Stealth fuel costs drive inflation
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We're all familiar with "pain at the pump," the narrative that launched a thousand local news segments. But there's more than one fuel product that can be pumped, and the extent of the pain can vary.
Driving the news: The price surge for industrial fuels such as diesel and jet fuel — byproducts of petroleum refining, known as distillates — have far outstripped the rise in price for consumer-facing products such as gasoline.
Why it matters: The surge in these acts as a stealth inflationary force, pushing up prices of a wide range of goods — anything that's trucked in — and services, such as air travel.
State of play: The difference in prices among these fuels crisply illustrates the economic concept of "elasticity," or how sensitive demand is to changing prices.
- Gasoline demand is much more elastic than distillate demand. That's because consumers can, in many instances, drive less, if gasoline prices get too high.
- Industrial fuel like diesel, however, is less sensitive to climbing costs, because those costs can often be passed along to an end customer elsewhere.
- Because of this, the oil market depends, in part, on high gasoline prices to dissuade people from driving — known as "demand destruction" — to allow overall energy markets to adjust supply and demand.
