With the days growing shorter and summer’s light now faded, it is appropriate to focus on the cost of gasoline, diesel, fuel oil and inventories.
Data from the recent Consumer Price Index and Producer Price Index for September captures the jump in energy, oil and distillate prices that have added to the growing demand destruction taking place across lower-income households.
Too often an oversimplified focus on day-to-day price movements can obscure the bigger picture of stress that has settled in across households because of the energy shock.
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One measure of this stress is miles driven by Americans.
Miles driven usually peaks in the middle of the summer, but this year, that number has steadily fallen compared to last year.
The most glaring month was May, when the price of gasoline jumped by more than 40% compared to May 2025.
By August, the miles driven data suggested that vacationers had begun to stay closer to home compared to the previous year as they pulled back on driving.
This change in behavior is likely to continue. Given the data in the wholesale pipeline and pass through from the spike in energy prices over the summer, consumers are likely to adjust their spending behavior further.
Attacks on refinery capacity
While crude oil flows from the Persian Gulf have returned to approximately 80% of pre-war levels, flows of refined products remain at only 58% of those levels, according to JP Morgan.
This shortage has been amplified by Ukraine’s increased attacks on Russia’s refining infrastructure.
For some time, we have made the case that the primary economic challenge in the energy shock is not just the disruption in the flow of oil but also the availability of distillates.
The recent shortages of distillates have led to outsized increases in their prices. While U.S. refineries were running near maximum capacity, they have limited ability to adjust their refining mix toward diesel and jet fuel.
Refineries have managed to change their product mix this year, but only slightly, Gasoline’s share of total output increased from 53.2% at the start of the year to 56.7% in October. But diesel’s share has increased by less than a percentage point, and jet fuel’s share is flat.
It’s a refinery problem
The availability and price of crude oil is just the start of determining retail prices of petroleum products.
On top of the cost of crude is the cost of refining those products. That difference in price is referred to as the crack spread. And then, of course, there are retail margins and taxes.
Retail gasoline prices in October this year are more than 40% higher than last October, but retail diesel prices are more than 70% higher. The diesel problem is a refinery problem.
In fact, while the price of West Texas Intermediate, the North American benchmark for crude, are near $93 per barrel, today’s diesel prices suggest that crude oil prices should be near $169 per barrel, based on historical prices.
A year ago, crack spreads were $21 for gasoline, $30 for diesel and $29 for jet fuel. Those spreads are now 155% higher for gasoline, 215% higher for diesel and 200% for jet fuel.
One gauge of this cost is the 3:2:1 crack spread. It measures the refining cost of two barrels of gasoline and one barrel of diesel per three barrels of crude. That spread has reached $67, or 158% higher than the $26 average October spread over 2021-25.
Finally, while increases in gasoline and diesel are obvious for all consumers at their local gas stations, heating oil consumers in the Northeast are facing futures prices that over the past six weeks have increased by 110% compared with last year.
The takeaway
The energy shock is now eliciting changes in behavior and is contributing to the demand destruction hitting lower-income households.
The Producer Price Index for September showed clear evidence of rising wholesale prices in energy, transportation and food that will result in thinner producer margins and costs being passed downstream to American households.
Higher diesel prices that first affected farmers during the planting season have only continued during the summer harvest, and East Coast stocks are below their five-year lows.
The next aspect of the energy shock will be the behavior of homeowners that rely on heating oil.
In the CPI for September, fuel oil prices jumped by 15.3% during the month and were up by 74.2% from one year ago.
Businesses that purchase home heating oil and distillates saw an increase of 18.8% in September on the back of a year-ago increase in prices of 117.5%. All of which point to further stress on U.S. households and consumers.
Eventually, all eyes will be focused on agriculture and grocery prices, which are likely to rise because of the limited availability of fertilizers earlier this year and the recent jump in transportation prices.
So when miles driven decline as prices march higher, do not be surprised by rising reports of demand destruction among lower-income households.
There are many miles to go before we all get a respite from those shocks.
