The Shortage that Could Kick Inflation into Overdrive

November 3, 2022

The problem with this round of inflation, as I’ve said again and again and again, is that it’s not a cyclical monetary phenomenon like we’ve typically seen over the last 30-plus years.

It’s a secular inflationary monster the likes of which we haven’t seen since the “Great Inflation” of the 1970s. It was caused by an imbalance between supply and demand that was caused by breaking the supply chain thanks to the global pandemic lockdowns. 

That, combined with the massive injection of stimulus to keep people who suddenly found themselves out of work afloat, created a spending wave that drove prices way beyond the Fed’s artificial 2%-2.5% target.

While still at 40-year highs, inflation numbers have leveled off somewhat. Incumbent politicians are trying to spin that as good news as best they can.

However, a little-noticed news clip last week could be projecting another explosive round of price hikes…

The Green Inflation Act Strikes Again

It’s no secret that the Biden administration is “all in” on the green energy path forward no matter what the costs.  I’ve written about his burn the ships strategy to get us there.

Initially, the brunt of his actions were felt by Americans at the gas pump. 

But what wasn’t as widely noticed was what was happening to inventories of distillate fuel oil — diesel fuel.

Back in February it was reported:

In the short term, inventories could deplete even further if demand from manufacturers and freight carriers continues to outstrip the ability of oil producers and refiners to supply enough fuel.

By May the impact was being seen more clearly:

Today’s truckstop retail diesel prices hit a new record of $5.32/gallon. Since February 1st, national truckstop diesel prices have increased by $1.57/gallon. For an owner-operator whose truck gets 6.5 miles per gallon, this equates to a cost increase of $0.24 per mile.

Diesel isn’t only critical to the trucking industry. It’s critical to EVERYTHING. Trucks, trains, ships… They all run on diesel. And all their costs are going higher. 

Wholesale diesel prices in the spot market of New York harbor, a key pricing point, have surged this week to more than $200 per barrel. Excluding a brief interval from late April into mid-May, that would be a record high.

Costs that will be transferred back onto whatever they’re shipping…

Of course that assumes the supply of diesel is even available. According to the Energy Information Administration (EIA):

…the US now has just 25 days of diesel supply, the lowest since 2008; and while inventories are record low, the four-week rolling average of distillates supplied – a proxy for demand – rose to its highest seasonal level since 2007.

Effectively the supply chain — that little thing that was at the center of this current episode of inflation — is being bent to the point of breaking again.

The Fed can’t fix that.

And I Wouldn’t Expect the Administration to Understand

Diesel is the lifeblood of the supply chain. As I said, EVERYTHING runs on it. So the more it costs, the more everything else is going to cost.

(This ain’t a job for solar!)

The current administration simply doesn’t understand that.

They don’t understand that refineries won’t restart for just long enough to get us through the current crisis only so we can put them out of business again.

They don’t understand you can’t endlessly tap reserves because…

The Washington Post reports that diesel demand is so high, that if a million barrels of diesel were delivered from the Northeast reserves, they would be depleted in less than six hours.

There are other actions they can take to try to soften the blow of this next inflationary go-round. But none of them will “normalize” the situation. 

And once again we see how the price of energy impacts the price of everything

And if you want to hit the economy with another 1-2 punch, just unleash another round of supply-driven inflation.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily