What About Banning Diesel Exports?

Watching the Trump Administration in action sometimes reminds me of the popular arcade game Whack-A-Mole. In the game, players use a mallet to hit mechanical toy moles as they randomly pop up. Similarly, the Administration implements a policy which creates unintended consequences; implements another policy to address consequences stemming from the first policy; which leads to further consequences and policy changes; and so forth and so on — just like the moles keep popping up in the game. The latest example is the ban on diesel exports being bandied about. The goal of the ban would be to reduce diesel prices which have risen due to the closing of the Strait of Hormuz and a global shortage of diesel. The idea of a export ban was floated by elected officials from agricultural states, notably Sen. Chuck Grassley, who are no doubt hearing from producers on the record prices.  

With harvest beginning, the price surge comes at a bad time for farmers. Kansas State University farm management specialist Gregg Ibendahl estimates that the higher diesel costs could raise expenses to grow corn around $10 per acre this year. And while fuel isn’t the largest expense for farms (fuel costs range from 3-6% of total farm production expenditures according to the U.S. Department of Agriculture Economic Research Service) the additional costs impact the bottom line. Many farmers prepurchase their fuel needs. Those who did should avoid the worst of the price pain this year unless they need to purchase more to fill their harvest needs. They will feel it when purchasing next year’s needs. Producers who purchase diesel on an as-needed basis will feel the greatest pinch this year.  

Analysts say that an export ban would lead to lower prices in the near-term but any relief would be short-lived. Moreover, Midwest farmers probably won’t see the relief. That’s because nearly all U.S. diesel exports originate from refineries and facilities on the Gulf Coast and there isn’t the pipeline infrastructure to move significant quantities from the coast to the Midwest. Midwest needs are largely filled by refineries in the region. Nebraska’s usage is supplied by refineries in Kansas, Illinois, and Wyoming. Without being able to move product, storage in the Gulf would quickly reach capacity and refineries would have to slow down production. Some refineries might use the opportunity to shut down for maintenance, also reducing supplies. Other refineries could cut production in response to lower prices, all of which negate any benefit of a ban. Over the long-term, a ban could exacerbate already tight supplies and cause prices to rise even higher.