The Diesel Ban Moves The Shortage Instead Of Fixing It

Politico reports the administration is preparing a 90-day ban on US diesel exports, with retail diesel at $6.52 a gallon against $3.69 a year ago. The proposal faces strong internal and industry opposition, and oil executives have lobbied against it. The market answered the same morning. US diesel futures sank more than 7% to an intraday low while European diesel futures surged more than 7% to a session high. European gasoil cracks rose as the market priced reduced US supply. Gasoline cracks rose about $2 on the expectation that thinner diesel margins force refiners to cut runs. On the settles, October diesel fell 3.35% to $4.7764 a gallon while November crude rose 1.81% to $92.16 and October gasoline rose 2.85% to $3.5870. Diesel fell on a day crude rose. The estimates attached to the policy all point the same way. S&P Global puts the potential cut to refinery runs at nearly 2 million barrels a day. Capital Economics calculates that higher US exports this year have offset roughly half the global supply lost to disruptions in Russia and the Iran war, and that a full ban could remove another 30% of seaborne diesel supply worldwide. Goldman Sachs and Energy Secretary Chris Wright both say the ban would raise gasoline prices, because diesel and gasoline come out of the same barrel — cut one and you cut the other.

The framework's read on this energy shock is that the binding constraint is refining capacity rather than crude supply. Crude has fallen repeatedly this month on Saudi flows and diplomacy headlines while product cracks kept setting records. That is what a refining constraint looks like. A ban does nothing to that constraint. It relocates the price signal. Trapping barrels inside the US lowers the American benchmark, which is the number the White House can see in a midterm poll, while every importer that depended on those barrels pays more. Latin America and Europe absorb the difference. Then the second-order effect arrives. Refiners facing a domestic-only market with collapsed margins run less crude. Less crude run means less gasoline and less jet fuel — from the same equipment, at the same time. The policy aimed at one fuel price raises the other two, which is why the Energy Secretary, the largest sell-side energy desk and the refiners themselves are on the same side of the argument. There's a further consequence worth naming. A US benchmark that no longer reflects global product scarcity stops being a usable instrument. Anyone hedging or measuring this shortage through NY Harbor would be reading a number the government has moved.