The World’s Diesel Problem Runs Deeper Than the Iran War

U.S. Oil and Gas Production Climbs Despite Extreme Oil Price Volatility

Gail Tverberg is a writer and speaker about energy issues. She is especially known for her work with financial issues associated with peak oil. Prior…

The nature of the shortage of diesel and jet fuel is more complex than most people realize. Based on my analysis, a shortfall has existed since at least 2020. The shortage is not simply the result of the closure of the Strait of Hormuz.

In this post, I will provide background information regarding the nature of the shortfall and the international conflict it is leading to. I will also share my thoughts on how, over the long term, the situation might be mitigated. I doubt whether a solution will be available in the short term, but I can at least give readers an idea of one direction in which a possible workaround might be available.

My idea is that the economy needs to transform itself in a way that uses diesel and jet fuel (grouped together on some reports as “middle distillates”) more sparingly. At the same time, research on extracting heavy oil and bitumen at lower cost is needed. If this is done, it may be possible to use additional heavy oil to increase the supply of diesel and jet fuel.

One thing that will probably need to change is the price of diesel relative to gasoline. The price difference will likely need to be even greater than it has been in the recent past because heavy oil is inherently more difficult to extract, refine, process, and transport.

Energy supply and the economy are a great deal more interconnected than most people realize. For example, if the price of diesel rises, the price of food also tends to rise because diesel is used in food production and transportation. Similarly, if the price of gasoline rises, the additional cost also tends to squeeze budgets. Politicians see these price increases and say to themselves, “These increases will make voters unhappy. Let’s raise interest rates and see if we can get oil prices back down.”

Higher interest rates don’t affect everyone immediately, but they particularly impact people purchasing a vehicle or a home, and businesses seeking a loan.

Figure 1. Slide by author, illustrating the impact that rising debt payments taking place at the same time as rising energy costs pose to household budgets.

Clearly, raising interest rates at the same time as energy prices are rising is “playing with fire.” If the economy is really overstimulated and growing too quickly, this type of approach makes sense. But if the underlying problem is that diesel and jet fuel prices are high because of inadequate world production, what is really needed is higher oil prices, especially for the heavier crude oils that provide a disproportionate share of diesel and jet fuel.

Consumers and oil producers have two different needs for prices:

While prices for diesel and jet fuel are higher this fall, quite a bit of the extra charges relate to extra transport and insurance costs. The high prices need to stay, and perhaps even increase, even if the immediate issues disappear, in order to incentivize greater long-term production. It is these rising prices that are likely to continue to squeeze budgets and push economies toward recession.

Most people assume that all oil is equivalent, but this is not the case. Petroleum is a mixture of hydrocarbon molecules. The lightest ones are gases are room temperature, the medium weight ones are liquids, and the heaviest ones tend to be quite viscous. Some are even solids. Some oils, especially heavy oils, have sulfur or metal inclusions. Crude oil that contains sulfur is called “sour oil.”

Heavier oils are ones that disproportionately produce diesel and jet fuel. Lighter oils tend to produce more gasoline, along with products like solvents, and the feedstocks for plastics.

In my view, a major reason why there tends to be a shortfall in diesel and jet fuel production (even apart from the current Middle East blockages) is that the type of oil needed tends to be more expensive to extract, refine, and transport than light oil. Furthermore, oil with sulfur tends to be quite corrosive, and removing the sulfur adds another layer of costs. The primary issue I see is that it is hard to pass on the higher production costs of heavy and sour oils to customers.

In theory, to cover all the costs involved related to heavy and sour oils, diesel and jet fuel prices should be quite a bit higher than gasoline prices for the same volume (liter or gallon). But if this were the case, the price of food would also increase, since diesel is extensively used in food production and transportation.

Figure 2 shows end products from the production process. We know, however, that lighter end products tend to come from lighter crude oils, so we can deduce that the crude oil mixture has been getting lighter over time. The amounts in Figure 2 include natural gas liquids, which are very light and growing in quantity.

Figure 2. World per capita oil consumption (including natural gas liquids) by end product based on data from exhibit “Oil: Regional Consumption by Part” from the 2026 Statistical Review of World Energy , published by the Energy Institute. Amounts are measured by volume, not energy production.

The earliest oil that was extracted tended to be “medium oil,” which tended to have a mixture of heavier and lighter molecules. As the medium oil depleted, new production tended to be lighter. In particular, US tight oil from shale is quite light. The increasing production of US tight oil from shale is adding to the Very Light layer, as well as the Gasoline layer.

Because of the need for diesel and jet fuel in industry and transportation, a person would expect per-capita diesel and jet fuel consumption to grow as industry and international trade grows.

Figure 3. World per capita consumption of diesel plus jet fuel based on data from the sheet, “Oil: Regional Consumption by Part” in the 2026 Statistical Review of World Energy , published by the Energy Institute.

Figure 3 shows that per capita consumption of diesel and jet fuel stopped growing about 2005. The year 2005 seems to be the time that the world’s output of “conventional” (easy to extract) oil reached a peak. Figure 3 also shows that per capita consumption then plateaued until about 2019. It fell 16% in 2020, and it has not been able to fully recover since. The historical data on this chart is only through 2025, but the big Middle East cutbacks in 2026 will clearly send diesel and jet fuel consumption down from the 2025 level in 2026, as indicated by the red arrow.

At least in part, what is happening is that recent oil prices have not been high enough for countries producing somewhat heavy, sour oil. This is especially the case for oil exporting countries that depend on oil revenue to support their economies. They need more revenue than just enough to cover the cost of extraction, plus a reasonable return for shareholders. They also need money to fund the development of make-work projects to employ their citizens and to fund subsidized imported food for their population.

In the peak oil community, there seems to be the view that Middle East oil is always cheap to extract and refine. At one time, this may have been true, but most analyses overlook the tax needs of oil exporting countries. Tax needs are high in countries with exploding populations who need subsidized imported food. Huge make-work projects to provide employment possibilities, such as Saudi Arabia’s construction of the city Neom, add to the need for higher tax revenue. Middle Eastern oil costs may also be rising because of depletion issues, such as wells yielding relatively more water in the oil/water mixture extracted.

If a person looks through my suggested list of heavy/sour oil producers shown on Figure 4, all the countries seem at least somewhat war-like. Even Canada tends to be war-like. Canadian leaders would be much happier if the price of crude oil exported to the US were considerably higher, and it would be less inclined to seek export partners in Asia and Europe.

Figure 4. Recent crude oil production by countries whose oil tends to be heavier and/or sour, based on monthly oil production data of the EIA. Middle Eastern oil tends to be medium sour. I may have omitted some heavy/sour countries.

If the oil production of the heavy/sour countries and country groups found on Figure 4 is added together, the result is as shown in Figure 5. The total production of these countries exceeds the production of the rest of the world.

Notice that the countries of the Middle East tend to be quite price sensitive. Their production dropped steeply in 2020 when oil prices fell. Likewise, their production rose in 2022 when oil prices were temporarily higher, related to the start of the Ukraine-Russia conflict.

Figure 5. Monthly world crude oil production of the total of the countries shown in Figure 4, compared to the monthly crude oil production of the rest of the world based on data of the EIA.

The United States Geological Services provides maps of available heavy oil and bitumen deposits. Figure 6 indicates that heavy oil is widely available in North America, Europe, Russia, and the Middle East.

Figure 6. Map of Heavy Oil and Bitumen Resources by USGS. Source: Open File-Report 2007-1084

In 2015, the International Energy Agency published a report indicating that in its view, there were huge deposits of extra heavy oil and bitumen (EHOB) that could be accessed if the price of oil rose high enough for long enough (Figure 7). The same exhibit shows somewhat smaller availability of tight oil from shale. In fact, the US has been able to access a substantial amount of tight oil from shale in recent years.

Figure 7. IEA Figure 1.4 from its World Energy Outlook 2015, showing how much oil can be produced at various price levels.

In my opinion, in order to access the EHOB, the prices of diesel and jet fuel need to rise to a high level over the long term; the prices of gasoline and even lighter products don’t necessarily need to rise. If the prices of diesel and jet fuel rise high enough, for long enough, the price signal should work its way back to oil and gas companies, suggesting that they need to make investments in the direction of adding more extraction from EHOB. If this succeeds, it could perhaps relieve the problem of inadequate supply of diesel and jet fuel.

The prices of diesel and jet fuel are high now, but this is at least partly due to higher insurance costs and partly due to the extra costs related to shipping oil longer distances to avoid blocked straits. These extra costs don’t get back to oil companies in a way that encourages countries to extract more heavy oil. What is needed are permanently higher prices for diesel and jet fuel, relative to the price of gasoline, even if the problems with respect to the straits of Hormuz and of Bab al-Mandab, disappear.

Figure 3, above, shows that the total supply of diesel plus jet fuel has been low, especially since 2020. One issue that has arisen recently is “Who gets the supply of diesel plus jet fuel that is available?” Figure 8 shows that increasingly, it has been the poorer countries of the world who obtain the diesel and jet fuel that is available. Note that total consumption of the Other than Advanced Countries has exceeded that of the Advanced Countries since 2020.

Figure 8. Diesel + Jet Fuel consumption for the Advanced Countries (OECD members), compared to that for the Other than Advanced Countries, based on data from the sheet, “Oil: Regional Consumption by Part” in the 2026 Statistical Review of World Energy , published by the Energy Institute. China, Russia, and Iran are in the “Other than Advanced Countries” group. The US, Israel, and NATO countries are in the Advanced Countries group.

Figure 9 shows that for the Advanced Economies, per capita consumption of diesel plus jet fuel has been declining since about 2005, the time of peak conventional crude oil. The same figure shows that per capita consumption of diesel plus jet fuel has plateaued since 2013 for Other than Advanced Countries. I think of 2013 as the year that China first started encountering major limits on coal extraction (somewhat like the year 1970 in the US for oil extraction). In recent years, China has been able to raise coal extraction somewhat, but at a higher cost.

Figure 9. Per capita consumption of diesel + jet fuel for Advanced Countries (OECD members), compared to that for Other than Advanced Countries, based on data from the sheet, “Oil: Regional Consumption by Part” in the 2026 Statistical Review of World Energy , published by the Energy Institute.

I would expect that countries in both groups would be dismayed by the situation shown in Figure 9. The per capita consumption of diesel plus jet fuel for the Advanced Countries has been falling for a long time. Partly this is the result of the economies changing to service economies. As service economies, the need for diesel by industry has been lessened. Wages tend to be less for many of these service jobs, making workers unhappy.