The Nigerian economic crisis aggravated by the  Russian – Ukraine war is not likely to be over soon as it has fallen victim of the global diesel crisis which is far been over.

This is because the economy of the country runs on imported diesel which has remained critically low in supply. Most industries in the country depend on diesel to power their production processes.

The transport sector which is dominated by heavy-duty vehicles also relies on diesel to function well. The high cost of diesel has led to increasing inflation, job losses among Nigerian workers and the price of petrol, just to mention a few.

Because the country’s refineries are not functioning, no diesel is produced in the country and the few volumes that are produced through modular refineries are far from being enough to satisfy the yearning of the manufacturing sector of the economy.

Because of this, Nigeria has largely depended on imported diesel to run its economy. Now that the global diesel stock is critically low her economy may run into further trouble.

When the EU and the U.S. were discussing oil sanctions against Russia, some analysts warned that while markets would shrug off the oil embargo, things would be different for fuels. Because every economy runs on diesel, and global diesel stocks were critically low.

Global diesel stocks remain critically low a month after the fuel embargo went into effect. U.S. crude oil exports to Europe are on a strong rise as a replacement for Russian barrels, but fuels production is in decline because of winter storms. There is one thing that has helped both the U.S. and Europe avoid a diesel shortage, and that, ironically, is the economic slowdown.

Reuters’ John Kemp reported in early February that U.S. diesel fuel inventories had started the year at critically low levels despite a buildup of inventories since October thanks to higher refinery run rates and a mild winter that capped demand for middle distillates.

He noted, however, that any pickup in economic activity, pressured by inflation, could deepen the imbalance between supply and demand, fueling further inflation despite the Fed’s efforts to rein it in with a series of rate hikes.

Indeed, new data released by the United States government this week confirmed freight transport and manufacturing in the final months of 2022 had slowed down. This would normally not be seen as good news, but when there’s a looming diesel shortage on the horizon, and the only thing that’s keeping it on the horizon is an economic slowdown, things begin to look different.

The situation is quite precarious and basically comes down to being stuck between the rock of inflation and the hard place of a recession, which, for some observers, is already a fact and, for others, will be successfully avoided.

While opinions on the possibility of a recession in the United States remain split, including in the business world, opinions on the importance of diesel for the U.S. economy, as for any other economy, are necessarily unanimous. And this means that one way or another, a recession is unavoidable.

Indeed, Reuters’ Kemp has argued that recession will manifest sooner or later because either central banks would raise borrowing costs to an unpalatable level in their attempts to control inflation or inflation will do its job and cause shrinkage in spending and industrial activity, adding up to a recession.

Diesel consumption, then, is a good marker of where the economy is going—towards natural or artificial recession. For now, it seems that the two are working together: one look at the oil industry reveals cautious higher spending plans because of inflation and equally cautious growth plans because of higher borrowing costs.

The U.S. manufacturing sector has been posting contractions for four months in a row. This is not good news GDP-wise, but through the diesel lens, it’s not that bad either. Signs of a pickup in activity, on the other hand, while a positive development from an economic growth perspective, would lead to higher diesel demand, which would further stock depletion and ultimately contribute to inflation.

With the slowdown in manufacturing activity, diesel demand declined, and inventories began to rebuild. However, as Kemp noted recently, inventories remain at multi-year lows, and any pickup in activity will result in a price spike.

The situation is not unlike a vicious circle, and breaking out of it would be a challenge. Diesel stocks are critically low. If demand rebounds, prices will rise, pushing inflation higher. If demand remains slow because of lower economic activity, inventories could get rebuilt, but this would take a long time, during which the U.S. economy will effectively be in recession.

The way out is if refiners ramp up distillate fuels production substantially, but no refiner would ever do that unless there is demand for those fuels on the market. There is also the issue of smaller refining capacity—the result of refinery conversions and closures in recent years. The state of diesel suggests there’s still pain ahead for the U.S. economy.

By  Olusola Bello with report from Oilprice.com