We live in an era of government intervention into the marketplace to achieve policy objectives that are sometimes laudable but often result in a distortion of markets, supply shortages and higher prices.
The recent loose and undisciplined talk of imposing an export ban on diesel to address growing affordability challenges is another example of what at first appears to be a good idea but on closer examination is not.
Get Joe Brusuelas’s Market Minute commentary every morning. Subscribe now.
With the average price of diesel at $6.53 per gallon and gasoline at $4.75, it is understandable that policymakers would want to ease those elevated prices for stressed households.
Those prices are in part derived from the 31% increase in distillate fuel oil exports since the war in Iran started. U.S. exporters have been filling the gap created by the loss of exports from the Persian Gulf.
But banning diesel exports is misguided. An export ban would further strain a segmented U.S. energy market, send prices higher and harm the people the policy is intended to help.
Policy actors whose priority is inherently short term—getting re-elected—will often fall to the temptation of implementing policy that is in their near-term interest but detrimental to the economy.
The diesel export ban is a good example.
The elimination of 1.67 million barrels per day of diesel exports would create a short-term domestic surplus, which would then have to be sold at a discount. Prices would decline, and policy actors would be able to claim that they are addressing a growing affordability crisis.
But such a ban would end up doing the opposite: raise prices and reduce supplies.
Because the U.S. exports its surplus production—total production is 5.3 million barrels per day, above 3.6 million barrels of daily domestic demand—energy firms would pull back on production until it reaches the new and lower equilibrium.
Revenues would decline for energy firms, and industry unemployment would most likely increase.
And shortage of supply would not only be for diesel but also most likely gasoline as the crude that was previously dedicated to the production of diesel would need to be sold, resulting in increased exports of raw crude at higher prices.
A bifurcated price structure domestically would ensue, creating further uncertainty across the economy.
Already, diesel prices on the Gulf Coast are lower than on the West Coast while prices on the East Coast are closer to internationally set levels.
Even if the Jones Act, which requires all goods transported by water between U.S. ports to be on American-owned and staffed ships, were temporarily lifted, it would not eliminate the bifurcated price structure that would ensue.
Increasing complexity within an antiquated energy infrastructure is in no one’s economic or policy interest.
Second, such a ban would result in the elimination of the 1.67 million barrels in U.S. diesel exports, reducing the total global supply by just over 18%.
That would send global prices higher, creating conditions in which those costs would be passed along to the production of other goods, which the U.S. imports.
A negative feedback loop would then ensue, worsening an already deteriorating international pricing environment that would most likely prompt global central banks to raise policy rates more than they intend.
To understand how integrated the U.S. is into global markets, consider the broader category of distillate fuels.
U.S. exports of distillate fuels surged in the first six months of the year as the Iran war set in, posting an average 40% increase over exports in the same months of last year.
Exports reached as high as 51 million barrels in May, topping the 54 million recorded in 2018. On a 12-month basis, exports are once again nearing their record levels.
A look at broader distillate exports, as well as narrower diesel exports, demonstrates that U.S. trade partners in Europe, Mexico and South American would be harmed.
In addition, emerging economies and American military allies like Poland that obtain their distillates from the Middle East would experience a surge in prices.
The takeaway
Adjustment to global regime change in inflation and interest rates is straining the global economic outlook. As central banks prepare to raise rates in part because of the sustained energy shock, this is not the time for an ill-advised diesel export ban.
It would result in another supply shock that is entirely policy induced, further fragmenting the domestic energy markets and sending prices higher while curtailing roughly 18% of global diesel exports.
