The Trump administration, growing increasingly fretful of high fuel prices just a month before the U.S. midterm elections, issued late Monday a novel executive order meant to make diesel fuel a little cheaper for beleaguered truckers and farmers. It almost certainly won’t help.
U.S. President Donald Trump authorized the deferral, through the end of the year, of federal taxes on diesel fuel used to power vehicles on roads and highways. (That tax revenue, like the gasoline tax, helps pay for highway maintenance.) His solution is to temporarily legalize the use of so-called red-dye diesel—a tax-free diesel flavor normally earmarked for off-road uses such as agriculture, mining, and logging—for use by truckers.
The Trump administration, growing increasingly fretful of high fuel prices just a month before the U.S. midterm elections, issued late Monday a novel executive order meant to make diesel fuel a little cheaper for beleaguered truckers and farmers. It almost certainly won’t help.
U.S. President Donald Trump authorized the deferral, through the end of the year, of federal taxes on diesel fuel used to power vehicles on roads and highways. (That tax revenue, like the gasoline tax, helps pay for highway maintenance.) His solution is to temporarily legalize the use of so-called red-dye diesel—a tax-free diesel flavor normally earmarked for off-road uses such as agriculture, mining, and logging—for use by truckers.
There is no difference between red-dye diesel and regular diesel except the addition of red dye, which is put into the fuel to make it easier for inspectors to see if potential violators are using tax-exempt fuel where they shouldn’t; the fines and penalties are steep. Trump’s measure would, in theory, shave 24 cents off the price of a gallon of diesel, which last week was at record levels and remains very high, at $6.31 a gallon. If states follow suit with their own tax breaks, diesel could potentially be back under $6 a gallon.
But there are a lot of problems with the hail-mary measure. For starters, it is only a deferral of those federal fuel taxes, not an outright suspension. Unless Congress passes legislation, at some point those deferred taxes will come due, which simply means storing up bigger bills and bigger accounting headaches for truckers down the road.
“It’s one thing to waive a tax and another thing to simply defer it. This just looks like a mess, but then again, it’s all a circus,” said Tom Kloza, the chief energy advisor at Gulf Oil and a four-decade veteran of petroleum product markets.
More importantly, while the measure could, if taken up by both sellers and buyers of red-dye diesel, slightly lower prices for some highway users, it won’t add any supplies to a very tight market. The reason U.S. diesel prices are high is because supplies of diesel are strained, and there is little relief on the horizon. U.S. refiners can’t produce any more than they already are, and other global exporters have voluntarily or involuntarily curbed their own supplies.
“This doesn’t move the needle in any way on diesel availability,” Kloza said. “It almost seems silly.”
There is another risk in potentially robbing Peter to pay Paul, beyond the prospect of lost tax revenues needed to keep highways operable. Farmers who operate tractors, combines, and other off-road vehicles are also suffering from high diesel prices, and the new measure could open up their privileged red-dye diesel to much broader use by the trucking industry. That may be why Trump, in his executive order, stressed the need for the Department of Agriculture to ensure availability of red-dye diesel for farmers, who are in harvest season.
Finally, the measure doesn’t address the fundamental reason for the high fuel prices, which is a combination of stubbornly high crude oil prices and a shrunken global refinery complex that produces things such as gasoline, diesel, and jet fuel.
Ukraine will redouble its long-range strikes on Russia’s oil refineries in reprisal for Moscow’s stepped-up attacks on Ukrainian infrastructure ahead of winter, Ukrainian President Volodymyr Zelensky said over the weekend. Ukraine’s “long-range sanctions” have already struck most of Russia’s oil refineries at least once, and the Ukrainian Defense Ministry says it has taken out about half of Russia’s refining capacity. Industry experts suspect the long-term damage to Russian refineries is less than such headline estimates suggest, but since Russia was the world’s second-largest diesel exporter after the United States, the offensive still affects global supplies.
The Middle East has still not recovered its refining capacity that was damaged or constrained by the Iran war that began in February, even though crude oil flows out of the Persian Gulf have in recent weeks rebounded. That lack of refined product exports from the region is likely to persist, as Iran has intensified its anti-shipping campaign in recent days, with at least 11 attacks on tankers and other vessels just in October. Most analysts figure at least 3 million barrels of formerly exported Middle East refined products remain absent from the market.
And the United States, despite deferrals on tax and scheduled fall maintenance at big refineries, cannot squeeze much more out of facilities that were operating at a near-record 95 percent capacity in the third quarter. Many refiners have put off scheduled seasonal maintenance to keep producing at record margins, but that means more will have to go offline early next year.
And just to keep things interesting, a tropical depression-cum-tropical storm-cum-hurricane is forming in the Gulf of Mexico, with a projected path that will take it right toward the U.S. Gulf Coast refining complex.
Trump’s executive order is a “cosmetic measure. It’s the whole world, not just the United States, that looks like it could have a pending diesel crisis this winter, especially Europe. If you get a cold winter in the U.S. or Europe, or that Gulf storm develops, diesel could be $10,” Kloza said.
