"Doug Casey on the Diesel Crisis -
and What It Means for the Economy"
by International Man
"International Man: Most people barely think about diesel until the price at the pump jumps. What’s the story with diesel?
Doug Casey: It’s said that war is nature’s way of teaching Americans geography. It can now be said that diesel is another way of teaching them geography—plus chemistry. And they’re getting a graduate degree in it right now. The wars in the Ukraine, Iran, and now Houthiland have doubled the price of fuels in the last six months. And I believe they’re going higher.
As my colleague John Hunt shows, oil, gas, and diesel were much higher in real terms not so long ago. Like almost all questions in today’s highly regulated world, the answer to why this is has both a technical and a political component. Even though civilization runs on oil, very few Americans know anything about it, or have any contact with it beyond a visit to the gasoline pump. Diesel is something only some blue-collar workers and truckers consider.
Few Americans drive diesel cars. But almost half of Europe drives diesels. Why might that be? Largely taxes. In the US, diesel has typically cost more per gallon than regular gasoline, but at $6.50 per gallon it’s now about $2 per gallon more. Europeans are paying around $10 per gallon for either gas or diesel. The difference is taxes. As bad as they are in the US, they’re much worse in Europe. Considering that Europeans typically have 20-30% less disposable income than Americans, their standard of living is collapsing. The peasants around the world might become very restless.
American families don’t use much diesel in their cars. But the economy runs on it. And diesel has some real advantages over gas.
First, it contains roughly 10–15% more energy per gallon.
Second, it allows roughly twice the compression ratio in the engine, say 20-1 as opposed to 10-1 for gasoline. Those two factors make it roughly 25% more thermally efficient, which is why trucks, tractors, locomotives, ships, and heavy equipment run on diesel.
Third, diesel’s flash point is considerably above gasoline’s, and it gives off essentially no ignitable vapor. That makes it much easier to store and transport.
Fourth, diesel is itself a lubricant for an engine’s pumps, injectors, and rings, while gasoline is a solvent that washes oil away. That, plus the fact that diesel engines are built heavier to withstand greater compression and combustion pressures, means that they’re typically two or three times more durable than comparable gasoline engines.
Finally, because its combustion is lean and efficient, diesels emit fewer emissions than gas. That said, Americans still prefer gas because it offers higher performance and gas engines are much lighter and cheaper to manufacture than diesel engines. But American commerce runs on diesel. And that’s even more true of the rest of the world.
International Man: We keep hearing that the world could be heading toward a diesel shortage. What forces are driving this—underinvestment in refining, government regulation, geopolitics, or something else?
Doug Casey: All of the above. But we can’t do much to change what the government does or the thoughts of the mobs that vote for politicians. So I’m going to spend some more time on the chemical and economic realities of the petroleum business. One important concept you should get a grip on is the “crack spread.”
The crack spread is the price difference between crude oil and the refined products made from it. Essentially it’s the gross margin a refiner earns for “cracking” a barrel of crude into fuels like gasoline, diesel, kerosene, and heating oil. How much of each of these products comes out of a barrel of petroleum depends on the type of petroleum and how a refinery is set up. But typically three barrels of oil will yield two barrels of gasoline and one of other distillates.
Right now, refineries are coining money. But the public buying their products is being squeezed. Naturally, we can expect the government to “step in,” which is exactly what Trump is doing. He appears to be banning the export of diesel from the US, which is quite a problem since we’re the largest diesel exporters in the world. That may level out domestic prices for a while, but it will create chaos and anti-Americanism internationally. On top of the fact that, the world knows the US started this war with Iran, which precipitated the whole disaster.
Meanwhile, the Zelensky regime is destroying Russian refineries, making things worse. And Bessent’s total ban on third parties trading with Iran will tremendously compound the situation. What also scares me is the thought that Trump may put on wage and price controls as Nixon did in the 70s in a foolish attempt to contain the price explosions his foreign adventures have caused. Any or all of these things could be the catalyst for the Greater Depression in earnest.
International Man: Diesel powers trucks, ships, heavy equipment, mining, and agriculture. If diesel prices spike or shortages emerge, how quickly could that work its way through food prices and the broader cost of living?
Doug Casey: Higher diesel prices mean higher costs for everything. Most people think that that’s a cause of inflation. It’s not. Inflation is a purely monetary phenomenon. It comes from creating fiat currency—money printing. Higher diesel prices, like prices for any other cost input, only result in lower margins for producers and/or consumers spending more on this and less on other things. The result is a lower standard of living, not higher inflation. It’s an important distinction that most people don’t understand.
I’m not overly concerned about higher prices next week or next month. My big concern is that the lunatics running European governments will go completely wild and start World War III. They’re clearly cultivating hysteria among their populations and trying to push Russia into a war.
The bottom line is that the world in general, and Europe in particular, is in big trouble, not just because of much higher prices of the important petroleum distillates (diesel, kerosene, and gasoline), but because of their looming unavailability. All three war fronts—Ukraine, Iran, and Yemen—are attacking refineries. It’s a serious economic war, similar to what the US did to Japan before WW2, cutting off their oil. Roosevelt backed them into a corner, where they felt their best alternative was to attack first. Some country could easily react the way Japan did 85 years ago.
The way I see it, we’re just at the beginning of a real emergency. Remember, the Ukrainians have severely damaged a half-dozen Russian refineries, and the Iranians and Yemenis are doing the same to Saudi and Gulf refineries. The Americans and Iranians are both sinking or disabling two million-barrel crude carriers in the Gulf.
I don’t see that there’s any reasonable solution between the American-Israeli camp and the Iranian camp at this point. The Iranians are demanding $300 billion in compensation for damage so far, plus that the Americans leave all Middle East bases and drop their sanctions. Meanwhile, the Americans are moving to punish third parties that have anything to do with the Iranians. A rock has met a hard place. Both sides are adamant, and both sides are escalating.
It’s a chaotic situation, and the outcome is innately unpredictable, except to say it’s devolving towards a genuine crisis. I’m betting the situation is going to get worse for the foreseeable future
International Man: Governments have spent years discouraging investment in hydrocarbons while assuming energy will remain cheap and abundant. Are we now starting to see the consequences of that policy?
Doug Casey: The public has been taught to hate petroleum and its byproducts. They think of it as dirty and polluting, and its producers as evil. They imagine oil spills killing birds and otters. The political caste naturally caters to the whims of the Green-influenced mob. California in particular has been actively closing down its oil refineries as well as its nuclear plants, which is totally insane. It’s really a pity, since there are enough hydrocarbons to last many, many years, while nuclear is built out. Eventually fusion and other power sources will be perfected.
The direct source of all of our power problems is the institution of the State, the government. Yet, even when Boobus americanus sees that, he still looks to the government to solve the very problems it created. On the bright side, scientists, engineers, entrepreneurs, and investors are working to solve our power problems. I’m optimistic that the good guys will win in the end. But the size and power of the State is greater than ever. There are real risks that things could go massively wrong along the way."
No comments:
Post a Comment