In the first months after the invasion of Ukraine, the prices of petroleum products, including gasoline and diesel, rose much more than the crude oil from which they are refined. Since June, gasoline prices have fallen rapidly, but diesel prices remain close to all-time highs. This reflects the collapse of US and European diesel inventories. Stocks of diesel had already started to run low in the second half of 2021, before the war in Ukraine affected an already tense market.
The shortage of diesel reflects multiple factors. From 2020, the International Maritime Organization (IMO) required the use of a less-polluting (lower sulphur) diesel fuel for long-distance sea haulage, similar to the diesel used in industry and other transportation. This increased global demand for diesel by about 3 million barrels per day (mbd). The slump in demand following the outbreak of the pandemic masked the impact of this shock, but the rebound in international trade since late 2020 quickly eroded diesel inventories. In addition, oil companies reduced refining capacity in Western countries by around 1.5mbd during the pandemic.
Unsurprisingly, refining margins have also increased, and particularly so for diesel. The spread between the futures contract prices of diesel and gasoline has risen to USD 1.2 per gallon, far above the 2006-21 average of less than USD 0.1, making diesel a record 40% more expensive than gasoline. Finally, the spread between retail and futures contract prices of petroleum products has also surged.
While many commentators, especially in the US, focus on the price of gasoline, diesel is also important to the economy. Diesel is used to power industrial and agricultural machinery as well as ships, airplanes and trucks. In addition, an increasing number of carriers and online retailers apply a surcharge linked to the fuel cost, increasing the final price paid by consumers. Finally, diesel is used by services sector companies for heating and electricity generation.
To investigate the impact of the rise in petroleum products prices on US inflation, a model is used to show how prices of services and non-energy goods, including food and beverages, respond. The model shows that a standard shock to diesel prices strongly influences the CPI of services less energy and of food several quarters after the shock.
Statistical analysis shows that the past increases in the price of diesel added more than one percentage point to CPI ex-energy inflation in Q3 2022. Furthermore, while estimates indicate that the impact of the past shocks will grow again in the last months of 2022, this would mean that the expected fall in inflation would be more moderate in the short-term but would then accelerate in 2023. of inflation 2023. Should this be the case, the Federal Reserve’s upcoming interest rate decisions would be affected, with high chances that the Fed will soon pivot to a softer guidance on interest rates.
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