Benchmark Diesel Price Falls Over 11 Cents in Two Weeks; Are Refineries at Risk?
Against a backdrop of falling asset prices virtually across the board, the benchmark diesel price used for most fuel surcharges fell for the second week in a row. The weekly average retail diesel price posted by the Department of Energy/Energy Information Administration declined 5.3 cents a gallon to $3.582.
Combined with last week’s drop of 6.2 cents a gallon, the price is now down 11.5 cents in just two weeks. It’s the biggest two-week decline since a Dec. 16-23, 2023, drop. It also puts the price just above the lowest level of the year, recorded on Jan. 6, of $3.561 a gallon.
With recession fears roiling Wall Street as the most visible sign of market worries, a commodity like oil, tied to economic activity, took a hit as well. The settlement Monday on the ultra-low sulfur diesel contract on the CME commodity exchange was $2.1799 a gallon. It’s the lowest ULSD settlement since Dec. 6, when the market settled at $2.1326. The price was down 3.61 cents a gallon for the day, a decline of 1.63%.
With the drop Monday, the price of ULSD is down 10.73 cents in just a week. Since a recent high settlement of $2.5034 a gallon on Feb. 20, it’s now down 32.35 cents, suggesting retail prices still have a ways to go to catch up.
From the perspective of diesel buyers, the decline is nothing but good news across the board. For trucking companies, diesel costs are generally the second-largest cost of doing business after labor, though companies with robust fuel surcharge programs can push them down to shippers to varying degrees.
However, another prospect was raised in a report Monday: that U.S. tariffs on imports, in general and energy in particular, might bring about retaliation, potentially leading to long-term damage or outright loss of capacity for the U.S. refining industry, which increasingly depends on the export market.
This was the argument put forth Monday by longtime energy economist Philip Verleger in his weekly report, "Notes at the Margin." In December, the latest month for which data is available, U.S. refiners exported about 3.7 million barrels a day of all finished petroleum products. A little more than 1 million barrels a day was finished motor gasoline, and ULSD was about 1.3 million barrels a day.
Making a comparison to a ban on soybean exports by President Richard Nixon in 1973 as a measure to slow food price inflation in the U.S., Verleger emphasized that farmers today are still suffering from lost markets due to the growth in Brazilian soybean production that occurred as a result of the Nixon ban. It may have cost farmers as much as a trillion dollars since then, he added.
"US Gulf Coast oil refiners may suffer a similar hurt if aggressive U.S. tariffs are maintained," Verleger wrote. "Reprisals by their best foreign customers could leave them begging as refiners in the Persian Gulf, Russia, and now China seize their markets."
The U.S. Gulf Coast market has lost a significant refinery in recent weeks, as the LyondellBasel refinery, believed to be the oldest Gulf Coast refinery, closed.
Verleger cited two recent reports by the energy consulting firm Wood Mackenzie, which came out before the tariff wars, indicating that more than 20% of existing world refineries were at risk of being closed as new refineries worldwide open for business in the Middle East and Africa. Those reports did not see U.S. refineries as vulnerable, according to Verleger.
A new refinery in Nigeria, the Dangote refinery, has been described as "colossal" and is a direct competitor with U.S. refineries in the Atlantic basin.
But the Trump administration tariffs "may change that because the refiners located on what has been known for more than a century as the Gulf of Mexico rely heavily on product exports," Verleger wrote. "These facilities may fall victim to retaliatory tariffs on those products."
U.S. product exports are an economic strength, argues Verleger. They "comprise an arrow in the administration’s energy dominance quiver," he said in the report. But there’s a downside: “They are also highly vulnerable because key importers, Mexico and Europe, have governments preparing to retaliate against US tariffs."
Despite concerns that tariffs could lead to higher petroleum prices in New England and the U.S. northeast, the region saw a smaller decline this week than the national average in the DOE/EIA report. However, the tariffs are not in place yet.
The average diesel price in New England was $4.037 a gallon, down 0.6 cents, while for the East Coast as a whole, it decreased by 5.3 cents a gallon to $3.742.
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