U.S. Manufacturing Stagnation Impacts Diesel Demand

Explore the sluggish growth of U.S. manufacturing output and its implications on diesel consumption, highlighting recent data, biodiesel impact, and economic forecasts.

Published June 23, 2024 - 00:06am

6 minutes read
United States
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U.S. manufacturing production has barely increased since before the pandemic, leading to stagnant diesel consumption. The Federal Reserve reported production grew by a faster-than-expected 0.9% in May, but this followed declines of 0.4% in April and 0.1% in March. Real manufacturing value-added grew at an annual compound rate of only 0.7% since 2018, trailing broader economic growth.

The U.S. manufacturing sector, rebounding from the 2018 trade war with China and the 2020 pandemic, has failed to exceed pre-disruption output levels. According to the U.S. Bureau of Economic Analysis, inflation-adjusted manufacturing value-added reached $2.29 trillion in 2023, up from $2.21 trillion in 2018—an increase of just $77 billion over five years.

The limited growth in manufacturing has impacted the diesel market significantly. Over three-quarters of diesel consumption comes from road and rail freight haulers and industrial users. Given the flat-lining manufacturing activity, the volume of distillate fuel oil supplied domestically has shown minimal growth since 2018, with only a 1% increase or 42,000 barrels per day in 2023 compared to 2018.

Distillates from petroleum sources actually fell by 213,000 barrels per day (5%) as more fuel was supplied by biodiesel and renewable diesel. Moreover, the shift from heating oil to natural gas for residential and commercial heating and an exceptionally mild winter in 2023/24 have further reduced distillate consumption.

Despite indicators suggesting the manufacturing sector is exiting a prolonged downturn that began in 2022, the recovery remains too weak to spur significant diesel demand. The U.S. Energy Information Administration (EIA) is not expecting notable growth in distillate consumption through 2024 or 2025.

The sluggish pace of U.S. manufacturing production is one factor contributing to lower-than-expected global petroleum consumption and the subsequent retreat in oil prices. While the sector attempts to recover, efficiency improvements and the switch to renewable fuels further complicate the outlook for diesel consumption.

U.S. manufacturing production has barely increased since before the pandemic, leading to stagnant diesel consumption. The Federal Reserve reported production grew by a faster-than-expected 0.9% in May, but this followed declines of 0.4% in April and 0.1% in March. Real manufacturing value-added grew at an annual compound rate of only 0.7% since 2018, trailing broader economic growth.

The U.S. manufacturing sector, rebounding from the 2018 trade war with China and the 2020 pandemic, has failed to exceed pre-disruption output levels. According to the U.S. Bureau of Economic Analysis, inflation-adjusted manufacturing value-added reached $2.29 trillion in 2023, up from $2.21 trillion in 2018—an increase of just $77 billion over five years.

The limited growth in manufacturing has impacted the diesel market significantly. Over three-quarters of diesel consumption comes from road and rail freight haulers and industrial users. Given the flat-lining manufacturing activity, the volume of distillate fuel oil supplied domestically has shown minimal growth since 2018, with only a 1% increase or 42,000 barrels per day in 2023 compared to 2018.

Distillates from petroleum sources actually fell by 213,000 barrels per day (5%) as more fuel was supplied by biodiesel and renewable diesel. Moreover, the shift from heating oil to natural gas for residential and commercial heating and an exceptionally mild winter in 2023/24 have further reduced distillate consumption.

Despite indicators suggesting the manufacturing sector is exiting a prolonged downturn that began in 2022, the recovery remains too weak to spur significant diesel demand. The U.S. Energy Information Administration (EIA) is not expecting notable growth in distillate consumption through 2024 or 2025.

The sluggish pace of U.S. manufacturing production is one factor contributing to lower-than-expected global petroleum consumption and the subsequent retreat in oil prices. While the sector attempts to recover, efficiency improvements and the switch to renewable fuels further complicate the outlook for diesel consumption.

In addition, global factors are also playing a role in the U.S. manufacturing scenario. The international supply chain disruptions, largely resulting from geopolitical tensions and lingering effects of the COVID-19 pandemic, have hampered the ability of manufacturers to scale up production efficiently. Raw material shortages and logistical challenges continue to delay manufacturing processes, putting an additional strain on production growth.

Moreover, the increasing adoption of automation in manufacturing facilities may be altering dynamics. While automation drives efficiency, it does not necessarily translate into increased diesel consumption, as the machinery utilized often relies on electricity rather than diesel fuels. This transition could be further decoupling manufacturing activity from traditional energy consumption patterns.

Policymakers are closely monitoring these trends, as prolonged stagnation in manufacturing can have broader economic implications. Manufacturing is a critical component of the U.S. economy, providing numerous jobs and contributing substantially to Gross Domestic Product (GDP). Sustained sluggishness in this sector could impede overall economic recovery and growth.

Indeed, investment in infrastructure and green energy initiatives is being seen as a potential catalyst for reviving the manufacturing sector. Federal incentives for clean energy and technological advancements could not only modernize outdated facilities but also pave the way for a more resilient manufacturing landscape. By improving energy efficiency and incorporating renewable energy sources, the manufacturing industry could reduce dependency on diesel and other fossil fuels, aligning with broader environmental goals.

However, such transformations require significant time and investment. While long-term strategies are being charted, short-term measures to boost manufacturing output remain crucial. Stimulating demand through government projects, reducing trade barriers, and providing tax incentives for manufacturing firms could be viable options to navigate through current challenges.

In essence, while the road to recovery for U.S. manufacturing is fraught with obstacles, coordinated efforts from public and private sectors could foster a more robust and sustainable rebound. Enhancing supply chain resilience, investing in innovation, and shifting towards renewable energy are key steps that might ensure the manufacturing industry not only recovers but thrives in the long run.

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