With Ukrainian attacks limiting Russian refining capacity and the Persian Gulf conflict restricting exports through Hormuz and the Red Sea, a diesel shortage is imminent.
While the U.S. should be able to weather this storm without issue, the poorly connected domestic distribution system will be a major source of problems. Unless the U.S. can move away from its heavy reliance on diesel trucks for shipping, the next 18 months will be full of shortages and rising transportation costs.
Hey everybody. Peter Zeihan here, coming to you from a drizzly Colorado today. We’re going to talk about diesel and what is almost certainly going to be diesel shortages in the United States, which is going to reverberate through the entire American economy for months.
Okay. So on the front end, the approximate causes are two fold. Number one, we’ve got the Ukrainians basically taking out Russian refining capacity. Russia used to be the world’s largest exporter of diesel. And now it is a net importer pulling from the United States, India, South Korea, lots of places. That is not going to change anytime soon. Even if the Ukrainians were to stop attacking, the Russians no longer have the capacity to repair all of this infrastructure in a short period of time. And so they will probably be net importers at least through the remainder of the year, probably through the remainder of next year. And that assumes that Ukrainians stop attacking, which is highly unlikely. Number two, of course, is the Persian Gulf conflict. We now have the Saudis basically largely removed from oil markets. We’re probably near the very end of their ability to use pre-positioned crude on the Red sea to export that direction, because the pipeline has been taken offline. It’s a bypass pipeline that used to bring crude from the eastern part of the country, where the oil fields are to the western part of the country. That is not dependent on Hormuz, but it’s been bombed. So who knows how long that’s going to be offline, and it can always be bombed again. In addition, the Strait of Hormuz remains mostly closed. At the best, in the last three months, we’ve seen maybe 20 ships go through a day, down from what used to be about 150. And as of Wednesday, only three ships came through. So the ability of the Iranians to shut that on and off is pretty, pretty strict. And that means we’re looking at roughly 20 million barrels of crude that can’t get out. And that’s going to hit energy at every level, including diesel.
Anyway in the United States, we’ve got a couple of things going on. First of all, it’s bringing this to my attention. So there have been a lot of social media posts in places like California and Texas of gas stations saying that they’re just out of diesel. I wouldn’t worry too much about that at the moment. Having weekly outages here and there. Throughout the country is a normal thing. And the number of outages is not of a number that suggests that it breaks from the norm. The problem is price, because now we’ve got this pressure in the international system, and every time somebody exports a cargo of diesel from anywhere in the world, everybody is trying to buy it. So that is putting upward pressure, even on domestic prices here in the United States, even though we are diesel exporters. But there’s also a regional breakdown issue. The Californians, for example, have closed most of the refineries. So the only way that they have to get diesel in is by ship. And that’s typically a Jones Act certified shipped from Texas. So in the United States, we’ve got this incredibly stupid law on the books that dates back to the 1920s, called the Jones Act, or the Interstate Commerce Act, which says that any cargo that is going to be transported between any two American ports has to be on a boat that is built in America, owned by an American, captained by an American, and crewed by Americans. And as a result, the cost of maritime transport in the United States is increased by a factor of five compared to the world average. Which is just idiotic. Anyway. So we’ve got that restriction. There’s only a limited number of Jones Act vessels, and they have to take the stuff all the way from the Gulf Coast, through Panama, on up to California. So the entire West Coast, California specific is facing what is about to be just astronomically high diesel prices. It’s not much better on the East Coast. They do have something called the Colonial Pipeline that goes from the Gulf Coast, Texas/Louisiana area and sends fuel directly into the American northeast. But the volume isn’t sufficient for the needs. So they also use Jones Act. Go further down the Atlantic coast into places like South Carolina, Georgia and Florida. You’re talking purely Jones Act or truck. Trucks use diesel, so you’re using the thing you’re running out of in order to ship the thing that you’re running out of to places that can’t make it themselves. In the middle, you’ve got the Rocky Mountains, the Mountain West and the Midwest, who for the most part produce most of the diesel that they need. And we’re not seeing any shortages there. And then, of course, the place with the surplus is the Gulf Coast, Texas, Louisiana. And that’s where most U.S. exports come from as well. The problem is these various regions are not linked together very well. There aren’t a lot of pieces of infrastructure like colonial, and so most of the stuff has to be shipped by truck or by train, both of which use diesel.
All of that combined means regional shortages are pretty much guaranteed. And that’s before you get to the real problem. Because of the Jones Act, the United States a century ago made the unconscious decision to move away from water transport and even rail transport to truck transport. Now, trucks have certain advantages. They can go to places where you couldn’t run a rail line because it’s too steep, important in the mountain west, but they cost a lot more and trucks use diesel. So by ton mile, the majority of U.S. cargo is shipped by truck. You see the problem here?
Nearly unique in the world, the United States has the best maritime transport system possible, but has instead opted for the most expensive transport system possible. Shipping things by water costs less than one tenth of shipping them by truck. And so we should be using our water network to the fullest extent, which would also minimize our diesel demand. Instead, we’ve done the opposite. And now with shortages on a global basis, guaranteed even in the United States, which is a net exporter, even in the United States, which is the largest net exporter of refined product, we’re going to be facing problems in our transport system, which will affect every single thing that has to be moved throughout the entire country for at least the next 18 months.
