How low diesel supply in the U.S. could affect Canada

A low supply of diesel in the United States could have spillover effects here in Canada in the form of higher prices, experts predict.

Recent headlines in American media pointed to an update from the U.S. Energy Information Administration last month showing that during the week of Oct. 21, 2022, the U.S. had 25.9 days' worth of supply of total distillate.

Petroleum analyst Dan McTeague, founder of GasWizard.ca, says the current U.S. shortages have mostly affected the eastern part of the United States and are tied to the closure of two major refineries in the Philadelphia area as well as one in Newfoundland.

"Those three plants represent a significant part of the puzzle as far as supply was concerned. And as we know, demand is extraordinarily strong. Our robust economy post-COVID is going for fuel," he told CTVNews.ca over the phone on Wednesday.

But experts have pointed out that doesn't mean supplies of diesel will run out in that time, given that other refineries continue to operate.

"It's being added to all the time every day, and, of course, it's being subtracted every day by demand," Ian Lee, an associate professor at the Sprott School of Business at Carleton University in Ottawa, told CTVNews.ca in a telephone interview on Wednesday.

He used the analogy of a bathtub, where water is emptied through the drain but continues to flow in from the tap.

The level of integration between the U.S. and Canadian economies, however, means we will likely feel the effects, including in transportation, agriculture and heating, which in turn could affect prices on store shelves.

"So the point being everything ... suggests we're not going to run out of diesel but the shortages are feeding into the price and there are going to be elevated prices for the diesel," said Lee.

According to McTeague, it's the "calm before the storm" right now before winter rolls around and demand for heating oil starts to pick up, which would cause a spike in diesel prices, given that they both come from the same product.

"It's likely that there will be significant upward pressure on diesel prices, as it's also a fuel used for furnace oil and when the weather gets colder, all the fuels … begin to see a dramatic rise usually around this time of year all the way into nearly the spring," he said.

Figures form Natural Resources Canada show the average price of diesel rose above 200 cents per litre over the spring and most of the summer, before dipping down to around 180 or 190 cents per litre in August and September.

In recent weeks, the average price has returned to well over 200 cents.

An imbalance in supply and demand, blamed partly on Russia's invasion of Ukraine and the subsequent ban on imports of Russian oil — Russia being a major oil-producing nation — as well as a reduction in refining capacity in recent years as demand plummeted during the COVID-19 pandemic, have all contributed, Lee said.

Some older and inefficient refineries that also didn't meet modern environmental standards have also closed, he said.

McTeague also noted that in early 2020, the International Maritime Organization mandated the use of ultra-low sulfur diesel for container ships, a type of diesel fuel that results in much lower levels of harmful emissions, but is more expensive to produce.

"A lot has changed. Diesel isn't the bottom-of-the-barrel stuff that we may have been led to believe it was over the past 30, 40, 50, 60 years. It is the fuel that is truly the workhorse of the global economy," he said.

Meanwhile, building a new refinery requires a large amount of capital, with investments unrealized for decades and potentially at risk as governments pursue decarbonization policies.

"In the medium and longer term, everyone understands we're going to decarbonize, but we're not living in the medium and long term — we're living in the present," he said.

"And in the present, there's a shortage of refinery capacity, which is feeding back into those shortages."