MICHEL MARTIN, HOST:

If you've been paying attention to prices at the pump, especially if you use diesel, you probably already know this. There's a big difference between the price of gasoline and diesel. That's because right now, the U.S. is experiencing one of the biggest shortages of diesel since 2008. Currently, there are only 25 days of supply left, and that number is dropping fast. And this matters even if you don't use diesel yourself, because it's an essential part of the supply chain. And as temperatures begin to drop, thousands of households across the country will be using it as their primary source of heat.

So what will it mean if things continue like this? And will we see something like this happen to gasoline? To help us think about this, we have Chunzi Xu. She covers the oil industry, particularly refined products, for Bloomberg News. And she is with us now. Chunzi Xu, thank you so much for joining us.

CHUNZI XU: Hi. I'm glad to be here.

MARTIN: So can I just start off with a basic question for people who aren't familiar with this? What exactly is diesel, and why is it so important as an energy source?

XU: Diesel is the fuel of the economy, and it's in just about everything that we use. The bulk of manufactured and retail goods move day and night on trucks and trains powered by the fuel and manufacturing. Farming and heating also relies on diesel. And diesel is so deeply embedded in American life that its consumption is often seen as a barometer of the country's overall economic activity. Without it, the supply chains would collapse, and things simply wouldn't work.

MARTIN: Well, if it's such a critical energy source, how did we get here? Why this shortage?

XU: Yeah. So for that, we have to go back to the early days of the pandemic. Gasoline and jet fuel demand evaporated overnight. And some companies closed around 1 million barrels per day of refining capacity during the pandemic. And that has created a shortfall in the ability to make gasoline and diesel at a time of resurgent demand. So supplies were already low when Russia invaded Ukraine, and that's prompted countries to sidestep Russian oil and instead turn to the U.S. for fuel. And in the short term, we've also had a pretty heavy refinery maintenance season that's cut into both domestic production and imports from overseas.

MARTIN: So I can imagine that this is a very difficult issue for the Biden administration. So do they have any options here? I mean, obviously, it's a campaign issue. It's a pocketbook issue. Even if you don't use diesel yourself, you're obviously affected by it, right? And, you know, with winter coming, cooler temperatures coming, this has to be a major concern. Does the administration have any options here? Are they responding to this, and if so, how?

XU: The Biden administration has a large toolbox, but they're filled with some pretty blunt instruments. For example, they could release 1 million barrels of fuel of gasoline and diesel each from emergency reserves in the northeast. And that could help the region in a pinch. But they will probably want to wait for the shortages to become much worse when the weather gets colder. But the relatively small volume available in these reserves mean the relief won't last for very long. And then they could also expand these fuel reserves. That would provide a much-needed cushion of supply in the most vulnerable region and (inaudible) shortages. But building up government supplies out of domestic production will reduce exports and drive up global prices further.

And then the most radical and perhaps most controversial option would be to limit exports. This could divert a lot of that Gulf Coast production toward the East Coast, but will almost certainly drive up international prices and hurt our allies in Europe and Latin America. Not to mention that parts of the U.S. on the East Coast and West Coast do rely on international imports that will become more expensive. So critics say that an export ban could backfire and actually drive up pump prices in areas of the country.

MARTIN: Wow. This is a difficult dilemma. So let me pivot to gasoline prices now, because, you know, this summer, we saw such an uptick. You know, it was a big story. It was almost like we were - people were talking about it all the time. But that seems to have calmed down. Is that correct? My assumption is correct there? Is my observation correct that prices seem to have eased?

XU: Yeah, prices have eased from record highs this May and June, but they are still much higher than they were a year ago and very high for election season.

MARTIN: And also, some parts of the country, is it accurate to say that the prices still haven't eased in some parts of the country? Is that accurate? And why is that?

XU: Yeah, that is accurate. On the East Coast, West Coast and - we've done some research recently in swing states where the decision on who gets control of Congress is particularly crucial. And that's because, again, similar to diesel, inventories are very low. And again, the lack of refining capacity, a summer of drawdowns - suppliers were unable to build up supply because of a backward-dated market structure that incentivizes people to sell now instead of holding on to fuel. And so we're in a situation where supplies are so tight that some terminals on the East Coast have started to run out of fuel. People are unable to fill up their tanks.

MARTIN: So normally, gas prices ease. But with all these elements going on at once, it seems like that's not really going to happen.

XU: Yeah. So right now, the price increase is directly tied to the tight supplies, and that's even happening when oil prices have come off. And supplies are going to tighten further over the next few months because Europe is going to pivot away from Russian fuel more so than they have done with their embargo coming in the next few months. And that will shift more of the burden of global supply onto U.S. refiners. And particularly on the East Coast, where supply is tightest and most reliant on foreign imports, the risk of actually running out of fuel is higher than ever because stockpiles in the region have been at record lows since April for diesel and a decade low for gasoline. And we're seeing shortages up and down the coast. And suppliers are rationing fuel and initiating emergency protocols. And winter hasn't even begun.

MARTIN: Let's just finish where we started, talking about diesel. As we said, as of today, as of right now, 25 days of supply left. What's going to happen?

XU: The economy runs on diesel. So when diesel gets expensive, everything costs more. And when we run out of it, supply chains collapse, and things simply don't work. If the fuel scarcity gets worse and has the potential to drive inflation, in a worst-case scenario for consumers, daily life becomes increasingly expensive while in the middle of a recession that's supposed to suppress demand and cool inflation.

MARTIN: That was Bloomberg reporter Chunzi Xu. She covers the oil industry, especially refined products, for Bloomberg. Chunzi Xu, thank you so much for talking with us.

XU: Thank you for having me. Transcript provided by NPR, Copyright NPR.