Striking Diesel/Jet Fuel Shortages Are Coming: The world economy is in trouble.

• Author: Verleger, Philip K.

The words below appear in the second volume of John Maynard Keynes' A Treatise on Money. Keynes, known for his macroeconomic writings, was a famous, successful commodity economist and trader. In 1936, his long position in wheat amounted to a month's worth of consumption for the United Kingdom, according to Reuters.

If there is a shortage of supply capable of being remedied in six months but not at once, then the spot price can rise above the forward price, which is only limited by the unwillingness of the buyer to pay the higher spot price rather than postpone the date of his purchase.

Keynes's comment regarding supply shortages is evident today in the market for gasoil, also known as distillate, diesel fuel, or heating oil. It is also evident in jet fuel. The evidence can be seen in the market data. The figure on the next page shows the spread between cash distillate delivered in New York Harbor and the fifth futures contract for the fuel.

The graph shows the difference between the spot price of low-sulfur distillate fuel oil (generally diesel fuel) delivered in New York Harbor and the fifth futures contract for the identical fuel. The data are weekly and begin in 1986. The last observation is for early May 2022. The spread at that point is the highest in the thirty-six years of data presented. It is fifteen times the standard deviation around the mean, which is statistically not different from zero. The probability of such an event is zero.

I have followed and collected these data as part of my study of energy commodity markets since 1985. Never have I observed such a situation. Agricultural economists who follow spreads such as these are equally amazed.

The graph reflects Keynes' maxim, in this case for diesel fuel, at least as delivered in New York. A similar graph can be generated for the European gasoil market by comparing the spot price of low-sulfur gasoil (again diesel fuel) with the third forward contract. Data from forward markets in other regions, such as the large U.S. Gulf Coast refining center or Singapore, show an identical pattern.

Markets are warning us that supplies of the fuel we need to run the global economy are exhausted. Consequently, some types of economic activity will be forced to slow or stop. Airlines may have to cut flights. Railroads might need to reduce the amount of cargo moved. Farmers could be forced to cut planting or let fields lie fallow. Truckers may be brought to a standstill as they already have in...