Rising diesel prices, supply disruptions and high borrowing costs are renewing warnings of an inflation shock that could weaken global growth, much like in 2007.
A semi truck drives past a sign advertising the price of diesel along Interstate 5 in Williams, California, on Sept. 28.REUTERS/YONHAP
Kim Sung-jae
The author is a business administration professor at Furman University and the author of “The Story of Tariffs” (2025).
Hurricane Katrina struck the U.S. Gulf Coast in August 2005, devastating New Orleans, then a city of about 500,000 people, after levees protecting areas below sea level failed. More than 1,800 people died.
The disaster did not end just with the human toll. Flooded refineries disrupted U.S. refining capacity and crude processing. Gasoline rose above an average $3 a gallon for the first time and diesel prices surged.
Diesel had the greater economic impact. It powers trucks, trains, ships, farm machinery and heavy equipment, making it essential to industrial production. An increase in diesel prices raises costs throughout manufacturing, logistics and distribution, quickly transmitting an energy shock across the economy far more broadly than a jump in gasoline prices alone.
Because diesel has few practical substitutes, tighter supplies fed directly into inflation and pushed up prices elsewhere, worsening core inflation, which excludes food and energy. Meanwhile, booming emerging economies, including China, sharply increased diesel demand while European countries encouraged diesel use because of its lower carbon emissions. Refineries ran at full capacity but could not keep pace.
Diesel reached a record $4.85 a gallon in 2008, while core inflation approached 3 percent. The Federal Reserve, which had been steadily raising its policy rate from 1 percent, eventually lifted it to 5.25 percent. As tightening squeezed liquidity, problems in subprime lending became visible in 2007.
When Lehman Brothers collapsed the following autumn, a recession set in and the global financial crisis intensified.
While that scenario happened nearly two decades ago, the pattern of black swan shocks driving up diesel prices and inflation has recently resurfaced.
Drone attacks have forced production cuts at major Russian refineries. Russia had accounted for 11 percent of global diesel exports. Meanwhile, the Bab el-Mandeb Strait, a key Red Sea route for Saudi Arabia, has effectively been blocked by Houthi attacks.
U.S. diesel prices, around $4.60 a gallon in early July, have since soared. They recently climbed more than 40 percent in a short period, reaching an all-time high just north of $6.50. That jump will increase pressure on core inflation and could reinforce the Fed’s tightening stance.
At the same time, fiscal deficits and enormous AI infrastructure spending have helped push U.S. long-term interest rates to their highest levels since 2002.
If surging borrowing costs squeeze households and businesses more broadly, growth could weaken. Should that deterioration tip the economy into stagflation, it could then ultimately spill into a financial crisis.
Diesel prices are sending the same warning they did in 2005. Most people do not see it. They usually read it too late.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
