See what the main villain behind most global price hikes is

While gasoline prices at the pump serve as one of the most prominent symbols of runaway inflation, economists are more concerned about the side effects of price increases on another major fuel source: diesel.

Diesel plays a huge role in consumer prices because it and its chemical cousins, jet fuel and marine fuel oil, power almost everything that is grown, processed or manufactured around the world.

“Diesel is what drives the trucks. It’s what drives our global economy,” said Joseph Sykora, equity analyst at Aptus Capital Advisors. “It cannot be ignored as it is a driver for the price of things.”

The United States consumed about 128 million gallons of diesel a day in 2021, according to the U.S. Energy Information Administration, but production — especially refining capacity — has not kept up with the post-Covid surge in demand and scarce supply has driven up prices.

According to the June Consumer Price Index released Wednesday, the energy category that includes diesel increased 75.8% year-on-year, an even bigger increase than the 59.9% rise in prices. of gasoline.

While the cost of oil and gasoline has retreated in recent weeks from spring peaks, analysts are skeptical that this relief will last — and that’s before considering the prospect of an unusually active hurricane season or additional geopolitical shocks such as Russia reducing fuel exports to the European Union.

“Inventories have not been this low in a generation around the world. You have the potential for trouble, even if we go through this series of concerns with power grids and hurricanes in the coming months,” said Tom Kloza, global head of energy analysis for OPIS. “If there’s one fuel that can become absolutely ballistic, I think it’s diesel.”

The demand for diesel is less elastic than for regular gasoline. While people can respond to high fuel prices by using their cars less, there are no good industrial-level alternatives to diesel, said Bill Fitzpatrick, managing director and portfolio manager at Logan Capital Management.

“We are all fighting for solutions, but innovative technologies have yet to materialize. It feels like we’re trying to bridge the gap regarding our dependence on fossil fuels, but we’re just not there yet,” he said.

While electric vehicles have gained ground as an alternative to gas-powered cars and trucks, Sykora said, fleets of trucks, planes and freighters are still fueled by hydrocarbons. “The technology doesn’t exist at scale for transitions from electric vehicles to high-capacity transport,” he said.

diesel domino effect

The high cost of diesel is spilling over into corporate supply chains. Walmart said in a memo obtained by the Wall Street Journal that it will begin adding a fuel surcharge to some of its suppliers next month. Amazon imposed a similar fee on sellers who use it for certain fulfillment services in April.

The impact is already hitting store shelf prices, and analysts say they expect more of the same.

“Essentially, all goods that need to be shipped by truck will be impacted,” said Michael Englund, chief economist at Action Economics. He pointed to the rising cost of groceries – Wednesday’s CPI report showed the cost of food at home increased by more than 12% year on year – as a glaring example.

More expensive diesel not only increases the cost of transporting food – it also increases the cost of growing it, and agricultural experts are warning that sustained high prices could lead to shortages.

Kyle Kotzmoyer, an official with the Pennsylvania Farm Bureau, told state lawmakers during a June hearing that some farmers cannot afford to operate their tractors and are abandoning energy-intensive crops like beans and corn as a result.

“Many industrial processes are heavily dependent on transport,” Englund said. This includes the production and transport of construction materials and supplies, putting further pressure on an already punitive market for homebuyers and renters.

Some analysts say even a painful recession may not stop the tightening. “While this will certainly reduce demand, I would not expect to see strong easing in terms of prices, just because there is very little excess capacity in the market to absorb any additional demand,” Fitzpatrick said.

“People complain about oil prices,” Kloza said. “This year, I think the wolf is at the door for diesel.”