Diesel prices have become a growing force in the US economy and financial markets, pushing up inflation expectations and adding to political pressure on Donald Trump ahead of next month’s midterm elections.
The national average for diesel is about $6.277 a gallon, according to AAA. Although that is down from a peak of $6.528, prices remain 71% higher than a year ago, compared with a 56% rise in US crude oil.
The sharper increase in refined fuel has been linked to damage to refining capacity in the Middle East and Russia. Diesel is a crucial input for manufacturing, farming and logistics, meaning the impact has spread well beyond the forecourt.
Recent consumer and producer price data showed transport costs rising, while purchasing managers’ surveys pointed to substantial increases in the prices businesses are paying.
Amrita Sen, director of market intelligence and co-founder at Energy Aspects, said refined products had been trading at more than twice the price of crude in recent months, an unprecedented divergence.
“Ultimately, diesel and gasoline drive inflation, not crude oil,” she wrote in the Financial Times.
The breakdown in the traditional relationship between crude and refined fuel prices is also being reflected in bond markets. Since May, yields on 10-year US Treasury bonds have correlated more closely with diesel prices than with crude oil prices, Sen said.
Higher fuel costs have kept inflation forecasts elevated, encouraging markets to price in a more hawkish Federal Reserve and the prospect of further interest-rate rises. Rising bond yields, in turn, increase borrowing costs for consumers.
Trump moves to ease diesel prices
The Trump administration has taken steps to try to reduce the pressure. On Monday, the president signed an executive order deferring the 24-cent federal tax on each gallon of diesel until the end of the year, although individual states impose their own levies.
On Friday, Mr Trump said he had reached an agreement with Vladimir Putin for Russia to supply diesel to the US. He said more than 300,000 tons would be delivered initially, followed by 500,000 tons in November and 1 million tons “immediately thereafter”.
He also said Russia would provide a further 3 million tons “within a short period of time”. The announcement came despite a sanctions law signed by Mr Trump last month that imposes steep tariffs on major buyers of Russian energy.
Energy experts and representatives of industries that rely on diesel have questioned whether either measure will significantly improve affordability. Farmers and truckers have said the tax deferral offers limited relief when prices are about $2.60 a gallon higher than a year ago.
Michael Lynch, a distinguished fellow at the Energy Policy Research Foundation, said importing Russian diesel could simply redirect supplies rather than increase them globally.
“If we get diesel from Russia, basically it means that their existing customers are not going to get it and they’ll have to go somewhere else, and that will keep the price basically where it is now,” he told the Associated Press.
The measures may also offer limited political benefit for Republicans. A Politico poll found that only 10% of undecided voters would be more likely to vote Republican if petrol prices fell by $1 a gallon, while 29% said it would make no difference and 57% were unsure.
Responses were similar when voters were asked about the possible impact of ending the Iran war or bringing inflation down sharply. One Republican operative working on battleground races said voters might not believe any improvement attributed to Mr Trump.
