Posted on by John Sloman

Diesel prices: an update



As we saw in a recent post, Why have diesel prices risen more than petrol prices?, diesel prices have soared since the outbreak of the Iran war at the end of February this year. In the UK, they rose from around 142p just before the US/Israeli attack on Iran to over 200p by the start of October – a rise of around 42%. The rise has been aggravated by threats of Houthi attacks on oil tankers in the Red Sea, Ukrainian attacks on Russian refineries leading to a Russian diesel export ban, a Chinese diesel export ban, refinery shortages in several countries and buoyant industrial, transport and agricultural demand.

The hope was that the gradual reopening of the Strait of Hormuz would ease oil prices. But despite oil flows increasing from the Gulf, prices have not eased. And with the November mid-term elections approaching in the USA, the Trump administration has been threatening to cut off US diesel exports and divert diesel supplies to the domestic market, thereby reducing diesel prices in the USA. The threats were to put pressure on European countries to tap into their own emergency stocks to ease global diesel prices. By the beginning of October, diesel futures were at record prices.

Then on Friday 2 October, the Group of Seven (G7) nations gave in to pressure from the USA (one of the G7). Co-ordinated by the International Energy Agency (IEA), the G7 announced the release over the next four months of 100 million barrels from reserves, partly of diesel and partly of crude oil. The release would be front loaded to put immediate downward pressure on diesel prices. President Trump stated that a major proportion would be from European stockpiles.

The IEA had already organised the release of 400 million barrels from stockpiles back in March. However, not all were released because, at the time, the USA was flooding the market with its own diesel to keep the market price down. By the beginning of October, 75 million barrels had yet to be released, but were still considered ‘available’. The new G7 announcement did not make clear whether the 100 million barrels would be in addition to the March agreement or would involve only an additional 25 million barrels.

This promise of an increase in supply had an immediate effect, with US diesel futures falling by around 4.5% and European diesel futures by around 6.5%. The question, though, is how long any reduction in diesel prices would last. The world consumes roughly 840 million to 900 million barrels of diesel per month. Unless the conflicts and other causes of the underlying shortage of diesel are resolved, the extra diesel released from stockpiles will provide only a temporary relief from high prices.

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Questions

  1. What will determine the size of the effect of the G7’s decision to release stocks of diesel and crude oil?
  2. How do expectations affect diesel prices – both spot and future prices?
  3. Why would a diesel export ban by the Trump administration have only a minimal effect on diesel prices in much of the USA?
  4. What determines the price elasticity of demand for diesel in (a) the short run; (b) over a few years?