DIESEL SUPPLIES AND FOOD / GEOPOLITICAL FUTURES

Diesel Supplies and Food

At worst, shortages could shrink the global food supply.

By: Allison Fedirka

Diesel supplies appear to be the next casualty of global energy disruptions. 

In fact, they started the year in a weak position, thanks to the COVID-19 pandemic. 

Inventories were tight, and global refining capacity dropped to 78 million barrels per day from 82.1 million bpd. 

Things got only worse after Russia invaded Ukraine. 

The United States, Russia and China have the three highest crude oil distillation capacities, while the U.S. and Russia are the two leading diesel exporters, accounting for 22 percent of global trade by value.

Supplies from Russia have been severely disrupted or have been taken offline entirely. 

Just under a third of Russia’s refining capacity has been idled due to Western sanctions, and in April, Rosneft announced it would no longer export diesel.

 Consequently, market experts estimate that 1.3 million bpd from Russia will remain offline for the rest of the year, and Russian production is likely to stay down given its dependence on technology it no longer has access to so long as sanctions remain in place.

The biggest concern over potential diesel shortages is how they will hurt the agriculture sector, particularly in the Western Hemisphere. 

Diesel and gasoil – both middle distillates – are the primary fuels in Latin American freight transport and farming machinery. 

U.S. farming and trucking also use a ton of diesel because it’s usually cheaper than gasoline. 

In other words, a threat to crop production and shipment is a threat to food supplies.

Three of the world’s leading grain and oil seeds exporters – Brazil, Argentina and the U.S. – are especially vulnerable. 

Last year, the U.S. was the world’s second-largest wheat exporter, Argentina the seventh. 

Together they accounted for a fifth of global wheat exports by value. 

The U.S. is the global leader in corn exports, Argentina is the second, and Brazil is the fourth. 

They account for nearly 63 percent of global corn exports. 

Brazil leads global exports in soybeans, while the U.S. ranks second and Argentina fourth. 

They dominate the global soy market, accounting for 87 percent of exports. 

Brazil and Argentina have already reported concerns over diesel supply and have warned of the impact it will have on their crops. 

The U.S. is better positioned but will find itself increasingly constrained when it comes to rising prices and distributing the diesel supplies it has available.

Brazil

For Brazil, the problem with diesel shortages is three-fold: high prices, import constraints and domestic political battles. 

If current trends hold, shortages will begin in September, according to state-owned oil company Petrobras, just in time for the seasonal spike in agriculture demand. 

These concerns have prompted some Brazilian farmers to reduce their sowing area for the upcoming season and have raised concerns about truckers’ ability to distribute what crops are harvested.

Despite producing roughly 75 percent of its own diesel, Brazil has a hard time securing imports, which have risen as Brazil fails to increase refining capabilities. 

In recent weeks, Brazilian importers have reported a notable decline in the number of responses to calls for fuel purchases. 

(Past calls would receive offers from about 20 ships; now that number is two or three.) 

About 80 percent of its imports come from the U.S., but Brazil isn’t sure that it can count on Washington, which may experience its own shortages and has begun to look for other supplies in West Africa and India.

Either way, domestic political considerations will constrain Brazil’s management of diesel shortages. 

Through Petrobras, the Brazilian government can set domestic fuel prices. 

The Petrobras pricing mechanism also affects imports. 

If the company imports fuel at a market price higher than the domestic price, it must absorb the difference so that the cost isn’t passed on to consumers. 

This framework has discouraged Petrobras from importing diesel at its current price and has paralyzed the company from being able to raise prices. 

Containing food and fuel prices is paramount to the sitting government’s strategy for reelection, and the government has therefore strongly resisted efforts to hike prices.

 

The government and Petrobras, however, are looking for ways to redress the issue. 

For one, they are calling on distributors to increase mandatory inventory levels, which currently stand at three to five days. 

Leading distributors such as Vibra have already started doing as much on their own and have set inventories at seven to nine days. 

A second option involves increasing the percentage of biodiesel in diesel from 10 percent volume to 12-13 percent. 

Last, the government is considering legislation that would allow private companies to use state-run terminals and pipelines, with the ultimate goal of reducing prices. 

Ultimately, Brazil’s efforts to resolve the diesel crisis pit its interest in keeping fuel prices low against importing greater volumes of needed diesel.

Argentina

Argentina is no stranger to shortages. 

In fact, the government’s economic intervention has played a notable role in the development of shortages. 

Demand for diesel fuel in Argentina has risen 17.7 percent this year. 

According to the Energy Secretariat, this is due to seasonal demand, increased economic activity and, most important, sales to vehicles crossing the border from Paraguay and Brazil. 

In Argentine provinces bordering those countries, diesel demand increased 37-57 percent. 

The spike in foreign purchases of Argentine diesel is a direct result of the government price controls that keep Argentine diesel much cheaper than diesel sold in neighboring countries. 

Argentine freight drivers have already reported difficulties acquiring enough gasoil and diesel fuel. 

The latest survey by the Argentine Federation of Freight Transportation Entities showed that only a third of freight transporters can freely access fuel. 

The majority (57 percent) have some limitations or difficulties with acquiring fuel for their vehicles, while 10 percent reported no access at all.

Argentina’s diesel shortage overlaps with its agriculture production. 

The country’s agriculture activity is concentrated in Buenos Aires, Cordoba and Santa Fe provinces. 

Agriculture activity also extends farther north to the Paraguayan border and the northeast, where fuel shortages are even more severe. 

The shortages started in late May, toward the end of soy and corn harvesting season, which runs from mid-March to early June. 

The lack of diesel supply and depleted inventories have already made farmers worried about harvesting what remains of current crops and about their ability to sow new ones in the coming months. 

The government’s options for managing diesel shortages are limited. 

State-owned oil company YPF plans to increase fuel imports in June and July from two or three ships to four. 

But unknown time frames and volumes cast doubt on whether incoming volumes can do much good. 

The country’s larger macroeconomic problems, particularly revolving around U.S. dollar supply and debt, also put into question the government’s ability to pay for increased energy imports. 

These financial constraints will limit the government’s ability to import diesel, which will become increasingly more difficult as prices rise.

The United States

One of the shared challenges facing Argentina and Brazil is that their main supplier of diesel, the U.S., is dealing with diesel supply problems of its own. 

On the geopolitical front, the U.S. must support Europe as it reels from decreased energy supplies from Russia. 

Before the Ukraine war began, Europe relied on Russia for 45-50 percent of its diesel imports and Russian oil products to feed its domestic refineries. 

In an effort to offset these losses, the U.S. exported 1.47 million barrels of diesel and gasoil to Northern Europe in March, a significant rise compared to the 300,000 barrels in February. 

April and May shipments are on par with or higher than the March values.

The question, then, is how long the U.S. can sustain exports and meet domestic demand without prices skyrocketing. 

The U.S. Energy Information Administration forecasts diesel exports to average 1.3 million bpd this summer, a 38 percent increase from last summer. 

At the end of May, U.S. distillate stocks totaled 106.8 million barrels after reaching a 14-year low at the start of May with 104 million barrels. 

Current inventories are about 20 percent lower than the pre-pandemic five-year average and can last about 28 days. 

This decline has been most heavily felt on the East Coast, where inventories are the lowest since 1996 due in large part to declining refinery capability in the region. 

Select service stations like Pilot and Love’s have started warning about diesel shortages at some East Coast locations. 

And with U.S. refineries already running at 92-95 percent capacity, there’s only so much Washington can do to goose production.

U.S. farmers are in a less dire situation than their South American counterparts but remain wary about the impact diesel prices and possible shortages may have on their crops. 

Most of the U.S. spring season has already been harvested; the rest will be done by the end of the month. 

However, the planting season for most grains and oil seeds is in August and September. 

Diesel demand will dramatically increase at that time, further pressuring prices and supply. 

The White House is contemplating an emergency decree that would allow access to 1 million barrels of diesel in strategic reserves. 

Such a move could be a stop-gap measure for rising summer demand but falls short of solving any of the structural supply and production issues afflicting the country.

At the very least, the rising cost of diesel will jack up food prices at a time when they are already high. 

At worst, they could lead to material declines in vital food-exporting countries, which would strongly aggravate the food supply crisis.