The national average for a gallon of diesel in the U.S. reached $5.85, surpassing the previous record of $5.81 in June 2022, according to AAA data. The record high is significant because diesel powers much of the industrial supply chain in the United States via the so-called “three t’s” of the economy: trains, tractors, and trucks, according to Patrick De Haan, petroleum analyst at GasBuddy. A gallon of diesel cost $3.76 on the eve of the war with Iran. It’s now up more than $2. When diesel drives the supply chain and that cost goes up, De Haan says, “There’s going to be a trickle down.”

Impact on Food and Transportation Costs

Higher diesel costs are spilling over into the cost of food and transportation, and Much of the farm equipment relies on diesel, so higher diesel prices risk making the cost of farming—and eventually food—more expensive. The rising price has also stretched school district budgets as 90% of the nation’s 500,000 school buses run on diesel, according to an analysis from the Federal Reserve Bank of New York.

Energy Prices and Inflation

Americans are already experiencing sustained inflation. Inflation across the economy was up 3.4% over the past year, according to the latest Consumer Price Index data released in August, while Energy prices, including diesel, are up significantly, which is eating into people’s budgets, especially among lower-income households. Prices for most types of petroleum products have gone up since the war with Iran began in late February, limiting how much could flow through the Strait of Hormuz. But other supply chain pressures have made diesel uniquely exposed to price hikes.

Global Supply Chain Effects

With the Strait of Hormuz partially blocked, buyers are flocking to U.S. oil, pushing U.S. crude exports to a record high of 5.2 million barrels per day, according to the Financial Times. European and Asian countries are seeking U.S. barrels as a Middle Eastern alternative; the surge in U.S. crude exports could also raise upward pressure on domestic oil prices and inflation. Meanwhile, in Japan, regular gasoline prices hit a new high after 16 consecutive weeks of increases, reaching 186.5 yen per liter on Sept. 6, according to the Ministry of Economy, Trade and Industry (METI).

Japan’s government has been subsidizing gasoline since January 2022; In response to the surge, the government will begin expanding gas wholesaler subsidies on Sept. 7 to curb prices. METI expects prices to fall around mid-September, with the national average dropping to around 180 yen by the month’s end and further easing to around 175 yen by the end of October. In Central and Eastern Europe (CEE), the Middle East conflict is driving up energy prices, which in turn will push inflation higher in import-dependent economies, according to ING THINK economic and financial analysis. Higher oil prices will delay rate cuts and put pressure on currencies and interest rates, particularly in Hungary, Romania, and Turkey.

The CEE region is traditionally highly exposed to higher oil prices due to its small size, dependence on energy imports, and less-anchored inflation expectations compared to developed markets. In energy markets, an aggressive price response is expected when markets open. ICE Brent could trade in the region of $80-90/bbl immediately, with risks of further strength towards $100/bbl and ultimately $140/bbl in a worst-case scenario, if there are significant and extended oil supply disruptions. European gas prices could see more aggressive moves, given the risks to Qatari LNG flows and the market being relatively tighter.