High diesel prices hit farmers as officials push export limits

During his weekly radio show Friday, Iowa Republican Senator Chuck Grassley called on the Trump administration to enact a full ban on U.S. diesel exports. Grassley compared the situation to bans on soybean and wheat export sales in the 1970s, warning that "the price of food could go up if you were exporting too much" fuel. "I think the president ought to put an embargo on diesel to drive the price down," the Iowa senator said.

By historical standards, the price of crude oil remains elevated but stable, and domestic natural gas is cheap, but diesel fuel—the lifeblood of commercial freight, rail, and farming equipment—is in short supply across most of the United States.

According to the Independent Grocers Alliance, fuel and transportation account for 15% to 30% of the total cost of food in U.S. grocery stores. With average U.S. diesel prices soaring to almost $6.50 per gallon this week, farmers are paying about twice as much as last year to fuel tractors, combines, and grain trucks. Moving crops from the fields to processors and supermarkets on freight trains and 18-wheelers costs twice as much, too. In Iowa on Friday, the average price of diesel rose above $6.10 per gallon.

At the same time, this energy crisis has so far been less impactful on most American drivers when they put gas in their tanks. The national average price for a gallon of regular grade gasoline on Friday was at $4.46, up a little less than 50% since the war began in February.

"In the 1970s, the crisis was right in your face," said Ed Hirs, an energy fellow at the University of Houston, who worked at the Department of Energy in 1980 as an intern when then-President Jimmy Carter proposed that the import-dependent United States mandate conservation efforts, impose price controls on crude oil and gasoline, and invest in a federal program focused on the development of shale drilling technologies.

"Today, the crisis here is hidden inside the overhead operational costs of freight trains, semi-trucks, and combine harvesters,” Hirs told the Center Square. “Consumers don't experience the pain when they fill up their sedans; they see it weeks later when the receipt prints out at the grocery checkout line."

Eric Smith, Associate Director at the Tulane Energy Institute, said the tightness in the U.S. diesel market is not caused by domestic policy. "We didn't cause the diesel shortage," Smith said, noting that Ukrainian drone strikes that have destroyed or disabled about 30% of Russian refining capacity. To fill the void, U.S. Gulf Coast refineries are running at an unprecedented 98% of capacity, about 8% above normal, he said.

The Tulane professor said a partial solution to the diesel shortage can be found in Louisiana, where two technically advanced refineries were shut down during the pandemic—the Shell Convent refinery and the Phillips 66 Alliance in Belle Chasse–are capable of processing a combined 495,000 barrels per day of crude oil.

"If people thought the shortage was going to be around for some period of time, those refineries could be restarted," Smith said. "You could get a good restart within about six months.”

Smith remarked that history shows government interventions seldom accomplish the intended objectives. In the late 1970s, Smith said, a Congress that was panicked over skyrocketing energy prices placed a blanket ban on exporting “anything that looked like a hydrocarbon,” paralyzing the domestic market. In late 1980s, the Ronald Reagan administration lifted the ban on exports of refined products like gasoline and diesel fuel as long as they were produced from imported crude oil, making the market more efficient, Smith said.

President Reagan’s thinking was that there were American refineries that could be running, employing people, and reducing prices, Smith said. “Reagan said we'll allow these people to optimize their refineries, but they have to show us they imported the crude to support their exports. That took place and it worked like a charm," Smith said.

Hirs believes Washington could revive the same policies that were unsuccessful in the 1970s. The energy economist said most of the 172-million-barrel withdrawal from the Strategic Petroleum Reserve over the last few months was shipped overseas as refined products, primarily gasoline and diesel. At the same time, Hirs noted, oil exploration and drilling activity has stagnated in recent months because U.S. oil companies are not convinced that high prices are here to stay.

Hirs said reimposing the same kinds of market restrictions and price manipulations as in the 1970s are a betrayal of free market principles. "You have to ask, how in the world do Thune and Landry and Trump wind up on the side of Elizabeth Warren? Landry is taking aim at the biggest employers in his own state,” Hirs said.