from it.
"This crisis is unfolding in a pretty meaningful way not through crude oil, but through refined products," said Daniel Sternoff, a fellow at Columbia University's Center on Global Energy Policy.
Supply disruption
The conflict between the U.S. and Iran has disrupted the flow of oil through the Strait of Hormuz, while also cutting off refiners based in the Persian Gulf region.
"There just isn't the ability to refine crude oil where it is needed and get the products to the places where they are needed. It's kind of a slow-motion crisis that is playing out, and we don't see it if all you do is look at the price of crude oil futures," he said.
Spreads have been moving higher since the war began at the end of February. The margin for diesel earlier this week topped $100 for the first time ever. Diesel is the fuel of choice for heavy-duty vehicles and machinery, and its price affects every corner of the economy.
Meanwhile, the margin on making U.S. gasoline recently topped $50, said Denton Cinquegrana, chief oil analyst at Dow Jones Energy. Spreads on gasoline, jet fuel and heating oil have also surged. (Dow Jones Energy is a unit of Dow Jones, the publisher of MarketWatch.)
Rising jet-fuel prices have also been a big headwind for airlines.
With the conflict in Iran now in its sixth month, U.S. refineries have become the world's gasoline and diesel suppliers of last resort.
U.S. plants are running at a pace not seen in decades, yet the increased productivity still isn't enough to compensate for the supplies that have been lost. Refineries operated at 97.2% of their capacity in the week that ended Aug. 14, according to the latest data from the U.S. Energy Information Administration, released Wednesday. A more usual run rate is closer to 90%.
Attacks on refineries in Saudi Arabia and in Russia, which recently extended its ban on diesel exports to protect its own supply, have compounded the problem.
Meanwhile, the U.S. and Iran are no closer to resolving their stalemate, and an agreement on shipping crude oil and crude products through the Strait of Hormuz remains elusive.
So far, most of the world has responded to the unfolding crisis with a combination of demand curbs and pricier but workable alternatives to Middle East oil. In the U.S., drivers are making fewer trips to gas stations, analysts at Jefferies said in a recent note, with foot traffic down about 4% year over year, they said, citing proprietary data.
Big problems for trucking
Rising costs for the fuel affect all modes of transportation, from airlines to trucking, and the ripple effect will impact "virtually all industries," said Joel Sutherland, a professor of supply-chain management at the University of San Diego's Knauss School of Business.
For trucking, the consequences could be particularly disastrous. Some 90% of U.S. licensed common carriers operate 10 or fewer trucks, and most are struggling to stay afloat, Sutherland said.
Some trucking companies have ceased doing business, and many more will likely fail if high fuel costs do not subside soon. That could cause U.S. trucking capacity to decline, making it even more expensive to transport goods around the country.
Larger companies tend to have a bigger buffer that allows them to absorb more of these costs. Still, as trucking companies pass along higher prices to their customers, it is only a matter of time before the impact reaches the consumer, Sutherland said. That could cause people to delay major purchases and cut back on other forms of discretionary spending - potentially a problem for an economy that is driven in large part by consumption.
"Sadly, the impact will not be short-term," he said, "and the impact will cause significant supply-chain stress, in virtually all essential industries, for many months, and possibly years."
-Claudia Assis
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