The rest of the world is trying to compensate – and capture windfall profits from enormous refining margins.
Many refiners outside the conflict zones have been running flat out for months, producing more diesel at the expense of other fuels. In the U.S., the world's largest diesel producer and exporter, refiners have recently pushed output of the fuel to the highest level since 2018 for this time of year.
But that effort is proving insufficient. Unlike oil producers, refiners have limited spare capacity, and ultimately, war-related damage has simply taken too many refineries offline. Global refinery throughput is therefore expected to average just 81.5 million bpd this year, down from around 84 million bpd in 2025, according to the International Energy Agency.
Inventories of diesel and other middle distillates are also relatively low after months of heavy draws. U.S. inventories are at their lowest level since at least 1982 for this time of year, when stocks typically rise before the surge in winter heating demand.
This has created a troubling dynamic. The cure for high diesel prices is typically high diesel prices, which spur production and curb demand. But with limited refining capacity available, the cure will likely be far higher prices and significant demand destruction.
That’s not something any president wants to hear.
The bigger question for Trump is whether persistently elevated diesel prices could push up U.S. inflation broadly – and durably – and ultimately drag down growth.
The U.S. economy is far less energy-intensive than it used to be, having shifted manufacturing overseas and expanded the services sector. The U.S. is also now a net oil exporter, having been a major importer for decades. Many experts point to this to explain why the spike in both gasoline and diesel prices this year has, thus far, had a limited impact on core inflation and economic growth.
According to economists at the Federal Reserve Bank of Dallas, the estimated 0.3-percentage-point decline in U.S. gross domestic product (GDP) from the global oil shock is only about one-twentieth of what it would have been in 1980 – an eyepopping 5.6 percentage points – and one-sixth of the hit estimated for the rest of the world.
Spending on oil as a share of GDP has also plummeted over the decades, falling to 3% in 2024 from a high of almost 8% in 1980, the researchers found. On the surface, the U.S. economy thus appears far less vulnerable to energy supply shocks.
But that doesn’t mean no pain is being felt – or is likely to be felt ahead – because fuel costs today are much higher than current crude prices would suggest.
This is particularly true for diesel. Analysts at Societe Generale calculated that diesel prices at the pump today are more in line with global benchmark Brent crude LCOc1 near $190 a barrel, not $105.
It’s also important to note that the inflationary impacts of diesel often come with a lag. That’s because diesel’s direct footprint in consumer inflation indexes is minuscule, yet its indirect impact through higher transportation, delivery and production costs is significant. Economist Joel Prakken estimates that diesel accounts for around 70% of intermediate fuel usage in the U.S.
Moreover, the same forces that have made the U.S. economy less sensitive to direct energy price increases could make it more vulnerable to indirect ones. A shift away from domestic manufacturing has stretched supply chains across continents, increasing reliance on diesel-powered shipping and freight.
The boom in home deliveries since the pandemic has also added further demand from trucks and vans.
Importantly, demand for diesel also tends to be stickier than gasoline demand. The latter can fall quickly when motorists drive less, but diesel use doesn’t tend to fall unless economic activity overall is slowing.
Higher diesel prices "take longer to filter through, gradually driving the global economy slower," said Alan Gelder, senior vice president for oil markets at consultancy Wood Mackenzie.
In other words, unless U.S. and global economic activity slows considerably, diesel prices may continue to rise, putting upward pressure on inflation broadly.
There is one reason not to panic. Adjusted for inflation, today’s diesel prices remain well below the peaks reached in 2008 and 2022.
But those earlier spikes were largely driven by fears of supply disruption. The 2022 surge, for example, followed Moscow's invasion of Ukraine and reflected concerns over a reduction in Russian exports that didn’t fully materialize at the time.
Today's rally is different. It reflects actual losses of refining capacity, constrained oil flows and depleted inventories.
The Trump administration has few levers to pull. Restricting U.S. diesel exports, an idea touted by some politicians, could offer short-lived relief, but it would likely wreak havoc on the country’s refining industry.
A lasting ceasefire in the Middle East and a full reopening of the Strait of Hormuz would certainly cool the energy market. But even then, oil flows would take months to normalise and damaged refineries could take years to rebuild.
In 2024, Trump’s predecessor Joe Biden learned the hard way how politically toxic high inflation can be. If diesel prices keep rising, the current administration risks finding itself in a similar position.
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