Diesel, most associated with heavy-duty vehicles, faces more pressure than other petroleum products during geopolitical conflicts, magnifying its importance to several key industries, analysts say.
It is primarily used for lorries, trains, buses, boats and vehicles in the military, farming and construction industries. Diesel-powered generators are also critical backup power sources at factories, hospitals and large buildings, as well as in remote areas.
Like Brent and West Texas Intermediate, diesel is derived from crude oil. But unlike those two benchmarks, diesel does not have a global exchange price. Instead, its cost varies greatly by region, influenced by supply and demand trends, logistical costs and local taxes.
Conflicts add to these factors. The effective closure of the Strait of Hormuz, threats by Yemen's Houthi rebels in the Red Sea and the halt of exports from Russia are escalating supply concerns.
All things considered, diesel is “both the most affected fuel and the most important for the macroeconomic outlook”, said Bridget Payne, head of energy forecasting at Oxford Economics.
“Its supply is being squeezed by lower Middle Eastern refinery output and the loss of Russian exports, while its central role in freight, agriculture and industry means higher prices feed rapidly into transport, production and distribution costs … ultimately to broader consumer prices.”
The price of diesel varies widely, with costs in oil-producing nations largely lower than in net energy importers. As of last week, the average global price of diesel was about $1.47 a litre, according to data from industry tracker Global Petrol Prices.
The gap between the cheapest and most expensive, however, is stark. Venezuela, which has the biggest reserves of crude oil, has diesel priced at only $0.004 a litre, while in Hong Kong it costs $4.379.
Only 31 countries have diesel prices below $1 a litre, including Egypt, Lebanon, Syria, Iran and the Gulf states. Besides Hong Kong, Malawi is the only other country with diesel priced above $3, at $3.63.
Petrol prices, on the other hand, range from $0.023 to $4.062, with Libya being the cheapest and Hong Kong still the highest. The global average is $1.47.
By early July, when a 60-day framework agreement was signed by the US and Iran, Brent had slid about 40 per cent from its wartime peak and returned to prewar levels. The price of diesel, however, fell by only 15 per cent and remains substantially elevated, Ms Payne said.
This was because the recovery in crude exports did not immediately translate into higher refined-fuel supply, she said. “Refiners secure crude and set operating plans several weeks in advance, so supply returned faster than they could raise purchases and run rates.
“This temporarily weighed on Brent prices, but the additional crude could not immediately be converted into diesel, jet fuel and gasoline.”
'Real inflation story'
Petrol is made of a mix of alkanes and cycloalkanes – types of saturated hydrocarbons – with a chain length of between five and 12 carbon atoms, with a boiling point between 40°C and 205°C, according to the European Automobile Manufacturers' Association.
Diesel, meanwhile, is made of alkanes containing 12 or more carbon atoms and boils at between 250°C and 350°C.
“Refined product cracks and margins surged to four-year highs in early July, as increased crude supplies pushed oil prices sharply lower, while product markets remained tight,” the International Energy Agency wrote last week.
Renewed hostilities between the US and Iran led to Brent and WTI rising by almost 16 per cent on a weekly basis last week. But refined fuels remain the “real inflation story”, according to Saxo Bank.
“If crude oil tells only part of the story, refined products continue to paint a much tighter picture,” said Ole Hansen, head of commodity strategy at Denmark's Saxo Bank.
“Unlike crude oil, refined products face far fewer mitigation options. Several Middle Eastern refineries remain affected by the continuing conflict while Russia's diesel export restrictions continue to constrain global availability.”
Refining capacity globally also remains relatively limited, preventing crude supply increases from quickly translating into additional diesel and gasoline production, Mr Hansen said.
“As a result, refining margins have expanded sharply … for consumers and industry alike, it is refined fuel prices – not crude itself – that ultimately determine the economic impact of an energy shock.
“This distinction matters because elevated diesel and gasoline prices feed directly into freight costs, manufacturing, agriculture and inflation, potentially creating a more persistent drag on economic activity than crude prices alone would suggest.”
It remains unclear how the conflict will play out, but Oxford Economics said any drop in fuel prices would require a sustained recovery based on a “meaningful improvement in Hormuz transit and the restoration of refinery throughput”.
It also warned of a “growing tail risk” of acute diesel shortages, which could constrain freight, agriculture and industrial production.
Elevated diesel prices, as well as petrol and natural gas, “have the potential to slow economic growth, squeeze corporate margins and weaken consumer spending”, Mr Hansen said.
