California diesel hits $6.92 as Iran war strains US supply chains

California's diesel price has climbed to $6.92 a gallon, up from $5.10 before the Iran war began six months ago, as the conflict's disruption of global refining capacity ripples through the nation's busiest port complex. The state's average now sits $1.56 above the national diesel average of $5.36, according to AAA data.

"I think this refining challenge is going to be with the world for a while," Darren Woods, chief executive of ExxonMobil, said. "Even after the Strait opens up, we'll see more products start to flow through the Strait, which is going to be critically important. But we've still got the Russia capacity that's been lost."

The world is short about 8 percent of global diesel demand, according to Andy Lipow of Lipow Oil Associates, as the Iran war halted most shipping through the Strait of Hormuz — a waterway that previously carried a fifth of the world's oil and natural gas — while Ukraine escalated attacks on Russian refining infrastructure. Brent crude, the international benchmark, soared from about $70 to above $100 a barrel during the second quarter, peaking at $126.

The transmission mechanism runs through the San Pedro Bay port complex, which handles nearly one-third of U.S. containership imports and exports. "[A] meaningful share of America's supply chain pays West Coast fuel prices," JPMorgan analysts led by Natasha Kaneva wrote in a June note to clients. "These prices influence freight costs, transportation margins, and ultimately the delivered cost of goods nationwide."

Diesel is the workhorse of the American economy — the fuel that powers the trucks and trains moving goods from ports to warehouses to store shelves. California's structural disadvantages compound the problem: the state has no major fuel pipelines connecting it to other refining regions, its fossil fuel industry has contracted over the years with refiners closing, and its environmental regulations are among the strictest in the nation.

Refiners capture windfall profits

The refining squeeze has been a windfall for integrated oil majors. ExxonMobil reported second-quarter profits doubled to $14.53 billion, boosted by record diesel production, with revenue up 42 percent to $116.02 billion. Chevron nearly quadrupled profits to $12.07 billion on revenue of $70.06 billion, up 56 percent. Six of Europe's largest oil companies posted combined first-quarter profits of $22 billion, more than 40 percent higher than a year earlier.

"The return on refining, on a percentage basis, has skyrocketed," said Tom Seng, assistant professor of energy finance at Texas Christian University. "Oil right now is priced what it is priced because of the Iran war. But in the meantime, the refineries are making money hand over fist."

American refineries are running at near-full capacity, benefiting from their access to crude supplies that Middle Eastern and Russian competitors have lost. Diesel is priced about 41 percent higher in the U.S. than before the Strait of Hormuz was blocked, and jet fuel and gasoline have followed similar trajectories. The average price for a gallon of regular gasoline reached $4.11, about $1 more than a year earlier.

"Ultimately, users of the energy services pay," said Timothy Fitzgerald, a University of Tennessee professor of business economics who studies the petroleum industry. "Consumers, people like you and me buying retail motor gasoline or diesel fuel or airplane tickets. But it also means that almost everything else we buy has an embedded energy content to it."

Policy response takes shape

The profit surge has drawn legislative scrutiny. Democrats in Congress introduced bills in March to impose a per-barrel windfall profits tax on companies producing or importing at least 300,000 barrels of oil per day in 2025, with proceeds redistributed to consumers. The UK and other European countries implemented similar taxes in 2022, with the UK extending its levy to 2030.

"We cracked $4 again per gallon last weekend in gas stations that I drove by, and that's a big expense, particularly for families that get their income from driving around from job to job in the work van or the work truck," said Sen. Sheldon Whitehouse, a Rhode Island Democrat who introduced the Senate version of the legislation.

Exxon's Woods pushed back on the proposal, warning it would deter investment. "Penalizing the businesses who stood by those countries and provided that product going forward is very short-sighted," he said. "We canceled investments that we had planned for Europe based on the last time they passed a windfall profits tax."

The global refining market remains under-supplied, and with Russia and China no longer exporting refined products at prior levels, integrated majors like Exxon and Chevron are capturing outsized margins, said Rob Thummel, senior portfolio manager at Tortoise Capital. "The world is going to be short jet fuel, diesel and gasoline, so we'll probably continue to see higher profits there."

For American consumers, the cost is already visible at the pump and on store shelves. Every truck mile and rail shipment that moves goods through California's ports carries the state's $6.92 diesel price into the national supply chain, a hidden tax that JPMorgan estimates will persist as long as the refining bottleneck remains unresolved.

This article is for informational purposes only and does not constitute investment advice.