U.S. Diesel Prices Surge to Over $6 Per Gallon, Setting Record; Middle East Turmoil Drives Prices Out of Control
The national average retail price of diesel in the U.S. has recently surpassed $6 per gallon, with the latest reading exceeding $6.3, marking the highest level on record; a year ago, the average was only $3.7, representing an increase of nearly 70% within a year. In some areas of California, the price surge is even more severe, with at least six gas stations in suburban San Diego's Scripps Mesa quoting diesel at $9.999, hitting the physical limit of the pricing display.
The direct driver of the uncontrolled rise in diesel prices is the worsening situation in the Middle East. Military conflicts between the U.S. and Iran have escalated again after a brief lull in the summer, and tanker passage through the Strait of Hormuz continues to be obstructed. Saudi Arabia's daily crude oil production has dropped from about 10 million barrels before the conflict to 6.2 million barrels in August. The benchmark Brent crude oil price reached between $105 and $109 per barrel this week, up more than 50% from around $70 before the conflict erupted in February. According to S&P Global Energy forecasts, Middle Eastern crude oil production is unlikely to return to pre-conflict levels before the end of 2027.
The average diesel price in California has reached $7.76-$7.91 per gallon, approximately $1.8-$1.9 higher than the national average, with an increase of about $2.81 this year. There are structural reasons behind this: Phillips 66's refinery in Los Angeles is set to cease crude processing on October 16, 2025, with a daily capacity of 139,000 barrels; Valero's refinery in Benicia is also scheduled to shut down by the end of April 2026, with a daily capacity of 145,000-170,000 barrels. The two refineries together account for a loss of 284,000 barrels per day of traditional diesel capacity. According to the California Energy Commission, the current operational refining capacity in the state is about 1.338 million barrels per day, with an additional 372,000 barrels per day of capacity idle.
California's own low-sulfur, low-aromatic diesel formulation standards (with a maximum aromatic content of 10% since 1993 and a sulfur content limit of 15 ppm since 2006) make it difficult for out-of-state refineries to supply products directly, and there are no finished oil pipelines from the Gulf Coast to California, meaning diesel supplies mainly rely on maritime transport. Coupled with a 13% diesel sales tax (compared to only 2.25% for gasoline), every price increase is amplified by the tax rate, creating a self-reinforcing cycle. Meanwhile, the U.S. Strategic Petroleum Reserve has fallen to its lowest level in 44 years, and there are no dedicated diesel strategic reserves globally, significantly weakening supply buffer capacity.
Freight rates have begun to transmit to end consumers. Amazon, UPS, FedEx, and the U.S. Postal Service have all raised fuel surcharges; since diesel costs account for 15%-30% of total food transportation costs, retail prices for perishable goods such as meat and fruits and vegetables are the most responsive, while cost pressures are gradually becoming evident in categories like clothing, cosmetics, and furniture. Analysts predict that if the conflict escalates further, the additional daily costs for U.S. consumers due to rising diesel prices could increase from the current over $700 million to $1 billion.
This round of price increases is essentially a bidding war for limited diesel supplies: refinery capacity reductions are occurring against a backdrop where demand (transportation, agriculture, industrial oil) has not simultaneously shrunk, and the supply-demand gap is directly reflected in the simultaneous rise of futures and spot prices. Funds betting on energy and refining stocks are the primary beneficiaries; however, logistics companies, agricultural producers, and end consumers relying on diesel transport are under continuous pressure, with some businesses already passing costs onto downstream customers through surcharge mechanisms. As long as the risk premium in the Strait of Hormuz does not dissipate and the capacity gap in California's refineries is not filled, diesel prices are unlikely to peak.
Monitoring agency GasBuddy reports that as of September 10, at least six gas stations in California have diesel prices hitting the display limit of $9.999 per gallon, marking the first widespread "price explosion" recorded by the agency; during the same period, the national average price for regular gasoline was about $4.27-$4.29 per gallon, with the premium for diesel relative to gasoline continuing to expand.
Source: Public Information
ABAB AI Insight
The exit of refineries is not an isolated event, but rather a continuation of a long-standing trend: in recent years, several refineries in California have ceased traditional refined oil production in favor of renewable diesel, with Phillips 66's Los Angeles plant and Valero's Benicia plant being the latest examples, together removing 284,000 barrels per day of traditional diesel capacity. Meanwhile, Saudi Arabia, historically a "swing producer," has typically increased production to stabilize oil prices during geopolitical conflicts, but this time its production has dropped from about 10 million barrels per day before the conflict to 6.2 million barrels per day, indicating that its role as a "stabilizer" has clearly failed under the current circumstances.
The direction of capital movement is noteworthy: refinery operators have not reinvested funds into expanding traditional diesel capacity but have chosen to permanently shut down or convert to renewable diesel facilities, which often receive federal low-carbon fuel subsidies, making the economic case more favorable than continuing traditional diesel production. At the same time, funds betting on crude oil and refining crack spreads have rapidly flowed into the futures market, while the U.S. Strategic Petroleum Reserve has been depleted to a 44-year low without any large-scale replenishment actions, indicating that the resource mobilization of policy tools is clearly lagging behind the speed of market gap expansion.
Similar scenarios have occurred in history: after Russia invaded Ukraine in 2022, Europe experienced a similar structural shortage of diesel and heating oil, rooted in the same combination of refinery capacity exits and geopolitical conflict; there has also been a long-standing "California premium" phenomenon in the U.S., where due to independent formulation standards and lack of pipeline capacity, California fuel prices are systematically higher than the national average. The current stage of the industry reflects a dual contraction period where refining capacity in developed countries continues to clear under environmental transition pressures, compounded by geopolitical shocks that amplify vulnerabilities.
The essence of this round of changes is the transfer of pricing power from the crude oil production side to the scarce refining capacity side. For decades, the focus of oil price negotiations has primarily been on the OPEC+ crude oil production share disputes; however, as more and more refineries permanently convert intermediate distillate capacity to renewable fuel facilities, even if crude oil prices fall due to conflict easing, the scarcity of diesel, as a "last mile" product, will not disappear simultaneously—capacity exits are irreversible capital decisions, not switches that can be turned on and off at will, which is the fundamental reason why the current diesel crack spread remains high and is predicted to remain unrepairable until 2027.
ABAB News · Cognitive Laws
Capacity exits are irreversible; demand returning does not help.
Pricing power always flows to the most scarce link.
Regulatory costs will not disappear; they will only be transferred to the bill.