It cost Carl Smith $999 to refill the 275-gallons fuel tank of his semi-trailer on Sunday for a run from Ohio to Wisconsin—and that’s just because his fuel credit card cuts off at $1,000. In the nearly 40 years he’s been driving, the price of diesel fuel has never been that high. “That’s the most it ever cost me to fill up, and I didn’t even get all the way filled,” he says.
He adds a fuel surcharge to his rates, which will help him withstand the current high price of diesel. But he knows all that means is he’s passing on those diesel costs to the average American, for whom the price of goods hauled by truckers like him to the local grocery store keep growing.
Though most consumers shake their heads at the cost of gasoline and complain about the cost of filling up their car tanks, what they really should be worried about is the price of diesel. The U.S. economy runs on diesel. It’s what powers the container ships that bring goods from Asia and the trucks that collect goods from the ports and bring them to warehouses and then to your home. The farmers who grow the food you eat put diesel in their tractors to plow the fields, and the workers that bring construction equipment to build your home put diesel in their trucks.
Diesel prices are the highest they’ve been in the U.S. since the government began tracking them, and will likely go even higher this summer as demand remains high and as forecasters predict this year will see an above-average number of hurricanes, which can idle refineries for days. The price of diesel went above $5.50 a gallon in the beginning of May, and has stayed there ever since, a 70% increase from just a year ago. Diesel supplies have tightened just about every week since January and could continue to do so as more people fly, drive, and shop during the summer months, consuming more petroleum products. “Unfortunately, I think there’s potential for another round of increases,” says Tom Kloza, global head of energy analysis for OPIS. “We’ve already seen the highest prices in our lifetimes, and it could go even higher.”
This means higher prices for just about everything. Mattel said in April that it is contemplating price increases, on top of ones it already posted last year, as the cost of ocean freight and raw materials climbs from 2021. Carter’s, the maker of baby clothes, said recently that its freight costs would be 10% higher than last year, and that it has raised pricing to cover “higher-than-expected transportation costs.” The Vita Coco Company, which makes coconut water, said in May that the total costs of its goods increased 19%, mostly because of a “sharp increase of our transportation cost;” the company said it was embarking on its first price increase in years.
Even Target and Walmart, which have the scale to lock in better rates with ocean carriers and trucking companies, said they were hurt by the high cost of diesel. Both reported hits to their profits for the most recent quarter because of higher-than-expected freight and transportation costs. Target said it anticipates $1 billion in incremental freight costs this year, as costs in the first three months of the year came in hundreds of millions of dollars higher than planned for.
The high prices to move goods come at a time when many companies say they’re already having trouble finding truck drivers. They might deter owner-operators from driving as many loads, because some freight brokers push back against continuing to raise fuel surcharges. That could lead to an even lower supply of truck drivers. “It’s just a matter of math—if you’re not getting paid as much to haul a load, there’s no reason to run that load,” says Rebecca Oyler, the president and CEO of the Pennsylvania Motor Truck Assn.
In addition to driving food costs even higher, a shortage of diesel could also suppress food production. Ben Simons, who farms dairy, soybeans, and corn near Utica, N.Y., says that the rising cost of diesel and fertilizer has meant that it now costs him $1,000 an acre to grow corn, up from $450 an acre in the past few years. At the same time, tires have doubled in price—an increase related to high demand for petroleum products—as have the chemicals to grow his crops.
Simons and his wife Robin have decided not to plant their marginal land this year—extra acres where they sometimes grow crops—because of the added expense. If more farmers follow, he says, “you’re going to be seeing that in your grocery bill. People are complaining now? Just sit back and wait.”
Diesel isn’t the only petroleum-based product seeing surging demand at a time when global supplies are limited. Demand and prices are also up for gasoline and jet fuel, as well as things like tires that are made of petroleum. The dynamic then becomes cyclical: to meet increasing demand trucks have to run more miles, which means they are burning more fuel and using more tires, which then creates the need for even more petroleum.
There are also fewer refineries, which process crude oil into diesel and other products, in the U.S. than were just a few years ago. There are just 124 now operating, down from twice as many in 1980, and down from 139 in 2016, according to the U.S. Energy Information Association. The northeast region is particularly spare, with just seven refineries today, down from 27 in 1982.
With fewer refineries, suppliers in the Northeast and other regions of the country are competing with Europe and South America for diesel supplies, says Patrick De Haan, the head of petroleum analysis at GasBuddy. Refineries in the U.S. send diesel to South America, in part because they don’t have to meet renewable fuel standard requirements, he says, rather than to the Northeast. Now, the Northeast is also competing for diesel with Europe, which lost some of its supply because of the war in Ukraine.
The story of why there are fewer refineries has become politicized, like just about everything else in the economy. One explanation is that a lack of antitrust regulation in the U.S. allowed refinery mergers and acquisitions that might have been good for their bottom line but not for diesel supplies in the U.S. “We have been following petroleum refining for years—the amount of consolidation is just staggering,” says Diana L. Moss, the president of the American Antitrust Institute, a progressive nonprofit that advocates for more antitrust enforcement. The federal government was lax on stopping refinery mergers, she argues. And, she adds, when industries consolidate, companies can raise prices because customers have fewer options.
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But Patrick De Haan, of GasBuddy, says that the closure of refineries has more to do with simple economics. The largest refinery on the East Coast, the Philadelphia Energy Solutions refinery, caught fire in 2019, one year after emerging from bankruptcy, and ultimately decided to close. Then, when COVID-19 hit and demand for oil plummeted, other refineries, including one owned by Royal Dutch Shell, in Convent, La., closed down. Others have closed over the years because when demand goes down, refineries are very expensive to run.
There’s little likelihood that refineries in the U.S. will be able to make more diesel, especially if demand for jet fuel and gasoline rise over the summer. The refineries in the Northeast are already running at 95% capacity. For prices to go down, the economy will likely have to go through what economists call demand destruction. Demand destruction happens when the price of something gets so high that people stop buying it. That ultimately leads to less demand and more supply, and lower prices.
Some businesses who have added fuel surcharges because of the cost of diesel say that they think that demand destruction is going to happen very soon. There are already signs it’s beginning. Poole Anderson Construction, a Pennsylvania firm that builds higher education and health care facilities, has had to raise costs of some big projects by as much as 30% because of the high cost of diesel and supply chain issues, says president Stephanie Schmidt. Now, some clients are electing to hold off on starting their projects, hoping that costs will ease soon. If enough businesses like them give up, they may get their wish.
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