This fuel is responsible for the increase in the price of almost everything

(CNN) — While prices at gas stations are one of the most obvious symbols of rising inflation, economists are more concerned about the effects of rising prices for another major fuel source: diesel.

Diesel plays a huge role in consumer prices because, along with its chemical cousins ​​jet fuel and marine fuel, it powers almost everything that is grown, processed or manufactured in the world.

“Diesel is the engine of trucking. It’s what drives our global economy,” said Joseph Sykora, equity analyst at Aptus Capital Advisors. “You can’t ignore it in terms of how it feeds into what things cost.”

The United States consumed about 128 million gallons of diesel a day in 2021, according to the US Energy Information Administration, but production, especially refining capacity, has not kept up with the post-America surge in demand. The covid crisis and the scarce supply have triggered prices.

According to the Consumer Price Index for June, published on Wednesday, the energy category that includes diesel rose 75.8% year-on-year, an even larger increase than the 59.9% rise in gasoline prices.

Although the cost of oil and gas has eased in recent weeks from spring highs, analysts are skeptical about how long this respite will last, and that’s before taking into account the prospect of a boom season. unusually active hurricanes or other geopolitical disturbances such as the reduction of fuel exports to the European Union by Russia.

“Inventories haven’t been this low in a generation around the world. There’s potential for trouble even if we get through this storm of concerns about power grids and hurricanes in the coming months,” said Tom Kloza, global head of OPIS energy analysis. “If there’s one fuel that could absolutely skyrocket, I think it’s diesel.”

Diesel demand is less elastic than gasoline demand. Although people may respond to high gas prices by using their cars less, there are no good alternatives to diesel on an industrial level, said Bill Fitzpatrick, managing director and portfolio manager at Logan Capital Management.

“We are all looking for solutions, but innovative technologies have not yet come to fruition. It seems that we are trying to reduce our dependence on fossil fuels, but we have not achieved it yet,” he said.

Although electric vehicles have gained ground as an alternative to gasoline-powered passenger cars and trucks, according to Sykora, fleets of trucks, planes and freighters continue to run on hydrocarbons. “The technology doesn’t exist at scale to transition to electric vehicles in higher-capacity transportation,” he said.

The domino effect of diesel

The high cost of diesel is rippling through companies’ supply chains. Walmart said in a memo Obtained by The Wall Street Journal that it will start adding a fuel surcharge to some of its suppliers next month. In April, Amazon imposed a similar fee on sellers using its distribution services.

The impact is already trickling down to store prices, and analysts say to expect more of the same.

“Essentially all goods that have to be shipped by truck are going to be affected,” said Michael Englund, chief economist at Action Economics. Wednesday’s CPI report showed the cost of food at home rising more than 12% from a year earlier.

Higher diesel prices not only increase the cost of transporting food, but also the cost of farming, and experts in the agricultural sector warn that keeping prices high could cause shortages.

Kyle Kotzmoyer, an official with the Pennsylvania Farm Bureau, told Pennsylvania lawmakers at a hearing in June that some farmers can’t afford to run their tractors and are abandoning energy-intensive crops like beans and corn. , as a result.

“Many industrial processes rely heavily on transportation,” Englund said. This includes the production and transportation of construction materials and supplies, putting additional pressure on an already battered market for home buyers as well as renters.

Some analysts say that even a painful recession could not stem the pressure. “While it is true that that will reduce demand, I would not expect to see a strong easing in terms of prices, simply because there is very little spare capacity in the market to absorb any additional demand,” Fitzpatrick said.

“People are crying wolf over oil prices,” Kloza said. “This year, I think the wolf is at the diesel door.”

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