How Bad Will It Get?
You may have heard that we only have 25 days of diesel left in the United States. This is a subject that is gaining a lot of attention lately, especially within the preparedness community. This subject has created sensational media headlines and attracts millions of views, but is it accurate? As we have seen before with other problems attached to countdowns, that isn’t always exactly accurate. Often there are many interventions and many other factors that can come into play to kick that can, as they say, further down the road. So, is there a diesel shortage looming on the horizon? It all depends upon whom you talk to or listen to. In this blog, we will assess the genuine threats and the ramifications, the unseen instigators of a more significant possible disaster, and what you should be thinking about now with your preps should this crisis worsen. Most importantly, stick around to the end as we’ll tell you if running out of diesel before Thanksgiving is a myth or something we should genuinely be worried about, so let’s drill down to the truth on this…
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WORST CASE SCENARIO
There is no doubt that if we run out of diesel fuel or even experience an extreme shortage of the stuff, we will instantly find ourselves in an economic depression that will pull at the strings holding together the very fabric of our country. Without diesel, we’d be in a world of hurt. Railway, trucking, manufacturing, and agricultural operations would immediately grind to a halt. Diesel generators are also used at most hydro, coal, gas, and oil-fired power plants and virtually all nuclear power plants in the US as an emergency backup power source for the station’s auxiliary needs. These auxiliary needs are essential, especially when it comes to nuclear power generation. Looking back at the Fukushima nuclear power disaster, for instance, there an earthquake and tsunami led to power loss. Without power, the cooling systems failed in three reactors, and their cores subsequently overheated.
These are outlying scenarios, though they are very much rooted in fact. Another Fukushima-type event would also involve a sudden loss of power. That’s not really the case when you see your diesel fuel levels dropping, and you take appropriate measures by shutting down systems. More likely would be failures at your local power plants following natural disasters. Then, if we ever ran out, power generation would have to be brought offline for safety reasons.
Even before we get there, though, the lack of diesel would bring manufacturing in the country to a halt. Millions would find themselves without work or laid off from their jobs. Agricultural operations would struggle to harvest or process food. These endeavors require fuel either in short supply or at a cost that far outstrips the profits of the food they’re pulling up from the ground. What they did harvest would be difficult, if not impossible, to transport via railway or truck to grocery stores, and so forth. The worst-case scenario of complete depletion of inventory is dark and gloomy, to say the least. If you imagine yourself sitting in your cold, unheated home, unemployed, and with no lights or food, you would have an accurate vision of how bad a total depletion could be. But, how close are we to that because many people glom onto the shocking inventory reserve number and approach it like a doomsday clock? That creates some sensational media headlines and attracts millions of viewers, but is it accurate? We prefer to look at the facts.
THE REALITY
Picture our reserves of diesel-like your car’s gas tank. Let’s say it’s full. For the purpose of argument, let’s say that your daily driving activity means a full tank would equal about 25 days of driving for you. Though this may not be realistic, it will help us visualize our own fuel tank in direct correlation to the 25 days supply in our national reserves. The first reality is that if the price of a gallon of gas were going higher, you would try to drive less. You do have some ability to curb your own consumption. Just as you ration and limit your driving, the government could preserve billions of gallons through conservation, rationing, and regulation, essentially prioritizing critical industries and requiring them to do more with less.
So now you have stretched that 25-day supply into a few more days, let’s say 30. We are also under the big assumption that all the service stations are completely dry and closed. That’s not the case. That 25-day tank can be repeatedly filled because oil refineries are still working. If some EPA regulations were temporarily lifted on them, they could probably work to produce even more fuel. Wells in the US have not run dry, either. There are thousands of drilling rights granted on paper though no drill bit has ever touched the ground in that spot, so we could drill and drill to produce more base product. Some politicians and pundits would have you believe that this alone is enough. You may have heard the chant, “Drill, baby, drill!” Unfortunately, it isn’t enough. The oil we pull out of the ground in the US doesn’t necessarily stay in the US. Oil, like any commodity, flows to the highest bidder. We saw that exact thing happen with the last release from the Strategic Petroleum Reserve.
Right now, the highest bidders for oil and natural gas are many of our strategic partners in Europe and countries like China and India. Our partners overseas, by the way, are facing the exact same shortages and reserve supply issues. Some are in far, far worse shape than we are. They, too, are facing the same inflation, the same economic slowdowns, the same winter, and the same fuel shortages, and in some cases, it is far, far worse and immediate for them. If we cut off our exports to these partners, we weaken the strategic alliance currently putting pressure on Moscow to stop the war in Ukraine. We guarantee you that Russia, Saudi Arabia, and the other countries of OPEC+ know this very well. If you didn’t understand what we just said, go back and listen again because it’s very important you understand this concept. Oil and natural gas are part of an open market that is being sold to the highest bidder, aka free market, which means these resources are being shipped out of the United States. Let that sink in.
Still, if the US ramped up production, repealed some EPA initiatives designed to reduce pollution in order to increase economic stagnation, and diverted exports inwards, you could keep enough fuel coming in to keep that strategic reserve topped up to its 25 or so days’ capacity. This would be you realizing that you started with 25 days of gas in your tank, but on day 3, you run to the gas station and top up your tank. Instantly, you’re back up to 25-days. It’s just a number indicating total capacity, like your tank size, and not a doomsday clock, so long as fuel is still going into the reserves. As long as the input replenishes the pumps, you will be fine. This is where the problem lies, as well. Input is reduced. Not gone, just reduced in comparison to rising demand. As we pointed out a moment ago, we’re in a free market and while oil production has remained steady in United States, we’re selling oil off the highest bidders, in this case, to Europe which is needing energy after being cut off by Russia. Let’s dive into this point a little further so you have a firm understanding.
During the pandemic, demand plunged, so production was scaled back. When the war broke out in Ukraine, supplies were low, and countries were asked to stop using Russian oil. Add in that some refineries have been brought offline for scheduled maintenance, and we find ourselves in a period of extremely high demand, especially going into winter, with a low output. If mismanaged or another disaster compounds the situation, demand spins wildly higher due to freezing weather, and there is a significant disruption to production, then, yes, the 25-days could be more of a countdown clock. Barring any further complications, however, it will most likely result in price increases and a few shortages. This is why many companies are topping off their tanks, stocking up on future deliveries at today’s prices, and driving the overall demand higher while shrinking the current and projected reserve. As for the suppliers, they are in a backward-dated market structure which incentivizes people to sell now instead of holding onto fuel. Thus, inventories drop further.
THE FUTURE
There are still some unknowns in this diesel fuel shortage possibility. First, how cold and how immediate will winter be around the world? Diesel demand will go up, and supplies will shrink. When diesel gets expensive, everything costs more. The economy runs so much on diesel that its consumption is often used to gauge overall economic health. So, decreased inventory, reduced input, and increasing demand chill the economy by driving up the cost of everything. That’s typically bad, but cooling the economy during a recession can often be a good thing. Another unknown is if there will be any hint of a railway strike–a topic we covered on this channel in another blog, which we will link to. That would slow down consumption, but it would also drive up prices.
The federal government will likely seek to encourage production and attempt to form a cushion by establishing minimum inventory levels. This will necessitate a reduction in exports at a time when Europeans are lining up for wood and coal to offset their loss of heating fuel. When it comes to overseas influences, there is a whole geostrategic recalibration right now as Russia clandestinely sells and distributes its oil, and China buys more and more from Saudi Arabia. China is currently Saudi Arabia’s biggest trading partner.
Almost guaranteed will be a requirement that future releases for the Strategic Petroleum Reserve, SPR, will be required to stay in the United States. No current requirement like that currently exists, and oil is an international supply and demand game that goes to the highest bidder. In July, the US released 20 million barrels of oil from the SPR, and it was snapped up by companies like Phillips 66 and sold overseas. In some cases, foreign-based companies received the barrels and shipped them overseas. Some of those exports ended up in China, India, and many other locations other than the US for which it was intended. There are already two bills before congress to prevent this from happening again. Still, it remains unclear how they will be able to prevent a U.S.-based company from buying oil from the SPR’s releases and selling it to foreign operators.
CONCLUSION
We will be honest with you, anyone telling you that we will run out of diesel by Thanksgiving and the US will grind to a halt is willingly ignoring the actual realities and is being a bit disingenuous with you. The facts are that there are some severe strains and challenges to the US diesel market, and for a short time, demand has outpaced supply, which has brought down inventory levels. Those levels, though, have been this low before. They are calculated on the assumption that all production has stopped and no more oil is coming into the system. That has yet to happen. The SPR is critical infrastructure, for sure. Distribution from it is less than perfect in its current state, as international oil conglomerates buy from it and sell overseas. OPEC+ nations are certainly going to try and keep oil at $100 a barrel. More oil will flow to countries like China, increasingly at odds with the U.S. and which have no issue with expanding consumption.
That all isn’t to say that the situation can’t worsen from here. Big oil is a strategic game with multiple moving pieces. Consumption, demand, weather, disasters, wars, and production are just a few of the pieces at play. More things can go wrong than will assuredly go right. As the Energy Administration warns, you can expect as high as a 27% increase in cost. That will drive up prices everywhere and cool the economy further. At the very worst, you may see some inventory scarcity in different regions of the country. Still, I don’t think even that is cause to panic because this critical component of our economy is already showing signs of correction.
So what should you do? If you require diesel for your operations, you may consider stocking up a small supply, including de-gelling agent, if you expect subzero temperatures. If you use fuel oils for heating your home, as many do, you should lock in your purchases before prices rise, even though this puts a higher demand on inventories. Likely, we will see some future action and increased production in the coming months, so the price will probably go back down, albeit slowly; however, there are really just too many unknown factors at the moment. Disasters are not currently one of those unknown factors, and running out of diesel altogether isn’t likely either.
You will know how bad it really is if rationing begins or diesel runs out at the pumps and is prioritized for critical infrastructure. If your power company warns of rolling blackouts because they lack fuel oils, you should start worrying in your area. Barring those, anyone telling you we will run out in less than a month is probably trying to sell you something.
As always, stay safe out there.
