President Donald Trump Has Floated the Idea of a Partial or Full Ban on Diesel Exports, but the Unintended Consequences of Such Actions Would Be Catastrophic

Although the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) are doing what they do best under President Donald Trump -- delivering outsize annual returns -- not all is well on Wall Street.

While the stock market's major indexes have managed to climb the proverbial wall of worry this year, inflation, driven in part by Trumpflation, may prove to be an insurmountable headwind.

Missed AI's "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we're only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »

Image source: Official White House Photo by Daniel Torok.

President Trump floats the idea of curbing diesel exports

The trailing 12-month inflation rate reached a three-year high of 4.2% in May, primarily driven by the Trump-led Iran war and the ongoing closure of the Strait of Hormuz. Iran's closure of the Strait of Hormuz has disrupted the flow of a fifth of the world's crude oil supply.

Though persistently elevated core inflation, which excludes food and energy costs, is a problem, energy prices have become a real eyesore for businesses and consumers. According to AAA, diesel hit an all-time high of $6.53 per gallon on Sept. 22, up roughly 77% from the previous year.

Last week, in speaking with his advisors, President Trump told reporters:

I've said let's not send out the diesel. We make a lot of diesel. I've called for it within my people. I've been talking about it.

In a nutshell, Trump's idea is to keep diesel production within our borders, thereby generating a domestic distillate surplus and quickly driving down the price.

According to the Energy Information Administration, the U.S. produces about 5.3 million barrels of distillate (diesel and heating oil) daily and consumes approximately 3.6 million barrels. Simple supply-and-demand economics suggests that when supply outpaces demand, prices decline.

Partially or fully banning diesel exports would epically backfire

But what the president has loosely proposed isn't that simple. The unintended consequences of his actions would likely prove catastrophic domestically and globally.

On the one hand, diesel prices would probably fall for a short time frame domestically if a partial or full ban on exports were enacted. However, this supply-demand mismatch would be quickly remedied by refiners. ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), and other brand-name refineries would simply cut their production to meet domestic demand. In other words, they're not going to continue creating a domestic oversupply that pushes the price of diesel artificially lower.