Explainer: US counts the 'cost of war'

The cost of war should be measured, first and foremost, in human lives. But there is another price. And often, those who pay it are nowhere near the battlefield. 

Diesel prices are surging as two major conflicts rattle the markets. The Iran and Ukraine conflicts have pushed prices above $6 a gallon in the United States. They're now nearly 70% higher than they were just a year ago.

As well as the impact on individual consumers, these prices matter because farmers use diesel in much of their equipment – tractors and combine harvesters, for example. If prices climb, they may charge more for their crops, which could lead to rises in the cost of food. 

But diesel isn't just used to make food. It's also used to move it. Most trucks in America's freight industry have diesel engines. And again, high diesel prices can have an impact, driving up the cost of transport and, ultimately, the food itself. 

This may sound like pie in the sky, especially with food inflation looking fairly tame. Last month, America's food prices climbed 2.5% year-on-year, way below the overall inflation rate of 3.7%. 

But farmers are starting to feel the squeeze. The US Labor Department says truck transportation costs climbed 19% year-on-year. That's the biggest jump since 2022. 

Inflation is also surging further back in the supply chain. Prices at the 'intermediate demand' level jumped 15% compared to September last year. These prices reflect energy costs involved in producing fertilizers and agricultural chemicals – in other words, the products that help grow the food we eat.  

Turm-oil in Iran 

So, how is war to blame? Let's start with Iran. Diesel is produced by refining crude oil. But one fifth of the world's oil passes through the Strait of Hormuz, a narrow waterway between Iran and the United Arab Emirates. 

The strait is caught up in the conflict and in some ways it's a battlefield in its own right. Iran has attacked commercial vessels, while the US has imposed a blockade designed to stop Iranian ships from leaving the region. 

Shipping firms have been wary of sending oil tankers along the route because it's become so risky. UN Trade & Development (UNCTAD) says an average of 129 ships passed through the strait each day over the period February 1-27. The US attacked Iran for the first time on February 28. By March 7 – just a week into the war – the number of transits had dropped to four. 

Traffic increased after the two countries started negotiations, but it remains far below pre-war levels. The International Maritime Organisation says 25 ships passed through the strait on September 23; that was the highest number for a single day across the entire month. 

All of that means less oil is coming out of the Middle East – and the law of supply and demand has kicked in. There's only so much oil available, and buyers have to compete for it. They do that by paying higher prices. In broad terms, that's pushed Brent crude oil from $78 a barrel in February to nearly $110 in October. 

The fuel and the fury  

But there's more to diesel than just oil. And that's where Russia comes in. Its fuel refineries can produce vast amounts of diesel, and just last year it was the world's second-largest exporter, selling nearly 800,000 barrels per day to foreign buyers.

Yet it comes with complications. Russia remains embroiled in its conflict with Ukraine which began in early 2022.

Ukraine has targeted Russian refineries, launching drone strikes on nearly 30 of these facilities between January and August. The International Energy Agency (IEA) says a Russian refinery was hit, on average, once every three days. 

Those strikes have forced Russia to reduce its diesel output. The IEA estimates that production dropped by nearly a third compared to the same period last year. 

The Russian government responded by banning diesel exports in July – a move meant to ensure its own citizens had enough fuel. It briefly lifted that ban after a deal with the US in early October, but for the most part, Russian exports have plummeted. 

That means there's less diesel on the market – and again, the drop in supply is pushing up prices. And there's little to indicate that will change anytime soon – the IEA is warning that the supply crunch will continue "well into 2027". 

Pain in the pocket

So, in a sense, it's double trouble for diesel. The raw material, oil, is getting more expensive. Meanwhile, the finished product, the diesel itself, is also getting more costly. In both cases, conflict is a driving force.  

There's no way to say what prices would look like if those conflicts were over. But there are some clues. 

Just before the Iran War, diesel cost around $3.80 a gallon in the US. One month later, it was $5.40 – a jump of 42%. 

Russia implemented its export ban on July 8, the announcement coming after a wave of drone attacks on its refineries. That same week the US and Iran ended a temporary ceasefire. Diesel was $4.80 per gallon at the time. It's now 28% higher, and has traded above $6 for more than a month.     

Markets are complicated, and the 'calculus of crisis' can't explain everything. But the fact is, energy markets are driven by supply and demand. War has hurt supply. Soon, it may hurt consumers as well.