Rising diesel prices could reach far beyond the pump

CARBONDALE, Ill. (Heartland News) - Drivers are seeing higher fuel prices at the pump, but an Southern Illinois University professor said the effects of rising diesel costs can travel much farther than the gas station.

Gregory DeYoung, an associate professor of operations management at Southern Illinois University Carbondale’s College of Business and Analytics, said diesel plays a central role in moving goods throughout the economy.

Trucks use it to move products from warehouses to stores. Farmers use it in combines, tractors and trucks during harvest. Trains and ships also depend on diesel or related fuels to keep goods moving.

That means higher diesel prices can eventually become higher costs for consumers and DeYoung said some products can reflect those increases relatively quickly.

“Products that turn over very quickly at retail like groceries, you’ll see the increases more quickly,” DeYoung said.

He said fuel surcharges on deliveries can be adjusted frequently as diesel prices change, creating a relatively direct connection between transportation costs and the price of fast-moving products.

The effect may take longer to appear in more expensive goods that remain in inventory for months. A refrigerator, vehicle or other big-ticket item already sitting at a retailer, for example, was transported when fuel costs may have been different.

A global market

DeYoung said the current pressure on diesel prices is not primarily the result of the United States running out of fuel.

The U.S. exports diesel, but domestic prices are still tied to the global market. DeYoung pointed to disruptions involving Russia and the Middle East as factors affecting production and transportation overseas.

He said damage to Russian refining capacity is particularly difficult to predict. Attacks on refineries can remove production from the global market, while sanctions can make damaged facilities more difficult to repair.

Shipping disruptions in the Middle East also remain a concern, although DeYoung said some transportation through the region has improved.

Those global connections are also why seemingly simple proposals to lower domestic prices can carry consequences.

DeYoung discussed calls to restrict U.S. diesel exports, saying keeping more fuel at home could initially appear to provide relief. However, he said refiners could respond by reducing production if they no longer have access to overseas customers.

Because gasoline and diesel are produced through the same refining process, DeYoung said reducing diesel production could also mean producing less gasoline.

A sharp reduction in U.S. exports could also worsen diesel shortages elsewhere in the world, creating additional problems for international transportation and supply chains.

A different concern at local stations

Even without a national diesel shortage, DeYoung said consumers could occasionally encounter a different problem at individual convenience stores, gas stations or truck stops.

Fuel retailers have significant amounts of money tied up in the product stored in their underground tanks. As diesel becomes more expensive, purchasing the same amount of inventory requires more cash.

DeYoung said some retailers may decide to carry less fuel rather than risk buying large quantities at a high price and then being left with expensive inventory if wholesale prices suddenly fall.

“You could see some local shortages because of, not because of supply chain problems, but because of decisions that are made at the inventory level at the actual retailers themselves,” DeYoung said.

He stressed that such a situation would be different from a nationwide shortage.

What happens next?

There could be better news for drivers who use gasoline.

DeYoung said gasoline prices could stabilize or decline as the summer driving season ends and demand eases. Diesel is more complicated because demand remains closely connected to transportation, agriculture and industry.

For diesel prices to see more lasting relief, DeYoung said additional refining capacity needs to become available globally and geopolitical disruptions affecting existing production and transportation would need to ease.

For consumers, there are few simple ways to avoid those broader forces.

DeYoung said people making large purchases may want to pay closer attention to freight and delivery costs, while businesses can consider consolidating shipments or other transportation options when possible.

But he cautioned against assuming consumers can simply wait a few weeks for the problem to disappear.

“There’s no real easy to see end in sight,” DeYoung said. “It’s really tough to say, just put that off for a month and a half and you’ll be fine. Who knows how long it’s gonna drag out.”

For now, DeYoung said one distinction is important: the United States has diesel available. The uncertainty is how much consumers and businesses will have to pay for it as events around the world continue to influence the market.