Calls Grow for a U.S. Diesel Export Ban - But Economists Express Caution

As fuel prices continue to rise amidst the ongoing Hormuz crisis, and the U.S. midterm election approaches, the idea of a diesel fuel export ban is gaining currency on the campaign trail - especially in farming states in the Midwest, where diesel pricing is a hot-button issue. Energy analysts say that an export ban would likely suppress diesel prices for a short period in refining regions of the South and Midwest, though the knock-on effects for the nation and for global energy markets could be significant.

"Place a temporary embargo on diesel exports. American energy should provide relief to American families first," argued Mike Rogers, the Republican candidate for a closely-contested Michigan senate seat, in a campaign ad aired Monday.

Similar sentiments have been heard from Rep. Ashley Hinson (R-IA), who has called for "pausing diesel exports" and "creating a diesel relief program"; longtime Midwest fixture Sen. Chuck Grassley (R-IA), advocating for "an embargo on diesel exports; Rep. Zach Nunn (R-IA), who has called for a plan to "sell American energy to Americans first"; and Senate Majority Leader John Thune (R-SD), who said last week that he was "open to considering" a diesel export ban.

While there are calls for a ban from the campaign trail, the consumer benefits would be short-term and geographically uneven, according to Bob McNally of Rapidan Energy Group, speaking to Bloomberg on Monday.

"You would have an abrupt collapse in [diesel] prices in Texas, Louisiana, maybe the Upper Midwest. . . . But then refiners would reduce runs and prices would rise again," said McNally. "Prices for diesel abroad would skyrocket, and since the northeast of the United States and the West Coast of the United States price their diesel off of imports, coastal prices would likely rise, not fall."

If refiners cut runs to deal with excess diesel production, then output of gasoline, jet fuel and bunker fuel would also decline, analyst Andy Lipow of Lipow Oil Associates told the Wall Street Journal. Likewise, refinery association American Fuel & Petrochemical Manufacturers (AFPM) says that it is a zero-sum game: Americans burn less diesel than refiners produce, so refineries would eventually have to slow down production of their entire slate.

"If exports are banned, refiners cannot simply stockpile unlimited diesel. They would have to reduce production. Because gasoline and diesel are produced together, producing less diesel also means producing less gasoline," AFPM said in a statement. "Less fuel production means tighter supplies and higher prices for both diesel and gasoline."

Rapidan maintains a 35% risk probability that a diesel export ban will be enacted, though McNally cautions that such a restriction could hurt investor confidence in the U.S. energy market "for a generation."

If actualized, a U.S. export ban would be far from the first restriction in the current market, and would add to a growing list: Russia, one of the world's leading distillate exporters, has a ban in place on diesel sales because of Ukrainian attacks on its energy industry; Mideast distillate exports are constrained by war and infrastructure damage; and China, facing a squeeze in a tight energy market, could choose to reinstitute strict quotas and limit its fuel exports, as it did for several months earlier this year.