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Diesel prices could lead us into the next recession, experts say

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(NEW YORK) -- While many Americans have noticed sky-high gasoline prices, the lesser-known increase in diesel costs could be what drives the U.S. economy into a recession, experts told ABC News.

Oil prices, which on Wednesday afternoon stood at $105 per barrel, are likely to remain high through November, when they’ll moderate to around $100 per barrel, according to the U.S. Energy Information Administration (EIA).

Elevated diesel prices could persist even longer as heightened demand for diesel outlasts that for gasoline, experts said. Since nearly all products that people consume rely on trucks, trains, and other modes of transportation that use diesel fuel, the already-inflated prices for many goods will prove difficult to dial back in light of those elevated diesel costs, they said.

“No one really notices diesel prices in the U.S. because it’s really only used by industries,” said Damien Courvalin, head of energy research and senior commodity strategist at Goldman Sachs. “But that diesel represents a piece of your plane ticket, a piece of that box of cereal… that price is folded into aggregate inflation.”

The nationwide average price for a gallon of diesel stands at $5.81, which marks a staggering 80% increase since a year ago, when a gallon cost $3.22, according to AAA data. In California, the average price of a gallon of diesel is just below $7 per gallon, AAA data shows.

‘Diesel is my biggest concern’

While gasoline demand may decline leading into a recession, diesel demand often remains elevated, experts said. “In the pandemic we didn't see diesel demand fall off the way we saw gasoline fall because we all ordered things off of the internet,” said Denton Cinquegrana, chief oil analyst at market research firm OPIS.

Many facets of U.S. industry rely on diesel-fueled transportation of goods, experts said. Typically, overall consumer demand drops during a recession. But diesel demand could remain at high levels in the lead up to a recession, especially in light of the prevalence of e-commerce and home delivery, experts said.

“Diesel is, quite frankly, my biggest concern, even more so than gasoline,” Cinquegrana said. “You could make behavioral changes when it comes to gasoline -- you could carpool to work, some of us have the ability to work from home."

But with diesel, high costs elevate the prices of everyday goods, since the higher cost of transportation is often passed down to consumers. In turn, consumers restrain their spending habits at grocery and other retail stores, slashing demand and exacerbating an economic slowdown, experts said. Consumer spending accounts for about 70% of U.S. gross domestic product.

“Those trucks run on diesel, and those costs get passed on to the consumer -- that's why the price of eggs, the price of milk, beer, go up,” Cinquegrana said. “It’s the price of diesel that kind of breaks the back of the economy eventually.”

Refineries are nearing capacity

The fundamental issue behind the high prices of both gasoline and diesel: demand is high and supply is constrained. Currently, U.S. refineries are producing about a million barrels less per day than they were pre-pandemic, according to the EIA.

In recent years, energy companies have slowed oil expansion in response to a call for fiscal discipline from shareholders. The rise of renewable energy alternatives has also posed a challenge for long-term investment in oil extraction.

While President Joe Biden is set to travel to Saudi Arabia next month, a prospective oil deal likely won’t help the U.S. in the short term.

“Their oil is in the ground,” said Courvalin, the head of energy research at Goldman Sachs. “None of us use that, we need refined oil -- it needs to go through the refining process to get what we consume.”

Last week, Biden sent a letter to major oil refinery companies calling on them to take “immediate actions” to increase output. The letter accused the companies of taking advantage of the market environment to reap profits while Americans struggle to afford gas. It mentioned the possibility of Biden invoking the Defense Production Act, which requires companies to produce goods deemed necessary for national security.

But experts told ABC news that U.S. refineries are already near full capacity, and it would take a prolonged period to build new ones. Refineries are “very complex, highly regulated, and very expensive to build," the EIA said. "Building new refineries to increase capacity is not something that can be done in a short time frame."

“You have to realize that up until recently, nobody was screaming for more refining capacity in the world,” said Bob McNally, president of Rapidan Energy Group, a consulting firm. "In fact, if anything, refining capacity was starting to look like horses in buggies did in 1908.”

Biden should ‘go further’

The Biden administration’s short term response to the crisis has involved the release of oil from strategic reserves and a call for a gas tax holiday. The long term response has centered around a transition to clean or low carbon energy, but Cinquegrana criticized this proposal as “not appreciating how difficult an energy transition is.”

“What we really need is that higher investment - we talk about refining capacity: if there is none, then I cannot increase gasoline supply,” Courvalin said. “There is nothing the policy can do at this stage.”

The Biden administration has called for a federal gas tax holiday which would temporarily pause the federal gasoline tax of 18.4 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuel.

“On the one hand, yes, it does reduce prices at the pump,” Courvalin said of the potential holiday. “But when you look at it from a commodity perspective, it also means we are still not balancing, just subsidizing what we are running out of.”

The American Petroleum Institute sent the White House its own 10-step proposal to alleviate supply shortages. Their recommendations ranged from lifting development restrictions on federal lands and waters to revising the NEPA permitting process.

“I would go even further,” McNally comments on the letter, “reversing the ban on cross-border pipelines, removing the prospective risk of onerous regulation of oil and gas companies and investment and so forth until we can legislate a proper climate change policy.”

Some of the major energy companies agree.

“In the short term, the US government could enact measures often used in emergencies following hurricanes or other supply disruptions -- such as waivers of Jones Act provisions and some fuel specifications to increase supplies,” ExxonMobil suggested in a statement to ABC News.

“Longer term, [the] government can promote investment through clear and consistent policy that supports U.S. resource development, such as regular and predictable lease sales, as well as streamlined regulatory approval and support for infrastructure such as pipelines," the company added.

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