Diesel hits $7 a gallon in California as wars strain supply

Diesel in California climbed to $7 a gallon Wednesday, up 30 cents over the past month and $1.89 year-over-year, as Ukrainian drone strikes on Russian refineries and Strait of Hormuz disruptions cut roughly 8 percent of global diesel supply.

"Diesel is the most important fuel for the global economy," Bob McNally, president of Rapidan Energy, said. "It is the important macro fuel to watch."

The national average for diesel reached $5.50 a gallon Wednesday, up 40 cents over the past month and $1.81 higher than the same period last year. Refiners are booking margins of $100 per barrel to turn crude into diesel — more than the price of WTI crude itself, which trades near $85. Ukrainian drone attacks have forced Moscow to ban diesel exports of roughly 800,000 barrels per day, while Strait of Hormuz disruptions have affected about 1.2 million bpd of Middle East diesel exports, according to Andy Lipow, president of Lipow Oil Associates.

The supply crunch is hitting consumers at a critical moment. Farmers are preparing for harvest and freight transportation is picking up ahead of the holiday shopping season, meaning higher diesel costs will ripple through grocery and retail prices. "That's a pretty significant inflationary concern," Kevin Book, managing director at ClearView Energy Partners, said.

Supply outages ripple across three fronts

The disruptions span three distinct supply chains. Ukrainian drone attacks on Russian refineries have forced Moscow to ban diesel exports of around 800,000 bpd, while the Strait of Hormuz disruption has affected about 1.2 million bpd of Middle East diesel exports, Lipow said. Iran's Houthi allies in Yemen recently attacked Saudi Arabia's Red Sea refinery in Jizan, shutting the facility and its 200,000 bpd of capacity at least until the end of August.

Ukraine's campaign has extended to maritime targets as well. Ukrainian forces struck the sanctioned tanker Fina A in the Black Sea this week, and Russia's seaborne oil products exports fell 15 percent in the first half of June to about 3.3 million tonnes, with diesel exports from the Baltic port of Primorsk down 18 percent, according to Reuters data from LSEG.

China's refiners are also processing less crude and exporting less fuel, Lipow said. S&P Global estimates about 6 million bpd of global refining capacity is offline, said Dan Yergin, the firm's vice chairman. "That's affecting the whole economy," Yergin said.

The scale of the disruption is visible in Russian output data. Russian refinery runs in June and July were among the lowest recorded in the past two decades, with throughput forecast to average around 4 million bpd between July and December — almost 30 percent below the 2016-2023 seasonal average of roughly 5.7 million bpd, according to Rystad Energy. Russia is likely to process about 1.4 million bpd less crude in the second half of the year than historical seasonal patterns would suggest.

California's structural premium

California diesel prices run higher than the rest of the continental U.S. because the state relies more heavily on costly crude oil imports, requires a special diesel formulation, and layers on environmental regulations plus state excise and sales taxes, Lipow said. The state hit a record $7.75 per gallon in April when Iran choked tanker traffic through the Strait of Hormuz, then fell below $6.50 in July after exports through the strait resumed.

Prices are unlikely to ease until damaged refineries come back online in Russia and more exports flow from the Middle East, Book said. Sanctions will make it difficult for Moscow to source materials to repair its refineries, which prolongs outages, he added.

The global diesel market faces a demand base of 28 million barrels per day, and the roughly 8 percent supply disruption is the largest dislocation since the pandemic-era demand collapse. The IEA projects global oil supply to decline by 4.3 million bpd on average in 2026 before rebounding by 8.3 million bpd next year to 110.3 million bpd, with 8.3 million bpd of Gulf output still shut in. Gulf oil production rose 2.5 million bpd in July to 23.9 million bpd, still 8.3 million bpd below pre-war levels, while regional exports fell 2.1 million bpd to 15 million bpd after the Strait of Hormuz was effectively closed again in early July.

With the holiday shopping season approaching and harvest underway, the diesel crunch could persist well into the fourth quarter, keeping upward pressure on consumer prices across the U.S. economy.

This article is for informational purposes only and does not constitute investment advice.