Desperation is not a good look for an American president. The price of Diesel #2 — the type of diesel typically used in, among other applications, trucks, buses, tractors, generators, and construction equipment — has soared in the last few months. In early January, it was priced at around $3.50 per gallon. It spiked as soon as the war against Iran began, and apart from one brief pullback, it has kept on up and now costs about $6.20 per gallon.
The U.S. produces more than enough diesel to satisfy its needs, but diesel is a globally traded product, and supply follows demand. Currently, demand is heavily outrunning supply. That’s because much of the diesel bought by non-U.S. buyers normally goes through the Strait of Hormuz from Middle East refineries, and transit through there remains uncertain. Further pressure on supplies has arisen due to Ukrainian attacks on Russian refineries (Russia had been the world’s second-largest exporter of diesel). These have cut Russia’s capacity by an estimated 20–30 percent, forcing it to keep more of its production at home.
The U.S. has increased its production of diesel but is running at capacity, meaning that the only other way U.S. producers can take advantage of the higher diesel price would be by increasing exports, meaning that U.S. buyers have had to pay up.
Should the U.S. prohibit diesel exports? We have argued against this idea, which would leave Americans “with rising fuel costs after a brief reprieve, destroyed production and export revenues, and aggravated market chaos.”
The higher diesel price has only a relatively small direct effect on price levels, but it has a more important indirect effect as, for example, higher transportation costs for food and other goods are typically passed on to the consumer after a lag. The longer diesel prices remain high, the greater the chance they will be passed on. Some estimates say that higher diesel prices could add 20–40 basis points to the inflation rate. Almost as important are the signs at gas stations and truck stops, all-too-visible reminders of higher prices.
In his effort to reverse the rise in diesel prices, President Trump has lifted U.S. sanctions on exports of Russian diesel. In return, Russia will supply 300,000 metric tons (2.25 million barrels) into U.S. and global markets (a trivial amount, equivalent to less than one day’s demand for the U.S. transport sector) to be followed in due course by an additional 1.5 million tons, a deal that may be in breach of the U.S. ban on Russian energy imports. Trump also unilaterally declared an “energy cease-fire” between Russia and Ukraine, which Russia promptly treated with contempt, attacking a facility in Kharkiv.
Trump also threatened to cut off the flow of U.S. weapons supplies and intelligence unless Ukraine’s President Zelensky played along. He also said that Ukraine should find itself a new leader if it could not agree to a new deal. For his part, Zelensky said that he would agree to new elections if Russia agreed to a complete 60-day cease-fire, something that will not happen. Moscow is trying to grind Ukraine down. There can be no room for a cease-fire in that plan.
Ukraine’s attacks on Russian energy production are delivering results. But Kyiv, deeply concerned about another winter in which Russia will try to freeze it into submission, would agree to an energy cease-fire if it applied to Russia, too. It is hard to see Russia agreeing. As with the war itself, Russian aggression is the chief obstacle to progress.
It is only fair to point out, as Trump has done, that the EU is (foolishly) still buying Russian LNG, pipeline gas, and oil. It is also true that U.S. and Ukrainian interests diverge here. Ukraine cannot be faulted for valuing the lives of its people over cheaper gas in the U.S.; an American president cannot welcome the price effects of the Ukrainian attacks. Nevertheless, the president has not served U.S. interests well with these latest maneuvers. He has delivered yet again a message that the U.S. can be an unreliable ally, a message that will be heard far beyond Kyiv. It will add to internal tensions within the Atlantic Alliance, it will weaken Ukraine, and it will encourage Moscow and Beijing. And Vladimir Putin will doubtless welcome the extra money the deal will send Russia’s way, money that will be spent on destroying yet more of Ukraine.
Making matters worse still, Trump has signaled to Moscow and Beijing that his domestic political weakness, something that is unlikely to diminish any time soon, will be a rich source of pressure points.
Meanwhile, Americans hurt by higher diesel prices will see no relief, and it’s unlikely that they will blame Kyiv for that.