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Against the backdrop of rapidly rising fuel oil prices in the global market, the G7, the alliance of industrialised countries, has decided to release a huge quantity of crude oil and diesel from emergency reserves into the market. Following pressure from US President Donald Trump, the alliance will release around 100 million barrels of oil into the market over four months in coordination with the International Energy Agency (IEA). Alongside this, a significant quantity of diesel will be supplied in the first 20 days alone.
However, analysts say this initiative may temporarily bring down the price of oil, and of diesel in particular, to some extent, but it will not remove the core problem of the supply shortage in the global market. As a result, bigger steps may be needed to stabilise fuel prices in the long term.
Why are oil and diesel prices rising so much?
Two wars, in the Middle East and Europe, are mainly playing a major role behind the rise in fuel prices in the global market. Fuel supply from the Gulf region has been disrupted because of the war of the United States and Israel centring on Iran. At the same time, supply has fallen further as various Russian energy installations and refineries have been damaged in Ukrainian attacks. As a result, major pressure has been created in the diesel market as well as in crude oil.
Hamad Hussain, climate and commodities economist at Capital Economics, said the G7’s decision to release emergency reserves may create some downward pressure on international diesel prices in particular. However, as it is a temporary solution, it will not have a lasting effect on the problem created by the supply crisis.
Last Thursday, the price of crude oil in the global market jumped by more than $4 a barrel in one go. Diesel prices had already reached a record high before that. In the United States, the average price of a gallon (3.79 litres) of diesel stood at $6.50 last Friday, which was $5.61 a month ago.
What has the G7 announced?
After a video meeting of G7 leaders chaired by French President Emmanuel Macron, the alliance said 100 million barrels of oil will be released into the market in a coordinated manner through the IEA.
Earlier, IEA Executive Director Fatih Birol had said member countries have already released into the market around two-thirds of the 400 million barrels of emergency reserves on which an understanding had been reached.
Under the new programme, the process of releasing the G7’s oil reserves will begin immediately and continue for four months. Of this, a significant quantity of diesel will be released into the market in the first 20 days alone. However, details have not been given about which country will release how much crude oil and diesel.
The G7 has said that, if necessary, the release of further diesel reserves will also be discussed through the IEA.
Besides, the countries of the alliance have called for not imposing restrictions on exports of energy products among themselves. At the same time, an initiative will be taken to coordinate the maintenance activities of oil refineries in G7 countries, so that supply in the market does not fall further with several refineries shutting down at the same time.
Why is the diesel crisis so acute?
Neil Atkinson, former head of the oil industry and markets division of the International Energy Agency, has spoken of three main reasons behind the fall in diesel supply in the global market.
First, diesel supply from the Middle East to Europe has almost stopped. Europe used to import a huge quantity of diesel from Saudi Arabia and Kuwait.
Second, Russia has stopped exporting diesel as various Russian oil refineries have been damaged in Ukrainian attacks.
Third, China has also reduced diesel exports.
On the other hand, demand for diesel is still comparatively high. Demand for diesel rises further particularly during the seasonal collection of agricultural produce or the harvest.
According to data, the United States is the world’s largest diesel producer and exporter. The country produces around 240.5 million tonnes of diesel a year and exports around 1.26 million barrels of diesel every day.
Russia is the world’s second largest diesel exporter. The country supplies around 783,400 barrels of diesel to the international market every day. On the other hand, although Saudi Arabia is the world’s second largest diesel producer, a large part of the country’s production is used in the domestic market.
Will prices fall with the G7’s initiative?
After the G7’s announcement came, the price of Brent crude in the international market temporarily fell below $100 a barrel. It later rose again to around $102.
French President Emmanuel Macron has said the release of oil from emergency reserves may bring down the prices of various petroleum products, diesel in particular.
Naeem Aslam, chief investment officer of Zaye Capital Markets, also thinks the G7’s initiative was necessary to ease the pressure created on the market. However, in his view, a detailed framework on matters such as which country will release how much of its reserves and where export bans will be relaxed is important for the market’s reaction.
He believes the pressure on the energy market may ease somewhat towards the end of the week. However, the market may again show an opposite reaction on the next working day.
According to Neil Atkinson, although the initiative to release fuel from emergency reserves is welcome, it is not solving the fundamental problem of the global market. This is because, even several months after the start of the war, the global supply of crude oil and refined fuel is significantly lower than in normal times.
Why does the price of everything rise when diesel prices go up?
The impact of a rise in diesel prices does not remain confined to the transport sector alone, because a large part of the world economy is directly dependent on diesel.
According to Frederic Schneider, a non-resident senior fellow at the United States’ council on Middle East affairs, while petrol is mainly used in private cars, diesel is used in trucks, freight trains, ships, tractors, harvesters, construction and mining machinery, and generators for emergency power generation.
As a result, when diesel prices rise, transport and production costs go up together. This affects the prices of food, construction materials and almost all kinds of goods transported by truck.
Farmers are facing double pressure in this case. On one hand diesel prices are rising, and on the other fertiliser is also becoming expensive. Pressure has been created on the supply and prices of both products because of the closure of the Strait of Hormuz.
Economists say high diesel prices effectively work like an additional tax on the production and supply system. This raises inflation on one hand and reduces the profits of the transport and agriculture sectors on the other. As a result, the risk of ‘stagflation’ in the economy, or inflation and weak growth at the same time, may also increase.
Pressure mounting on Trump too
The rise in diesel prices in the United States has created political and economic pressure for the Trump administration as well. With the midterm elections ahead in November, there is concern among Republicans too about what effect higher fuel prices may have on voters.
Last week, Trump called on Ukraine to stop attacks on Russia’s diesel and energy installations.
Then on Thursday he said the United States may call on European countries to release emergency diesel reserves into the market. US Treasury Secretary Scott Bessent had also called on Europe to quickly use its emergency reserves.
Trump had even threatened that the United States might ban diesel exports if Europe did not release reserves. However, on Friday he said the United States will not stop diesel exports; according to him, such a ban was in reality never part of the final plan.
After the G7’s announcement, Trump claimed on social media that Europe has agreed to release a huge quantity of reserve diesel into the market and that the process will begin immediately.
Meanwhile, Reuters has reported that the Trump administration is preparing to issue an executive order to tackle record high diesel prices in the United States.
What may happen next?
According to analysts, the G7’s decision to release emergency reserves may give the market some relief in the short term. In particular, if diesel supply increases, the immediate pressure on the transport, agriculture and industrial sectors may ease somewhat.
However, if factors such as the continuation of the war in the Middle East, obstruction to fuel transport through the Strait of Hormuz, Ukraine’s attacks on Russia’s energy infrastructure and the fall in China’s diesel exports persist, the market’s fundamental supply crisis will remain.
That is, although the release of oil from emergency reserves brings temporary relief to the market, resolving the war-induced supply crisis is becoming the most important thing for permanently reducing fuel prices worldwide. Source: Al Jazeera
