In the southeast, a major national supplier of diesel, Mansfield Energy, recently declared a “Code Red,” warning that some terminals were running out of fuel, forcing supply trucks to divert elsewhere. Industrial customers were advised to give three days notice before making new orders. Home heating oil suppliers are confronting similar challenges in New England.
This is the lowest diesel inventory we’ve had at this time of year since 1951,” said Andrew Lipow, a Houston-based oil industry consultant. “It is quite concerning, considering demand is four times what it was back then.”
Diesel is a workhorse of the economy, helping power most major industries. Companies rely on it to deliver their goods by truck, rail and ship, and nearly 1 in 5 homes in the northeast use diesel for heating oil. The price hikes this season are crushing, in turn driving up the cost of food and other goods. The average price at the pump is $5.36 per gallon, according to AAA, up from $3.64 a year ago. In California it is nearly $1 higher.
The cost to heat a residence using diesel-based home heating oil is projected to increase 27 percent over last year, according to the U.S. Energy Information Agency’s winter outlook.
The supply is going to the places that will pay the most money for it, and in New England we are having to pay a big premium,” said Kate Childs, vice president of Tuxis-Ohr’s Fuel, a supplier in Connecticut. She said some of her delivery trucks now have to drive from terminal to terminal before they can find enough fuel to fill their orders.
The crunch is driven by a confluence of issues. A surge in demand as the economy recovered from the pandemic coincided with a sudden plunge in global supply created by sanctions against Russia, which were triggered by its invasion of Ukraine. The United States now finds itself increasingly competing with Europe for fuel deliveries.
The challenge is compounded by the closing of older refineries in the United States in recent years, which has reduced the amount of diesel made here by 1 million barrels per day, or about 6 percent.
New refineries are unlikely to take their place, industry officials say. Building and running such infrastructure is expensive and typically only profitable if it operates for decades. Investors are wary of such projects at a time when the nation is transitioning away from fossil fuels.
Now, with winter coming and Europe about to impose a full import ban on Russian petroleum products, the frenzy to lock down enough fuel for American businesses and consumers is leading to big price hikes and uniquely challenging market dynamics.
In October, two tankers that were filled with diesel in the Middle East and on their way to deliver it across the Mediterranean in Europe were diverted to New York Harbor, according to tracking data reported by Reuters. Even at a time Europe is paying sky high prices for the fuel, U.S. buyers were willing to pay more to avoid outages. Such maneuvers are keeping the supply flowing, but at a very high price.
The shortage was a politically potent talking point for Republicans during the midterm campaign, with conservative candidates and pundits such as Tucker Carlson of Fox News suggesting filling stations were on the verge of running out of the fuel altogether. That was never the case. But soaring prices are very real, wreaking havoc on the economy and delivering a painful financial blow to consumers.
The pressure on Biden is not just coming from Republicans. More than 30 lawmakers in the House and Senate from New England, most of them Democrats, are pushing the president to release fuel from the Northeast Home Heating Oil Reserve, which stores about 10 days supply of fuel to be available in the event of a supply emergency. Their letters warn that families are in danger of not being able to keep their homes at safe temperatures this winter.
The administration has signaled a release from the reserve is likely as winter weather arrives. It has not been tapped since 2012, when it was used to provide fuel to emergency responders in the aftermath of Hurricane Sandy.
The administration has been meeting with governors to strategize on protecting fuel supplies. It is holding off on a release from the reserve at the moment so that small amount of extra fuel is available should conditions worsen with severe cold weather or an acute supply chain emergency.
The home heating oil shortage is hitting at the same time New England power companies that rely on natural gas are confronting their own crisis. Boston-based Eversource Energy, which serves 4 million customers, warned the administration in an Oct. 27 letter that gas supplies are so tight blackouts are possible this winter.
Biden has few options available to him to quickly boost such fuel supplies. One proposal the White House has put on the table: curbing exports of domestically produced diesel and natural gas, a move the industry warns would create chaos in energy markets as other countries retaliate.
Oil industry officials were bracing for Biden to make such a move during an election in which Democrats campaigned on voter anger over windfall oil company profits.
“If they were going to take the drastic market-altering action of limiting exports it would have made more sense for them to try and do that before the election,” said Stephen Brown of RBJ Strategies, a consultant to energy companies.
Administration officials say nothing has been taken off the table, and the White House is growing increasingly frustrated with the refusal of oil executives to voluntarily boost their domestic inventories.
“We have for months called on oil companies to address low inventory levels on the East Coast, and their continued inaction — at a time when they are reporting record profits — is unacceptable,” said White House spokesman Abdullah Hasan. “We are monitoring the situation closely and will continue to use all tools at our disposal to reduce costs and protect American consumers.”
Biden signaled only days before the election that he would be demanding oil companies take a more active role in lowering prices, vowing a “come to the Lord” talk would happen “soon.”
One easier route to lowering oil prices would be revoking a law that allows only U.S. vessels to transport oil or gas from the Gulf Coast to other domestic ports. Foreign vessels, Lipow said, are more readily available and charge considerably lower rates. But there is inadequate congressional support for weakening the rule, called the Jones Act, which is strongly supported by unions and shipbuilders.
“They need to change the Jones Act now,” said Chris Herb, president of the Connecticut Energy Marketers Association. “But it is very political inside D.C., and the interest groups are winning.”
Inventories are so tight right now that even the smallest hiccup in the supply chain, such as a fire at a refinery, threatens a major disruption. Mike Steenhoek, the executive director of the Soy Transportation Coalition, describes it as like being on the Beltway during rush hour, when there is so little spare roadway that a minor accident or flat tire can tie up traffic for miles.
The farmers he works with in the Midwest are getting particularly hard hit. Unlike major retailers such as Walmart or delivery companies like FedEx, farmers can’t just pass along fuel surcharges to their customers. Prices for their product are set by the commodities exchange in Chicago.
At the same time prices of diesel are soaring, farmers are burning more of it. Low water levels in the Mississippi River mean the barges many of them normally load their product onto are not in operation, forcing the farmers to drive long distances to alternative sites to deliver their crops.
That means having to buy yet more diesel.
“Some industries are nimble and can pivot more easily in times like these,” said Steenhoek. “Agriculture by its very nature cannot. When we have these supply issues, it creates big problems.”