Analysis: US Running Out of Effective Policy Tools to Slash Fuel Prices
As U.S. retail diesel and gasoline prices keep hitting new highs, analysts said policymakers might have already utilized most available effective tools to lower the price at the fuel pump in the near term — and the remaining options are quickly dwindling.
Senate Majority Leader John Thune (R, S.D.) said Tuesday he is “open to exploring” an export ban on diesel fuel. His comment underscores the need for officials to ease energy prices ahead of the November mid-term elections; diesel is heavily used in the agricultural sector, which is important to Thune’s home state of South Dakota.
Theresa Chen, a refining analyst at Barclays, said in a note that a diesel export ban could be both detrimental to the U.S. refining complex and unlikely to provide the intended price relief. Chen cited pipeline and shipping bottlenecks and possible retaliatory export bans from U.S. trading partners.
Additionally, a refined product export ban without corresponding crude export restrictions would benefit refiners overseas at the expense of U.S. refiners, which would be forced to reduce runs due to lower demand without export, Chen said.
“Refining margins would effectively migrate overseas, while doing little to alleviate consumer fuel prices,” she said.
The U.S. might consider releasing the 1 million barrels of ULSD held at the Northeast Home Heating Oil Reserve, as Maine and Massachusetts residential customers this winter could face heating oil expenses that are significantly higher than last year’s, according to Andrew Lipow, president of Lipow Oil Associates.
However, releasing all the fuel at the Northeast reserve — equivalent to roughly 10 days of Northeast residential heating oil consumption or just several hours of nationwide distillate demand — is far too small to reset the national diesel market, said John Deal, managing director of capital markets at the Post Oak Group, an investment bank.
U.S. distillate stocks are currently more than 10% below their five-year average, even though refineries have been operating in “max diesel” mode — at near-maximum utilization rates — for six months, since the Middle East conflict started in late February.
“Diesel is being squeezed by limited global refining capacity, international supply disruptions, strong export demand and the approach of refinery-maintenance and winter-heating seasons,” Deal said.
There was also market talk that the White House was mulling the expansion of its Defense Production Act power to direct refineries to prioritize diesel production.
While the DPA can help refiners expedite equipment, financing or permitting for projects to expand capacity in terms of years, it cannot increase near-term refining production, according to Deal.
The American Fuel and Petrochemical Manufacturers, a petrochemical refining trade group, recently estimated that the Renewable Fuel Standard is adding nearly 40cts/gal to the price of gasoline and diesel, suggesting policymakers could waive the RFS compliance cost.
However, removing the RFS volume requirements to blend biodiesel and renewable diesel into fuels would also shrink the size of distillate pool supply, which would raise fuel prices instead, analysts said.
Most analysts also agree that policymakers should remove logistical barriers like high shipping costs, and should assure refiners to continue maximizing production — without any government intervention.
In March, the Trump administration waived the Jones Act to allow relatively cheaper foreign-flagged ships to operate within U.S. waters, lowering the cost of moving fuel and crude oil domestically. The U.S. has also pledged to release 172 million barrels of oil held at the Strategic Petroleum Reserve to provide refiners with cheaper feedstocks.