New sanctions likely to drive diesel prices up further

New sanctions likely to drive diesel prices up further

Tractors have diesel engines

Farmers and other diesel users are likely to face further price rises when new fuel and oil sanctions against Russia come into force in December and February.

Analysts at Bloomberg said: “Within the next few months, almost every region on the planet will face the danger of a diesel shortage, at a time when supply crunches in nearly all the world’s energy markets have worsened inflation and stifled growth".

In Ireland, about 36% of cars, more than 80,000 tractors, and about 110,000 heavy goods vehicles and lighter commercial vehicles operate on diesel, along with diggers, excavators, generators, and other commercial equipment.

There have been calls on the government to develop an Irish industry around Hydrotreated Vegetable Oil (HVO), which can directly replace diesel.

Transport Minister Eamon Ryan has said additional supply of HVO is critically needed to meet Ireland's decarbonisation targets. He said there is potential for Irish production to scale up to between 435m and 735m litres of biodiesel or HVO by 2030, but reliance on imported feedstocks (used cooking oil and tallow) will continue to be high.

The Biofuels Obligation Scheme requires biodiesel to be 20% of motor fuel used in Ireland by 2030 (it is at 14.92% this year, the current fuel blend at garage forecourts is about 7% biodiesel).

Wexford Independent TD Verona Murphy has told the Dáil growing raw materials for HVO could replace the sugar beet industry, on up to 33,000 hectares. There have been a number of successful trials of HVO here.

HVO can be blended in at rates higher than standard biodiesel, but it is about three times the price of diesel, partly because of global demand for biofuel national strategies.

Meanwhile, the EU will cut off seaborne deliveries of all Russian fuels in early February.

From December 5, G7 countries will impose a price cap designed to prohibit shipping, insurance and reinsurance companies from handling cargos of Russian crude, unless it is sold for no more than the maximum price set by the G7 and its allies.

The cap will be set at a level making it still profitable for Russia to sell its oil, thus preventing a global supply shortage. However, there are fears that Russia will go through with threats to cut off supply to countries behind the cap. And other importers of Russian oil, such as India, China and Turkey, may not agree to participate in the scheme, which is aimed at the 70% to 85% of Russian crude oil exports carried by tankers rather than pipelines.

Some analysts warned crude oil prices could surge to more than $150 a barrel in December, but falling futures prices indicate the market does not agree.

The G7 countries are Canada, France, Germany, Italy, Japan, the UK and the USA. The USA and UK had already stopped importing Russian oil, and the EU has agreed to ban all imports of Russian seaborne crude oil from December 5, and all Russian refined products from February 5.

Diesel users are likely to be worst affected, because the global market for this fuel is already very tight. Global average prices for diesel reached record levels in October, about 70% higher than a year ago.

The EU embargo on diesel and other refined products from Russia in February is expected to push diesel prices up further, following the December market disruption due to the G7 price cap. Market analysts say the EU will have to find up to 600,000 barrels per day of diesel to replace Russian volumes. This is likely to come from the USA, the Middle East, and India.

These developments will add to the upward pressure on prices for diesel seen for much of the past year. First, the Covid-19 pandemic affected refinery capacity globally, global crude oil supplies also tightened, and then Russia invaded Ukraine. Moves towards renewable fuels and electric vehicles are slowing refinery investments. More recently, industrial action at European refineries also reduced diesel supplies.

Europe’s reliance on diesel from Russia has fallen from more than 50% before Russia invaded Ukraine. But it was still 44% of Europe’s total imports in November, compared with 39% in October. Importers in the EU have rushed to fill storage tanks before the Russian diesel ban in February. But stockpiles are expected to fall after the December and February sanctions.

In the US, stockpiles of diesel and heating oil are at their lowest in 40 years, for this time of year. The price of diesel has surged 50% this year in the USA, estimated to cause a $100 billion hit to the economy, even though the USA is a net exporter of diesel.

Globally, some poorer countries like Pakistan are no longer able to import sufficient to meet their diesel needs.

European Commission President Ursula von der Leyen has predicted a cut of 90% of oil imports from Russia to the EU by the end of the year, including German and Polish committments to reduce deliveries via pipelines. Pipelines from Russia supply a number of eastern member states of the EU, including Hungary.

Despite sanctions, Russia's oil and gas revenues are predicted to reach a record $285 billion in 2022, after countries such as India and China increased their purchases substantially.

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