Le Dain: All I want for Christmas is a full tank of diesel

Article content

US diesel inventories are at their lowest seasonal levels in 70 years. This is a big problem.

Article content

There are a few different numbers and headlines floating around about this “low price”, some not considering the season, others including several different fuels in their stock numbers. Come on, I’m scared.

Article content

Stock numbers, which reached their lowest levels in decades, are also not demographic adjusted as they simply compare the amount of diesel then and now. The population has grown significantly, and so has the use of fuel. These factors mean that demand for diesel is about four times what it was then, making these inventory levels even more risky. As a result, there are now real diesel shortages in several North American markets. Recently, Mansfield Energy issued a rare warning to the Southeastern United States. It’s interesting to understand how we got here, what caused it, and where we’re headed as a result.

Article content

Margins to refine diesel are at multi-year highs, but the imbalance persists as fewer refineries respond to these incentives. U.S. refining capacity has declined each year for the past two years. Some articles say the US refinery hasn’t been built in 20 years, but that’s not true. A few were built, but they were not very large and not enough to replace the larger ones that were shut down in a hostile political and economic environment. With global companies discouraged from investing in oil and gas, it is no surprise that the market cannot respond quickly with new refineries. More certainty is required when refinery investments are required.

Article content

Demand for diesel is strong as it is primarily used in agriculture and transports everything needed between major sites, mining and home heating. It’s a little scary that the market is so tight at a time when trucking companies are announcing job cuts and trucking rates are collapsing. This suggests a complete unpreparedness for a robust transportation market. Even FedEx has furloughed its employees, and regardless of what you think of their capabilities as operators, it doesn’t imply that they’re having a strong holiday shopping season right now.

Article content

The final dynamic is the inability to get diesel from areas where it is abundant to where it is needed. The child suggests that we should use ships to travel from places that have a lot of diesel, in this case the Gulf Coast, to areas that are short of diesel in order to do more with less. If the world were rationally designed, this simple proposal would work.

Article content

The Jones Act now prohibits cheap and available foreign vessels from carrying goods from the Gulf to other domestic ports. They are required to be transported and crewed by mostly American crew members.

Article content

This adds friction, but no one wants to talk about whether or not they need to change for fear of appearing un-American. increase. Every time US politicians demand its reversal, and the number of politicians demanding this grows rapidly, several groups demand that they be charged with treason. The bottom line is that the cost of boating fuel between states is high, as ships with a wider supply cannot be used.

Unfortunately, the problems causing diesel shortages and the ensuing high prices will not go away anytime soon. This is something that will require a concerted effort to resolve, or else it will be one of the troubling factors of inflation.

Mark Le Dain is Vice President of Corporate Development for Neo Financial in Calgary.