The White House is looking at issuing an emergency declaration that would empower President Joe Biden to release diesel from the federal Northeast Home Heating Oil Reserve to address diesel shortages on the east coast. The release, however, would provide limited, short-term relief since the reserve only contains 1 million barrels of fuel. Further, it is reminiscent of Biden’s much larger release from the strategic petroleum reserve where oil prices only declined for a very short period. Since Biden started releasing oil from the strategic petroleum reserve last November, oil is up 42 percent and diesel is up 51 percent. The President continues to look for short term fixes, band-aiding the problem, rather than actually solving it with by promoting more oil production and refining capacity, which would increase supply.
The East Coast Diesel Shortage
The East Coast is reporting its lowest seasonal diesel inventory on record. The region, which typically stores around 62 million barrels of diesel during the month of May, is reporting under 52 million barrels. According to DOE figures, the price per gallon of diesel has reached $5.613 per gallon nationally and $5.944 on the East Coast—more than double last year’s price.
In the past 15 years, the number of refineries on the U.S. East Coast has halved to seven, reducing the region’s oil processing capacity to 818,000 barrels per day, down from 1.64 million barrels per day in 2009. As recently as mid-2020, it was 1.224 million barrels per day. The drop in refining capacity occurred while East Coast oil demand remains strong. Refineries suffer from intense regulations that have limited the opening of new refineries. While the Great Recession of 2008 led to several East Coast refineries shuttering, shutdowns are continuing. One major Philadelphia refinery shuttered in 2019 after a fire and subsequent opposition from anti-oil groups and another refinery in Newfoundland shut down in 2020.
The Northeast has increasingly relied on diesel from the Gulf region, which is mostly shipped to the Northeast through the Colonial Pipeline–—a 5,500-mile pipeline that takes diesel 18 days to reach Linden, New Jersey from its source in Houston. In that amount of time, a company could send a shipment of diesel and find that its value dropped by $1 per gallon by the time it reached New Jersey. That could mean hundreds of thousands or more in lost profits, so traders prefer to avoid the situation, which is called backwardation. Backwardation refers to the market condition in which the spot price of a commodity is higher than its futures price. Press reports had indicated that volumes on the Colonial pipeline were at lower levels than usual, but more recent reports are that the pipeline is fully subscribed.
New England diesel retail prices are up 78 percent from the beginning of 2022, totaling $6.341. In the mid-Atlantic, diesel is up 68 percent at $6.36. The spread between a gallon of diesel in the Gulf Coast and its New York harbor price is usually just a few cents. More recently, that difference was up to 66 cents. But that amount is still not enough to move oil to the Northeast — particularly when traders can make so much more selling diesel abroad without the risks described above.
Due to Russia’s invasion of Ukraine and the subsequent sanctions, Europe is looking to get diesel from other sources. In 2019, Europe consumed about 6.8 million barrels of diesel each day with Russia exporting about 600,000 barrels per day. Because Europe has only eliminated one-third of its Russian diesel, prices are expected to continue to increase. Latin America, too, has been importing U.S. diesel. Waterborne exports of diesel from the U.S. Gulf Coast hit record highs in April, according to oil analytics firm Vortexa. Also, due to the COVID lockdowns, refineries on the East Coast scaled back due to staffing shortages. It can take six months to a year to reignite refineries that were previously shuttered.
Northeast Home Heating Oil Reserve
Only once before has the government released diesel from the Northeast Home Heating Oil Reserve: in the aftermath of Superstorm Sandy in 2012. The reserve was established in 2000 to meet a supply crunch caused by a severe winter storm. In 2011, it was converted from home heating oil to ultra-low sulfur distillate, a cleaner-burning diesel used to power engines in trucks, tractors and other vehicles.
Diesel, like gasoline, is a vital fuel for the U.S. economy, powering farm and construction equipment and trucks, trains and boats that move goods across the country. Skyrocketing diesel prices will likely get passed along to families, contributing to what is already America’s worst inflation in four decades, which is why the White House is concerned and has asked for the reserve to be studied regarding its release. This response is a band-aid, rather than a long-term strategy. It would be preferable to stop the shuttering of refineries and change the regulatory environment for more to be built. The Trump administration tried to reopen the Philadelphia refinery that shuttered in 2019, to no avail.
Biden continues to Band-Aid, rather than deal with policies that will solve the problem. Now, he is considering using a 1-million barrel reserve to deal with high diesel prices on the east coast. He needs to realize that there is a supply shortage compared to demand, which is increasing, and introduce policies that will increase domestic oil production and increase refinery output. These actions needed to be instituted at the start of his administration because the COVID lockdowns decreased output from industries due to their closure. The oil and refining industries were no different. Getting back to pre-COVID levels has not happened and this administration is not helping matters, starting with the cancellation of the Keystone XL pipeline and the continuing moratoria on oil and gas leasing on public lands, owned by Americans, who would like reasonable gasoline and diesel prices. Even Senate Energy and Natural Resources Committee Chairman Joe Manchin indicated that the Biden administration’s oil and gas leasing policies have “put America’s energy security at risk.”