Impact of Potential US Diesel Export Ban on Global Fuel Prices

Energy experts warn that a potential US diesel export ban could increase fuel costs both domestically and internationally. Diesel prices have reached record highs due to tensions between the United States and Iran, as well as the ongoing war between Russia and Ukraine, which have disrupted key oil and fuel trade routes. On September 23, the average price for a gallon (3.79 litres) of diesel was $6.50, an increase from $5.61 a month earlier, according to the American Automobile Association (AAA), which tracks fuel prices daily. The price spike has led the administration of US President Donald Trump and Republican lawmakers to consider restricting US diesel exports ahead of the upcoming midterm elections. A Reuters/Ipsos poll conducted in August found that 47 percent of voters identified the cost of living as the most important factor influencing their voting decisions in the midterms, more than double the percentage citing “democratic values and norms.” A Marist poll indicated that 42 percent of Americans have more confidence in Democrats than Republicans to manage the economy, compared to 34 percent for Republicans. In light of this voter sentiment, US Energy Secretary Chris Wright stated on September 22 that he was consulting with major oil refiners regarding a potential voluntary restriction on diesel exports, as reported by Reuters. This followed Trump's remarks on September 19 supporting the restriction of diesel exports from the US, the world's largest diesel exporter. Energy analysts and industry groups have cautioned that an export ban could have unintended consequences, potentially increasing fuel prices in the US and abroad. Despite being the largest diesel exporter, the US operates within a global market for diesel. Disruptions to refineries in Russia and the Middle East have decreased the availability of fuel worldwide, increasing pressure on US producers to meet demand. For instance, drone attacks in Russia have damaged major refineries, resulting in production cutbacks. Rachel Ziemba, a senior adjunct fellow at the Center for a New American Security, noted that while US refineries are operating at full capacity, global supply gaps persist. As of September 11, US diesel inventories had fallen to 107.9 million barrels, the lowest level in over four decades, according to the US Energy Information Administration. With tightening global supplies, diesel prices have risen worldwide, including in the US. American producers are incentivized to sell their fuel in the global market due to soaring prices, rather than setting lower prices for domestic consumers. In Washington, DC, discussions have emerged about encouraging US companies to limit or cease diesel exports. Republicans are advocating for a slowdown or outright ban on exports to lower consumer costs ahead of the midterm elections, where the cost of living is a critical issue. They believe that such a move could reduce local diesel prices, which is significant as diesel is used for transporting food and goods. Ziemba indicated that US diesel exports account for approximately 40 percent of domestic consumption. On September 19, Republican Senator Chuck Grassley from Iowa urged the president to impose a temporary embargo on diesel exports. Senator Dan Sullivan from Alaska echoed this call, stating, "The cost of diesel is just too high. I’m calling for a temporary pause on American diesel exports to rebuild our reserves ahead of winter." In the House of Representatives, Congressman Tim Burchett of Tennessee introduced two bills aimed at restricting US diesel exports: one proposing a ban until January 2027, and another restricting exports if the national average price reaches $5 per gallon. The administration has not made any official policy announcements, with the White House indicating that the president is evaluating all options. Experts in the oil and gas industry argue that a ban could lead to increased prices rather than reductions. Patrick De Haan, head of petroleum analysis at GasBuddy, stated that diesel operates in a global market, and forcing lower prices could lead to reduced production and higher prices. A ban would restrict US refiners from selling diesel to international buyers, theoretically increasing domestic availability. However, analysts at Wood Mackenzie warn that keeping more diesel in the US could lead to reduced refinery production, affecting markets that depend on US fuel, such as Latin America and Europe. They noted that China is the only major producer with sufficient spare refining capacity to potentially compensate for the loss of US refinery throughput, but it may not be in China's interest to intervene. Wood Mackenzie cautioned that a ban could quickly fill US diesel inventories, prompting refiners to cut crude runs and potentially increasing US petrol imports. An S&P Global analysis found that a complete export ban could lead to production cuts of up to 750,000 barrels a day, potentially making the US a net importer of petrol in the fourth quarter of this year. An export ban would impact US refiners, consumers, and countries reliant on US diesel. While such bans may offer temporary relief, diesel is a global commodity, and disruptions in one area can have widespread effects. Maksim Sonin, a visiting scholar at Stanford University’s Precourt Institute for Energy, emphasized that trade-offs are inevitable, and refiners are unlikely to support a blanket ban. He suggested that voluntary, controlled export reductions would generally be less disruptive in the short term. The potential for disruptions to US exports could reduce global fuel availability, with countries in Europe and Latin America competing for supplies. Ziemba noted that if implemented, the ban could lead to increased prices in Europe and Asia as buyers scramble for alternative sources. Analysts believe that the US may pursue a combination of incentives and penalties to encourage refineries to maintain production levels, potentially including voluntary export quotas and exemptions for countries supplying crude oil to the US, such as Mexico. This situation could place additional pressure on consumers, affecting not only fuel prices but also air travel costs. Airlines for America, an airline industry trade group, has warned that an export ban could result in higher prices for airlines and travelers. The broader concern among analysts is that restricting exports could decrease US refinery production rather than simply redirecting diesel to domestic consumers, potentially exerting upward pressure on fuel prices both domestically and internationally. Ziemba concluded that such measures are unlikely to significantly benefit US consumers as they do not address the underlying issues and could backfire if refineries reduce production.