Shrinking Diesel Supply Threatens To Spur Inflation

“American consumers caught the biggest break in inflation in five years by at least one measure last month. But a sharp drop in diesel supplies threatens to reverse the trend and boost prices for everything from dog food to lumber.

 

U.S. diesel futures have surged about 20% since the beginning of last week, while the U.S. and Iran continue vying for control of the Strait of Hormuz. The resurgent conflict compounds market fears of a diesel shortfall after Russia, one of the world's largest suppliers, banned exports.

 

Prices will likely keep climbing as domestic stockpiles -- already close to the lowest mark since the early 2000s -- continue thinning, analysts warn.

 

The supply crunch is showing up at the pump. The national average for a gallon of diesel rose to $5.01 on Thursday. Retail prices could soon climb an additional 20 to 25 cents a gallon, analysts say, after peaking near $5.70 in April.

 

This poses another potential headwind for the economy by fanning worries about inflation and driving government borrowing costs higher. Elevated diesel prices can weigh on U.S. consumers as much as gasoline, though the impact is more diffuse and perhaps less obvious.

 

"Higher diesel relates to everything that gets moved around," said Ed Hirs, an economist at the University of Houston. "In terms of the midterm [elections], Trump is giving the Democrats the 'It's the economy, stupid,' slogan."

 

The long-haul semi-trucks that move goods across the country burn more than 100 million gallons of the fuel each day. Truckers pass those costs on to retailers, which in turn charge more for groceries, gadgets, cars and home-building materials.

 

American farmers, already stung by President Trump's tariffs, rely on diesel to fuel tractors and get their goods to market. Diesel futures are up more than 85% since the start of the year.

 

Trump is running out of time to achieve his goals in Iran. His Republican allies in Congress want to see the rise in fuel prices stemmed well ahead of the midterm elections. Iran, meanwhile, is using missile attacks on tankers to try to maintain its control over the strait, which has given it leverage in past negotiations.

 

In the wake of events in Ukraine, economists closely linked a surge in diesel prices to a broader bout of inflation that affected virtually every corner of American life. Persistent inflation bedeviled Democrats, who went on to lose the White House and Congress in 2024. Trump, for his part, has vowed countless times to rein in inflation.

 

Tuesday's inflation report offered good news that economists say is likely fleeting. Consumer prices declined in June from May, the first month of falling prices in two years, according to the Labor Department. And excluding the food and energy categories, core prices were flat month over month -- the first month without rising prices in more than five years.

 

Diesel inventories in the U.S. ticked up about 4.6 million barrels in the latest week, the Energy Department said Wednesday, but they are down 10% since late February and approaching the lowest level since 2003.

 

"We're seeing some of the fundamentals tighten again" following the end of the U.S.-Iran ceasefire, said Dan Pickering, chief investment officer at Pickering Energy Partners. "You now have significant incentive to produce diesel from global refineries."

 

Yet the U.S. is one of the world's last major diesel suppliers. American exports are expected to climb to near-record levels in July, according to market-intelligence firm Kpler.

 

The strait's closure has largely blocked the Middle East's prolific exports. Russia banned diesel shipments last week after Ukraine hit its refineries with long-range drone attacks, based on American targeting information. South Korea, Japan and India have curtailed exports, too. China reversed course recently after a four-month ban on fuel exports.

 

All told, roughly seven million barrels a day of global refining capacity is shut, as are 800,000 barrels a day of Russia's diesel exports, which made up roughly 11% of the global seaborne diesel, according to vessel tracker Vortexa.

 

U.S. refineries have some catching up to do. American fuel makers largely have to choose between making more jet fuel or diesel. In the spring, they staved off a jet-fuel crisis by slashing their diesel output.

 

U.S. refineries boosted jet-fuel production to record levels of 2.2 million barrels a day last month, up from 1.7 million before the war. Meanwhile, they reduced diesel output to 4.7 million barrels a day in May from about 5 million in late March, and only in recent weeks have they ramped production back up, according to the Energy Information Administration.

 

Jet-fuel prices on the Gulf Coast had surged more than 80% from the start of the war to a peak of $4.45 a gallon in mid-May, according to FactSet. They have since come back down to $2.83.

 

Jet-fuel demand is about half as robust as diesel demand, so a shortage of the former can be solved faster than shortfalls in other fuels, said Denton Cinquegrana, chief oil analyst at energy-data and analytics provider OPIS, a Dow Jones company.

 

"The jet-fuel issue seems to have really calmed down, and that's because refineries really ramped up," he added.” [1]

 

It seems that by targeting Russian energy infrastructure Americans increase inflation in their own country.

 

Yes, targeted by Americans Ukrainian drone attacks on Russian energy infrastructure have contributed to rising global energy prices, which indirectly increase inflation in the United States. By crippling Russian oil refining capacity, the strikes force a global scramble for refined fuels like gasoline and diesel, pushing up retail costs at American gas stations.

How the Energy Market Reaction Works:

•           Supply Constraints: The strikes have caused a historic drop in Russia's crude-processing rates, forcing Moscow to restrict fuel exports.

•           Global Demand: Countries that traditionally bought refined fuels from Russia are now turning to other suppliers, driving up prices.

•           Price Spikes: This tight supply pushes up global crude and refined product prices, directly affecting U.S. consumer prices and contributing to broader inflation.

Broader Context:

While this dynamic directly pressures U.S. gas prices, the United States is not alone in feeling these effects. The energy market is also dealing with disruptions stemming from broader geopolitical conflicts, such as the war in Iran and tensions in the Strait of Hormuz, which are compounding global energy and commodity costs.

 

1. Shrinking Diesel Supply Threatens To Spur Inflation. Eaton, Collin.  Wall Street Journal, Eastern edition; New York, N.Y.. 17 July 2026: B1.