A "sleeper Issue" In Red States This Fall: Diesel Prices

Republicans have been facing a problem with voters over high gasoline prices for months — but the economic pain from near-record diesel fuel prices looks set to hit at the worst possible time for them.

The war in Iran, disruptions in Russian production and refining bottlenecks have sent the price of diesel fuel rising faster than that of gasoline or crude oil, and it's now grinding toward an all-time record just two months ahead of the midterms. That matters for Republicans in particular because diesel prices hit first — and hardest — in rural areas and affect blue-collar businesses like farming and trucking before spreading to suburban dinner tables and the rest of the economy.  

The White House has been seeking to show it is addressing the energy price spikes. It's planning to host U.S. oil refiners on Tuesday as the Trump administration looks for ways to bring down doggedly high fuel prices ahead of the midterms.

On Monday, the average price of a gallon of diesel was $5.60, up about $1 from early July and almost $2 higher than a year ago. The all-time U.S. record $5.816 set in June 2022 is looming — and with U.S. inventories at their lowest-ever levels going into the peak diesel demand season, little relief is likely.

"That shortage will be acutely felt by the farmers during the harvest, and so the inflationary consequences can be greater at harvest time," said Kevin Book, managing director at consulting firm ClearView Energy Partners. At the same time, products will be on trucks headed to stores for the holidays, and many voters in places like Maine and Alaska will be preparing for winter by buying heating oil, which, like jet fuel, is similar to diesel.

"There is a very strong history of caring about heating oil ahead of elections," Book added.

Add to that a shortage of truck drivers, said Dean Croke, principal analyst at DAT Freight & Analytics, and the combination could make diesel the "sleeper issue" of the nation’s energy inflation in the fall.

"We've never seen this," Croke said. "What you're seeing is a real squeeze going on right now."

That squeeze suggests the affordability issue is going to get worse for Trump and congressional Republicans as they face inflation-weary voters in midterm elections. A POLITICO poll conducted earlier this month found a solid majority of Americans believe the Iran war, launched by Trump six months ago, has made things more expensive for their families.

Croke said the driver shortage that's pushing up truck transportation costs has been aggravated by Trump's strict immigration policies and restrictions on foreign drivers. Others blame an aging workforce, insufficient pay and government regulations.

Asked about diesel prices and trucking costs, the White House pushed back on the idea that administration policies have worsened the truck driver shortage and pointed to the administration's "Freedom Hauler" program intended to get more veterans behind the steering wheels of big rigs.

"There is no shortage of American hands and minds to grow our workforce," said White House spokesperson Kush Desai.

Gasoline and crude oil prices also remain elevated, but both have fallen well short of breaking records. Diesel fuel inventories are nearly 10 percent below year-ago levels, while commercial crude oil inventories in the United States are about average for this time of year.

To be sure, these are risks, not certainties. High diesel prices will give refiners incentive to shift to the more profitable fuel as demand from the U.S. summer driving season recedes. And the cost of transportation is only about 4 percent of overall food costs, according to David L. Ortega, professor of food economics and policy at Michigan State University, though it's larger for dairy and produce.

And while gasoline prices at about $4.08 per gallon aren't close to all-time records, they've never been this high this late in the year, raising the prospect that drivers could pay the highest prices ever for the Labor Day holiday this weekend. AAA reports that for the first time, the national average in August has been above $4 per gallon every day, making it the most expensive August ever.

The diesel price surge presents an opportunity for Democrats in red states, said Nicholas Jacobs, a professor at Colby College in Waterville, Maine, who writes about rural and working-class voters. But he sees Democrats failing to capitalize because they're talking about "oligarchs and the billionaires" instead of pocketbook issues.

"The other party has to show up and show them an alternative," he said. The confluence of inflationary factors highlights the mutation of the Iran war energy crisis from a shortage of crude oil to a bottleneck in companies’ capacity to process enough of it. It's also a reminder that consumers don't buy crude oil — they buy gasoline and diesel fuel, and other "refined products" like jet fuel and heating oil.

Iran's move to close the Strait of Hormuz in retaliation for U.S. attacks hindered not only crude oil exports but also the flow of gasoline and diesel supplies by cutting off routes for exports and bombing refineries around the Middle East. The International Energy Agency says Iranian attacks took nearly 3 million barrels a day of refinery capacity offline.

A shift in Russia's war against Ukraine has added another wrinkle. Ukraine has been increasingly successful at sabotaging the Kremlin's war machine with drone attacks on Russian refineries, to the point that Russia is now importing both gasoline and diesel.

Russia has long been a major source of refined products, particularly for the European market. Last year, it accounted for more than 10 percent of the world's diesel exports, according to Bloomberg News, but Ukraine's attacks have left its refineries running at about 50 percent of capacity, according to the consulting firm RBN Energy. The Kremlin has banned exports of refined products, limiting its shipments to those for intragovernmental supply agreements.

On top of that, China also reduced its exports of gasoline and diesel, while throttling imports of crude oil from the Middle East. As with Russia, that increases oil supplies for the rest of the world, but reduces access to gasoline and diesel.

All told, the world is processing roughly 5 million fewer barrels of crude oil per day than a year ago, according to the American Petroleum Institute.

In the U.S., refineries are running at full tilt to make up the balance. Refineries operated at 97.4 percent of their operable capacity last week. API said U.S. refiners produced more diesel this July than in any July on record.

Now, some refineries are even delaying regular seasonal maintenance, raising the chances of an accident that could deliver an outsize price shock. And a strong hurricane churning toward the Gulf Coast could trigger the shutdown of numerous facilities in the world's largest refining hub.

But the prospect of fuel shortages is growing by the day. And the Trump administration doesn't have many more tools at its disposal, having ruled out limits on petroleum exports. But there's one fix that almost no one would choose.

"The fastest road to a lower price," Book said, "could be a recession."