Earlier this year, as the energy crisis sent gasoline prices soaring, Washington began waiving the very fuel regulations it had insisted were necessary. The government relaxed summer-blend requirements, expanded the ability to sell ethanol blends, and eventually acknowledged that the country faced “extreme and unusual” fuel supply circumstances. Now diesel has surged to around $6.50 per gallon, and suddenly Washington is scrambling again, this time allowing broader use of dyed diesel that is normally restricted to farms, construction equipment, and other off-road uses.
The EPA acknowledged in August that U.S. operable refining capacity was about 800,000 barrels per day LOWER than in January 2020. Refinery utilization ran above 96%, meaning there was very little spare capacity when something went wrong.
Diesel is far more economically dangerous than expensive gasoline because it is embedded in virtually everything you buy. The consumer may never personally purchase a gallon of diesel, but he pays for it every time something has to be grown, manufactured or transported.
There is already confusion over what dyed diesel actually means. The red dye itself is not some inferior fuel that will suddenly destroy a diesel engine; it is primarily a marker used so authorities can identify fuel that was sold without the highway taxes normally imposed on road diesel. If the underlying fuel meets the same ultra-low-sulfur specifications, the dye itself is not the problem. If government can suddenly waive restrictions when diesel becomes scarce and expensive, how much of the barrier was absolutely necessary in the first place, and how much was simply another layer of taxation and regulation that consumers were forced to pay for when energy was plentiful?
Now we have “blue diesel,” as if another government classification somehow creates more fuel. Red, blue, taxed, untaxed, renewable, off-road, the bureaucracy has turned diesel into a regulatory maze. When an energy crisis hits, they suddenly waive their own rules because trucks still have to move and farms still have to operate. You cannot regulate energy into existence. You either have the fuel or you don’t.
That is why this feeds directly into stagflation. A trucking company paying dramatically more for fuel does not simply absorb that cost forever. Neither does the warehouse, construction company, farmer, or distributor. Those costs work their way through the economy until they eventually appear in groceries, building materials, deliveries and virtually everything else consumers purchase. Meanwhile, businesses facing higher transportation and financing costs begin postponing investment and hiring.
Washington’s answer is now to change the rules again. President Trump has expanded access to dyed diesel and allowed federal excise taxes on its highway use to be deferred through the end of the year. Several states had already begun relaxing restrictions, suspending fuel taxes or changing transportation regulations in an effort to get more fuel into the system. The G7 has also announced plans to release 100 million barrels of diesel.
The government even temporarily relaxed hours-of-service restrictions for fuel truck drivers in September, allowing them to operate longer in an effort to move gasoline and diesel through the system faster. Think about what that tells you. The government is now dismantling regulations one by one because the energy infrastructure does not have enough slack to withstand geopolitical disruption.
There is also something almost comical about watching government waive its own regulations whenever the consequences become unbearable. If these rules can suddenly be suspended because fuel is too expensive, then perhaps someone should ask how much those regulations were costing consumers before the emergency. Government imposes the cost when energy is plentiful, then takes credit for temporarily removing part of that cost when the system begins breaking down.
The energy crisis is exposing something far larger than the price displayed outside the gas station. America has lost refining capacity while geopolitical instability is increasing and governments continue assuming that regulation can substitute for production. It cannot. You can manipulate taxes, blending requirements and trucking rules all you want, but eventually somebody has to produce the fuel.
First, Washington watered down the gasoline regulations because the system was under stress. Now it is scrambling to find diesel wherever it can while prices sit near record levels. The politicians can change the rules overnight, but they cannot repeal supply and demand, and every time they are forced to abandon their own policies in an emergency they are admitting what the free market has been telling them all along: you cannot regulate scarcity away.