The EU and the United Kingdom discuss the release of reserves due to the increase in the price of diesel

LondonIn London, filling a car with diesel now exceeds 2 pounds per litre at some petrol stations in the capital and its surroundings. This October 1st, the average price stood at 199.8 pence per litre, with significant differences depending on the station: some, increasingly fewer, still offered prices below 190 pence, while others already exceed 200. On September 29th, a petrol station in Chelsea, in the west of the city, reached the point of charging almost 3 pounds per litre. The figure is entirely exceptional, but it shows to what extent the market has become strained.

In approximately thirty days, the average price of diesel has gone from about 184.7 pence per litre to 200. For a driver filling a 50-litre tank, this represents about 7.5 additional pounds each time they go to the till. And if one takes a look much further back, the average price of diesel across the United Kingdom this Thursday is approximately 40% more expensive than in the month of March.

The data represents a historical high. And it widely exceeds the peak that had been recorded after the Russian invasion of Ukraine (2022). The problem, however, goes much further than the pockets of private drivers. Diesel continues to be the fuel that drives a large part of freight transport, agriculture, construction, and all kinds of industrial activities; diesel, in fact, is the link between the energy market and inflation. An inflation that this Thursday has contributed to the increase in the profitability of British and American Treasury bonds: the gilt 30-year British bond has exceeded 6%, a high since 1998, and the 10-year US bond has reached 5.33%, a high since 2002.

An erroneous forecast?

In 2023, the International Energy Agency predicted that by 2028 major oil companies would produce much more oil than would be purchased. Prices fell to levels too low, according to specialists, to attract investments in new wells and refineries. No forecast anticipated that the Strait of Hormuz, the main route for Middle Eastern crude to reach global markets, would remain almost completely blocked for several months. At the same time, although it had already been a year since Moscow attacked Kyiv, it was also difficult to foresee that the Ukrainians would retaliate against Russian energy facilities. These attacks have hindered the production and export of refined fuels from Russia. And although Europe does not buy them, due to sanctions over the invasion, this fuel was reaching the global market and, therefore, when it does not, the price rises.

The situation has been further aggravated by the threat from President Donald Trump to prohibit or restrict the export of diesel from the United States, which is the main supplier for more than a dozen countries, including Mexico, Canada, and much of Europe. One of those that would suffer most from this measure would be the United Kingdom, which imports 55% of the diesel it consumes, a third of which arrives from across the Atlantic.

To address this contingency, the United Kingdom held talks this Thursday with Germany, France, Italy, and Ireland regarding the possibility of releasing emergency diesel reserves, according to a spokesperson for the European Commission.

The United Kingdom's participation in any release of reserves would be limited, however. London only has reserves equivalent to about forty days of consumption, compared to the more than 200 days of France and Germany. The entire EU holds about 109 million tons of emergency crude and fuel reserves, according to Eurostat data.

Lack of refining

Furthermore, the United Kingdom faces another problem: refining capacity. The country currently has only four refineries. In the eighties, it had eighteen. An added obstacle is that one of these facilities, the Fawley plant in Hampshire, the largest in the country, has shut down this week for maintenance, an operation that will last until mid-November. The shutdown could temporarily increase the United Kingdom's need to import fuel from international markets. "The price would rise even further," said energy expert Ellen Fraser, from the consultancy Baringa, to the BBC yesterday.

But the diesel crisis is global. In Asia, countries like China and South Korea have a refining capacity much higher than that of much of Europe. Even so, they are not immune to global tensions either. If Europe needs to increase diesel purchases from Asian markets, international competition contributes to driving up prices in that region as well. Furthermore, the decisions by Chinese refiners to limit certain exports add uncertainty regarding available supply.

That is why the current crisis does not depend solely on the price of oil. The final cost of diesel is the result of an entire chain that includes crude production, maritime transport, refining capacity, exports from major producers, and available reserves in importing countries. When several of these elements fail simultaneously, prices soar. Gas stations in London –but in general all over the world– show this very visibly. In the short term, governments can resort to emergency reserves, temporary aid, or tax cuts to reduce the impact. But these measures can only cushion the effects of a crisis caused by much deeper problems.