What is Fueling the Fire? – Diesel Prices on the Rise

Diesel fuel is almost $0.50 per gallon higher December this year over last. That is nationally as well as by region across the country (U.S. Energy Information Administration). The first question is always, “What does that mean for you?” while the second question inevitably comes… “Why the increase?”

The answer to the first question is simple – whoever bears the cost of the changing commodity comes out on the short end of the stick. As they say, $%@# flows downhill, so the majority (but not all) of the time it is the driver or carrier as they are at the end of the food chain. There is, however, a wide range of debate over the answer to the second question of “why”.

One consistent message being reported around the world is “distribution margin increases”. This is the easiest to understand. The price goes up so the distributors can put more money in their pockets. This is in addition to the price per barrel cost increases, so now we conclude that there are multiple components to the answer (no great surprise).

The message here in the US is that the ban on drilling in the Gulf of Mexico by President Obama has weakened our domestic supply resulting in the cost per barrel
increase that we are experiencing. Well, there is a ban on drilling in the Gulf. In 2008 it was estimated that the Gulf supplied 25% of domestic crude oil used. No rocket science here. Domestic supply decreases result in increased reliance on OPEC resulting in higher per barrel costs.

Another report is that developing countries around the world are creating more demand which results in increased pricing when there is not a corresponding adjustment in supply.

Then there is the always suspicious “OPEC!” answer that usually comes with no further explanation because of the consistent message of price-fixing by the organization.

All of these sound reasonable on the surface. Besides, simple explanations click quickly and are easy to swallow. Conspiracy theories are usually more complex and carry a stigma of being fringy. Such theories require more energy to maintain than most people are willing to offer. But, let’s look at some other facts and see if we can offer up a simple conspiracy theory that requires much less effort to maintain (wink, wink).

The Conspiracy Theory

The Great Recession started in December of 2007 according to the National Bureau of Economic Research (an American non-profit research organization of high esteem – see Wikipedia for list of members that are Nobel Winners).



It is argued that general economic and monetary policy was the cause. To convert that to normal conversation: that’s how easy and cheap it was to borrow money, and most specifically for a home. The majority of these troubled home loans were called subprime loans. This was the market of high risk borrowers that were getting into homes that they could not afford without these favorable economic and monetary policies.

So, people were getting into more expensive homes than they could previously afford in part because of low, but variable interest rates. When these variable interest rate terms expired, the loan rates and terms were normalized and these people could no longer afford the monthly payments – hence, the bubble burst.

This crisis point of the subprime market occurred in June of 2007 (Bear Sterns Hedge Funds Collapsed). The fuel costs started to increase to new highs in late 2007 and didn’t return to prior levels until late 2008. These events led to the Great Recession as they drained the income of the U.S. household. How did the fuel costs play into it back then?

Well, the same intangible but simple explanations were given back then.

The conspiracy theory, you ask? The crude barrel costs were intentionally imposed to ensure that, along with the other economic issues at the time, there would be an eventual recession that would disrupt America.

The culprits, you ask? The Middle East, of course.

The relevance today, you ask? Similarly, the intent is to curb what some economists are saying is the beginning of the U.S. recovery from the Great Recession. The longer we are in economic distress the less imposing we are on those countries that fear us most.

While that is exciting to tease out, it did take more energy than I have and I certainly don't want to seem fringy (wink, wink). The truth is likely the simple but boring elements previously reported… we can only hope so anyway.