The coming oil shock

0:00Noel King:There is a time bomb lurking in the American economy. It has the potential to make almost everything even more expensive, and some experts say it's about to explode. You see it every time you gas up your car, but you probably ignore it. Diesel. The price of diesel has gone up and up and up since the war with Iran started. Diesel powers the American economy, and in about a month, it will almost certainly power Americans to vote in midterm elections where they say the high cost of living is their biggest concern. Aware that a wipeout is possible for Republicans in November, President Trump is up to his old tricks, trying to meddle in the U.S.

0:39Noel King:economy. Coming up on Today Explained from Vox. Well, it's I ran this and I ran that. Well, I ran out of damn money, tried to start selling pictures of my feet. I might not have money for food or to hang out with my friends, but I always have money for candles. I always have money for candles.

0:59Noel King:Support for Today Explained comes from Anthropic, the team behind Claude. Anthropic is a public benefit corporation founded on a hard question. That question is, how do we make sure AI goes well for people? They're working on it, publishing what they find, even when it's uncomfortable. There's hope in hard questions. Ask your hard question at claude.ai.todayexplained. That's C-L-A-U-D-E dot A-I slash Today Explained. Megan Rapinoe here. This week on Why Are You Like This, I am talking with comedian Amber Ruffin. We dig into all the twists and the turns of her journey from losing the White House Correspondents' Dinner and missing out on SNL to becoming a writer for Seth Meyers and getting her own Peacock TV show.

1:46Plus, I'm giving you a behind-the-curtain look on Rebecca Hunt's documentary, About Me. Check out the latest episode of Why Are You Like This wherever you get podcasts and on YouTube.

2:00This is Today Explained.

2:28diesel is primarily used in trucks and in farming equipment and in industrial machinery that essentially allows us to ship things from place A to B. Diesel is a fuel that I think a lot of people just don't pay attention to until something goes bad. And that's what we're facing now because the price of diesel has spiked and that affects trucking in particular. And most products in America are shipped along the road via trucks. It seems like every single week we We start the video saying the same shit. Fuel prices again hit a record high. I'm like a damn auctioneer over here in my head trying to figure out how much money this truck's going to take.

3:04Hey, hit the high, hit the high. Oh, apparently it's$175. This is getting damn ridiculous.

3:12Noel King:OK, so we're talking about serious rises in prices here. What is actually happening with diesel? Why is this going on? Obviously, there was one major geopolitical event this year that disrupted the entire energy economy, which is the U.S. and Israel attacking Iran. Right from the beginning, we projected four to five weeks. Iran is, of course, at the headquarters of the oil economy in some ways. But primarily, the thing you have to look at is the closure of the Strait of Hormuz and then the jockeying over it that's happened in the months since then. With the war now passing 200 days, Iran claiming it's struck an oil tanker trying to transit the Strait of Hormuz.

3:53As President Trump rejects Iran's proposal for a seven-day ceasefire to reopen the critical waterway. Once they closed that strait, that disrupted the entire global energy economy because that strait handles a substantial portion of the shipping that basically where they bring the supplies out of the Middle East and ship them to other people. And so that affected diesel prices, gasoline prices, affected jet fuel, affected effectively everything that is based on crude oil. I don't know how much more they can take, but, you know, whatever it is, it doesn't matter. And I'm not affected by the election.

4:28Noel King:Who are the people right now that are profoundly freaked out about the cost of diesel? Well, first off, I think certainly truckers are freaked out because their cost of doing business is going much higher. While nationwide, word of a possible truck driver's strike is spreading. If there's no fright, nothing move. No police ticket, no grocery store, nobody eat, nothing move. No construction on the highway. Trucking is a fundamental. And I think also farmers are freaked out because they're already facing real pressures from the trade wars that are going on that President Trump started, from things that are totally out of control, like climate issues that have caused their costs to go higher.

5:08And all of a sudden, the price of diesel affecting farmers as well. So that then eventually affects the price that they charge, which ultimately gets to the consumer because it ends up costing more to pay for things like an ear of corn. We're in the middle of harvest, the time that we use the most diesel. So it's really hitting us. I mean, we don't make any more for a bushel of corn, wheat, a pound of beef. So, yeah, that comes straight out of our pocket.

5:35Noel King:How stark do you think this might be? Like in a month or two months, do you think I could go down to the Walmart and I see that something I buy all the time is now a dollar more expensive? Or there's like a sign saying diesel is expensive. So we're adding a, you know, a 10 percent surcharge. Like, what do you think this actually might look like? I think that the impact is imminent. Oh, this flows through very quickly. Usually, you know, we're not talking about months. we're talking about weeks, if not days, before people will start to notice increases, especially in the grocery aisle. I think that's the first place people will notice it because fresh food has to be shipped on a weekly basis.

6:12And so I think diesel prices are going to have a big effect on food inflation. This is coming off of, of course, several years of food price increases that we experienced in the wake of the pandemic. And then we're also now barreling toward the holiday shopping season and holiday shopping season is going to be affected by this as well, because if a toy, for example, was made with some sort of resin that is affected by the cost of crude oil, which also affects the cost of diesel, and then it's shipped over the road to Walmart through a truck that uses diesel, all of these things add up and ultimately are gonna probably lead to higher prices.

6:46We've also got an issue with heating oil, which is a fuel that is used primarily by households in the Northeast, where essentially they're using that to heat up their home. And heating oil and diesel and all of these, you know, these oil-based products are caught up in this vortex right now, that ultimately is not something that the ordinary person can do that much about.

7:09Noel King:Okay, this is super interesting because it is everything. Power is the U.S. economy, like you said. When something is this crucial, one wonders if there are alternatives. Do the industries that rely on diesel have any other options? There's definitely alternatives to diesel, but in many cases, they're not alternatives that can be switched too quickly. Because if you think about the trucking industry, they're invested heavily in these big rigs that are taking products from places A to places B. And so if you are invested in a truck, yes, you could theoretically switch, but you're going to be basically scrapping this huge investment you've made.

7:53And so, you know, diesel trucks are not really going anywhere immediately. Also, a lot of times they're simply still the best way to get somewhere. And because you can switch to rail, for example. So railroads are definitely a competitor to trucking, but really only best for certain types of products. Now, there are other types of trucks that you can buy. Certainly, maybe a compressed natural gas or liquid natural gas. LNG is alternative fuel for some trucks and biodiesel in some cases can actually be good. And then, you know, maybe down the road, hydrogen or something. That's really more of a futuristic thing.

8:32Now, in the short term, there is there is the possibility of using electric trucks that is starting to become more realistic. In fact, just in recent days, Tesla began major production of the Tesla Semi, which is an electric semi truck that we've been waiting for for years. So this is really going to be a game changer truck. And also, it's going to make a ton of sense economically, because the cost of electricity per mile is much less than the cost of diesel, especially in these crazy times. I remember covering this in 2018 when Tesla debuted the Tesla Semi, and we all thought this was going to be coming out soon.

9:08Production begins 2019. Well, it's taken nearly a decade for this to finally become a reality in large proportions, but the Tesla Semi is an electric truck that could be an alternative for some. And then, you know, there's other companies that are making electric trucks, too. So that could be sort of viable. But the problem with electric trucks is that the battery is so heavy that ultimately it's still tough for electric trucks to compete with diesel on shipping heavy items. items. It was often joked that when the Tesla Semi first debuted, the very first thing that it shipped was a bunch of bags of Cheetos because Cheetos was so light and they couldn't handle any extra weight.

9:53And so they had that deal with PepsiCo and I'm sure PepsiCo needed those trucks, but it wasn't ready at the time to ship anything expensive. It's a lot better now, but again, the issue still is because of how heavy electric truck batteries are going to be, that is still going to make them somewhat limited in their capacity. But I do think that you're seeing some demand for the Tesla Semi that indicates maybe it will become more competitive with diesel because of the price of diesel now.

10:20Noel King:Okay, so when prices are high, generally, somebody somewhere is benefiting from high prices. Who is it in this case? I think that the people who are benefiting here from diesel prices being so high are these refineries, which a lot of people don't really think about that much because they're sort of the middle person, you would say, in this entire process. They're the ones who essentially take the crude oil and turn it into usable diesel for a pickup truck or for a semi truck or for farming equipment. And when that refinery business is experiencing such high demand right now, there's limited capacity to do this.

11:00And I think because of some of these issues in Russia. Where Ukrainian drone strikes are hitting critical energy facilities. Wow, look at the lid blowing off of that. And in Iran, of course, and in other places throughout the world, there's just limited diesel refining capacity right now, which means that there's just not really anywhere else to do this, and therefore they can charge higher prices. So that means higher profits for the refineries.

11:24Noel King:Okay, so all of this is shaping up to potentially mean a really ugly winter. One thing I think about a lot is that American consumers will accept a lot of pain. Like we had COVID, the inflation, the shortages of literally everything. Then we had the war in Ukraine and prices go up again. People still, however, keep spending money, even as we predict like, oh, God, this one's going to get bad. People still go to the store and they spend money and maybe they gripe, but it's not like we're out in the streets. Do you think that this coming diesel shock, imminent, your words, is going to be different?

11:59Well, I will say that, and I'm not an economist, but there is this interesting phenomenon emerging in the economy where consumer sentiment is rock bottom, but consumer spending is actually really strong. And so there's this gap emerging between what people say they feel and between what they're actually doing, which is in this case, they're still actually spending. Now, maybe it's sort of YOLO spending. They're thinking like, well, you know, I really don't got much going for me. I'm just going to keep spending. You know, I mean, I've experienced that a little bit. So, hey, I don't blame anybody.

12:32You know, hey, at the end of the day, I think that that the numbers matter a little bit more than what people say they feel. But I do think people are going to hit a breaking point at some point because they simply can't continue this level of spending if the underlying fundamentals of the economy start to collapse.

13:00Noel King:Axios' Nathan Bomey. Coming up next, President Trump's wild idea to lower diesel prices.

13:28Support for the show comes from Quince. Fall is the perfect time to pull out some of those items of clothing that just work with everything. from the sweater that's perfect for when the temperature drops to the coat that goes with everything. These are the clothes that make getting dressed easy, and that's exactly what Quince does best. Quince focuses on high-quality wardrobe staples made with premium materials like 100 % Mongolian cashmere, organic cotton, and merino wool. Nisha, how was your Quince experience? I got the washable silk skirt from Quince. And it's a great transitional piece. I can wear it in the summer and also into the fall.

14:16You can dress it up or down. It can really work for a casual outfit or dressing up for the office or holiday parties even. So it's a great piece that I'm really enjoying. Find your next fall favorites at Quince. Download the Quince app for app-exclusive offers or go to quince.com slash explain. Get free shipping on your order and 365-day returns. Now available in Canada and the UK, too. That's quince.com slash explain.

14:53Noel King:Support for TakeSplain comes from Shopify. Sitting on a great business idea can take up a lot of mental energy. Shopify can help you extract that idea and turn it into something real. Everything you need to start selling is included and ready from the moment your first customer is ready to pay you. Shopify's templates and AI tools get you a great looking site up and running fast. No coding needed. If you have questions, Shopify's built-in AI assistant Sidekick is there to help you build, troubleshoot and keep moving. All of Shopify's tools are conveniently located in one easy to use platform. Just sign in and start managing all aspects of your business right away.

15:28Noel King:You can join the millions of businesses worldwide who rely on Shopify to build successful online stores. This includes household names and small businesses just getting started. So if you're ready to hear the s***, head over to Shopify.com slash explain to start your free trial today. That's right. Start your free trial at Shopify.com slash explain. That's Shopify.com slash explain.

15:54Noel King:Support for Today's Explained comes from Anthropic, the team behind Claude. Every big AI headline is a lot of important questions like, what does this mean for my job? Should I even be using it? Anthropic is a public benefit corporation founded on asking those kinds of questions. More specifically, they say, how do we make sure AI goes well for people? So Anthropic sat down with some people. They did more than 120 ,000 interviews. They asked those people for their hopes and fears, and they don't gloss over what they heard. Anthropic publishes that data even when it's uncomfortable. What came back, they say, wasn't just fear.

16:33Noel King:It was curiosity with questions like, could this cure diseases? Or could my kids have a better future? Perhaps there is hope in asking hard questions. Ask yours at claw.ai slash todayexplained and keep thinking. It seems like every single week we start the video saying the same shit. Today Explained. To get on hit a record high. When is this going to stop? This is absolutely crazy. Colin Eaton covers the oil and gas industry for The Wall Street Journal. Colin's been reporting on an idea that President Trump has floated, a diesel export ban. So a diesel export ban would basically stop shipments of diesel to overseas customers.

17:15And it's unclear at this point whether it would be compulsory or voluntary. Last Tuesday, Trump said he's in favor of banning American exports of diesel. Well, I've gone for that too. I've said let's not send out the diesel. We make a lot of diesel. Over the weekend, he told reporters again they're seriously considering it.

17:33Noel King:So what about an export ban on diesel? Well, we're thinking about it very seriously. Basically, yeah, they think that they can inject some juice into the arm of agriculture by lowering diesel prices ahead of the midterms. And that might shore up some votes for them in the Midwestern states. And there's something to that. Goldman Sachs said that they estimate banning diesel exports would bring prices down about 25 cents a gallon each week that the ban is in place. But that's really just a temporary effect. Let me get just a bit more detail on the actual logistics of what a ban would mean. The United States sells diesel where in the world?

18:12Noel King:How does it get there? What would this mean if I am a consumer in one of the places where the U.S. sells diesel to? Right. So the U.S. oil refineries, they send diesel on gigantic tankers to Europe, to Asia, and they have a lot of global customers. The United States is actually one of the last major suppliers of diesel right now because Russia and refineries in the Middle East are unable to get supplies out. In Russia, Ukraine has struck refineries with sort of long-range missiles. And in the Middle East, Iran has hit some refineries in neighboring countries and has closed the Strait of Hormuz.

18:57So what this means is that the U.S. imposing restrictions on diesel exports would essentially bring prices higher for overseas countries because right now we're a major supplier for the world, essentially.

19:12Noel King:OK, so we think of big oil companies as some of the more powerful operators in the American economy. This sounds like the president of the United States potentially saying, hey, I want you to sell less overseas or not sell overseas. It's like the president is telling the oil companies what to do. What are you hearing from the oil companies themselves? Oh, I mean, the oil companies hate the idea of banning diesel exports. I mean, they've been worried since the Iran war started in late February that the admin would implement some sort of restriction on exports to help shore up prices. So, yeah, we were surprised because I think, if anything, it provides just temporary relief.

19:57An export ban would actually potentially raise fuel prices for American farmers and American consumers. And that's the exact opposite thing we should be doing right now. They pushed back on it a lot with the admin. And they got reassurances several times from the administration that they weren't considering it. And then last week at the United Nations General Assembly, Trump says he's in favor. I've called for it. I've called for it within my people. I've been talking about it. They've sort of clarified their position. Energy Secretary Chris Wright is spearheading the details on this. and he's saying it could be a voluntary pullback in diesel exports rather than an outright ban, rather than a government rule imposed on these companies.

20:43But the industry has been concerned that this could look like collusion. This could look like market manipulation to bring down prices or raise prices overseas. Some have noted that there's nothing on the books that would prevent them from colluding in a way that would harm markets overseas.

21:08Noel King:Hmm. Hmm. Wow. I think they have it built in. Anytime someone suggests sort of a voluntary multi-company effort to bring prices up or down, it sounds like market manipulation to them. And they're just worried about the after effects of that.

21:28Noel King:So you mentioned Energy Secretary Chris Wright. We know that President Trump is openly saying he's considering this. What are the other people surrounding the president telling him about this? Do we know? It's unclear exactly where the support for a diesel ban is coming from, but we are hearing that it's coming from the more politics minded folks in the administration. What we do know is that there's been sort of broad Republican support for the idea after Senator Chuck Grassley of Iowa pushed the idea. With diesel$6.57 in Iowa, why doesn't President Trump put an embargo on diesel exports like presidents in the 70s put embargoes on ag products because food prices were inflated?