The Retired Investor: Price of Diesel Will Fuel Inflation

Diesel fuel is now above $5 per gallon. You might think that doesn't matter to you, but that would be an erroneous and costly assumption. That's because diesel fuels the main engine of our economy, commercial transportation.

 

If you think gas prices are soaring due to Donald Trump's invasion of Iran, consider diesel. Diesel is rising faster because its price reacts more quickly and sharply to global shipping risks. Diesel supply was already tight before the war because winter increased demand for heating oil, which is nearly identical to diesel.

 

Almost 70 percent of all goods moving across the U.S. travel by freight. Trains and trucks are the most common methods of transportation. Anything powered by diesel engines, which provide more useful energy per unit of volume, is subject to immediate price increases. That means most construction, farming, boats, barges, buses, and military vehicles, as well as equipment, are diesel-powered. In 2023, Diesel fuel accounts for 23 percent of total energy consumption in the U.S. transportation sector and 6 percent of total primary consumption, according to the U.S. Energy Administration.

 

The rising costs of diesel are jacking up the operating costs of major companies as you read this. In a short time, those costs will be passed on to consumers, affecting everything from retail goods and groceries to construction costs and commodities. FedEx and UPS are already raising prices.

 

Let me give you a taste of what's to come. The Producer Price Index for February 2026, announced mid-week, rose 0.7 percent — twice the 0.3 percent economists expected. The Bureau of Labor Statistics said 30 percent of the increase in processed goods was due to a 13.9 percent rise in diesel fuel. That was in February, before the war started!

 

Iran understands that keeping the Straits of Hormuz closed to the U.S. and its allies drives up shipping risks and, consequently, oil prices. This dynamic is a key reason oil prices remain elevated.

 

This week, Donald Trump's demand that America's allies work with him to create an international convoy of warships to perform escort duty through the straits was met with silence. Oil prices rose again as his request was ignored and/or simply rejected. Why not do it ourselves?

 

The naval experts say it is too dangerous. Swarms of Iranian drones would overwhelm the vessel's defenses. My own opinion is that the U.S. simply does not have the ships to perform both security and escort duties simultaneously, and the Iranians know that. I suggest readers read my February column, "What is gunboat diplomacy without boats?" on the sad shape of shipping in the U.S., for further understanding of that issue.

 

On Wednesday, the president announced he would temporarily waive the long-standing Jones Act, which requires that goods be transported between U.S. ports by U.S. vessels. With fewer than 100 Jones Act-compliant vessels, the hope is that the decision would enable the U.S. to move fuel more easily.

 

The temporary suspension (for 60 days) of this requirement would allow non-U.S. international tankers to carry fuel, natural gas, fertilizer, and other goods to the U.S. Given that there are fewer than 100 Jones Act-compliant vessels, the hope is that the decision would help the U.S. move fuel more efficiently. But wait, you might ask, isn't the U.S. self-sufficient in energy?

 

Yes and no. While the U.S. produces enough energy, we can't fully use it because our refineries are designed for heavier Middle Eastern crude, not the lighter shale oil we extract. Moving fuel helps, but it doesn't solve the refining mismatch.

 

Nonetheless, every little bit helps, I guess, but it won't fix diesel prices, nor will it roll back the across-the-board price increases I expect in the weeks ahead. I suggest Americans batten down the hatches because the twin storms of higher inflation and a slowing economy could be just around the corner.