The global diesel market is bracing for a tumultuous period in 2024. Several factors, from geopolitical tensions to regulatory changes, are converging to create a perfect storm. This article will delve into these factors and their potential impacts on the diesel market, including oil refining and production, diesel consumption, and the broader economic implications.
The Global Oil Market’s Tightening Grip
The world’s oil market is becoming increasingly tight. According to the International Energy Agency, global oil demand is projected to rise by 2.2 million barrels per day in 2023, reaching 101.8 million barrels per day. This surge in demand is expected to be led by a resurgence in Chinese consumption, jet fuel, and petrochemical feedstocks[^1^].
At the same time, supply is being curtailed. In October 2022, OPEC+ agreed to cut production by 2 million barrels per day, marking the largest cut since the COVID-19 lockdowns started in early 2020^2^. Saudi Arabia and Russia have also confirmed they will continue their combined 1.3 million barrel per day cuts until the end of 2023[^3^]. (shameless plug: Rogue Edge Members see updated supply numbers from Saudi Arabia, Russia, and all major supply sources of crude oil and refined products.)
[^1^]:International Energy Agency[^3^]:Russia, Saudi Arabia Oil Production Cut
The Declining U.S. Strategic Petroleum Reserve
The U.S. Strategic Petroleum Reserve (SPR), a key buffer against oil market disruptions, is at its lowest level in four decades. Currently holding just over 348 million barrels of oil, the SPR could only satisfy America’s consumption for 46 days if it had to rely solely on the reserve[^4^].
The depletion of the SPR is a result of various factors. Ahead of the November 2022 U.S. midterm elections, the reserve was heavily drawn to keep fuel prices down[^5^]. Moreover, the influence of the U.S. over OPEC kingpin Saudi Arabia seems to be dwindling, further exacerbating the supply situation[^6^].
[^4^]:U.S. Strategic Petroleum Reserve[^5^]:U.S. Midterm Elections[^6^]:Saudi Arabia’s role in OPEC
Diesel Refining Capacity Challenges
To meet the growing demand for diesel, oil refining capacity needs to keep up. However, several issues are posing challenges to this.
In Russia, diesel exports have been restricted to Belarus, Kazakhstan, Armenia, and Kyrgyzstan[^7^]. The country’s oil refining industry, which produces 6.8 million barrels of refined oil per day, mostly diesel and jet fuel, is thus largely off-limits to the rest of the world[^8^].
In the U.S. and the U.K., refining capacity has also been reduced significantly. In the U.K., the capacity has halved over the past two decades[^9^]. In the U.S., dozens of refineries were shuttered during the COVID-19 pandemic, and the country’s refining capacity is now around one million barrels below the 2019 level[^10^]. (shameless plug: Rogue Edge Members learn from our tracking of supply and stocks of oil and refined products – including gasoline, distillates, jet, and so much more)
[^7^]:Russian Diesel Export Restriction[^8^]:Russian Oil Refining Industry[^9^]:U.K. Refining Capacity[^10^]:U.S. Refining Capacity
The Role of Regulatory Changes
Regulatory changes, particularly those aimed at reducing carbon emissions, are also affecting the diesel market.
In Germany, the government has agreed to a higher national CO2 price for transport and heating fuels for 2024^11^. The fixed carbon price for fossil fuels such as diesel, petrol, and heating oil is set to rise from the current 30 euros per tonne to 45 euros from 1 January 2024^12^.
This increase in the CO2 price will make diesel more expensive, affecting both consumers and businesses. It underscores the global trend of using carbon pricing as a tool to reduce greenhouse gas emissions and mitigate climate change[^13^].
[^13^]:Carbon Pricing
The Potential Impacts of Diesel Shortages
The convergence of these factors could lead to a global diesel shortage, with far-reaching implications.
First, the high cost of diesel would impact almost every aspect of the economy. From transportation to manufacturing, industries would face increased operational costs, which could be passed on to consumers in the form of higher prices for goods and services[^14^].
Second, a diesel shortage could disrupt critical services. For instance, a potential railway strike in the U.S. could disrupt coal-by-rail deliveries, affecting power generation and leading to higher natural gas prices[^15^].
Finally, on a macroeconomic level, higher diesel prices could fuel inflation, leading to higher interest rates and potentially triggering a global economic crisis[^16^]. (shameless plug: Rogue Edge Members gain insight to the every changing supply and demand balance each and every week)
[^14^]:Impact of High Diesel Prices[^15^]:Impact of Railway Strike[^16^]:Inflation and Economic Crisis
Conclusion
The diesel crisis forecasted for 2024 is a complex issue, with multiple factors at play. The tightening global oil market, declining refining capacity, and regulatory changes aimed at reducing carbon emissions are all contributing to the potential shortage.
The potential impacts of such a crisis are far-reaching, affecting everything from the cost of goods and services to critical infrastructure and the broader economy. It emphasizes the importance of understanding and addressing the challenges facing the diesel market today to ensure a stable and sustainable energy future.
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