Trump’s diesel order exposes White House limits to counter surging fuel prices

Truckers likely won't see much in the way of relief from President Donald Trump's executive order that allows them to use off-road diesel fuel on America's highways without federal penalties, analysts say.

Off-road diesel is exempt from federal and state excise taxes because it is used for construction and farm equipment, railways and to heat homes. It is dyed red to differentiate it from taxed on-road diesel, but is otherwise the same fuel.

The federal government charges an excise tax of 24.4 cents per gallon for on-road diesel. In theory, Trump's order spares truckers the tax by allowing them to use red-dyed fuel on the highway, without worrying that the federal government will impose penalties.

But the president's action only defers the actual tax payment itself until the end of the year, while calling on the Treasury Secretary to look for ways to eliminate the deferred obligation altogether.

"While it might be deferred, it may not disappear entirely," said Andy Lipow, president of Lipow Oil Associates. "Maybe you save a little bit of money up front, but you might have to pay it to the government later."

Treasury is preparing guidance to provide "clarity on the obligations for users and sellers of dyed diesel," a White House official told CNBC on condition of anonymity.

Treasury has enforcement discretion, the official said. The Internal Revenue Service will only enforce the deferred tax liability if it is directed to do so by the Treasury secretary and the president, the official said.

The IRS will soon make a determination on "whether dedicating its limited resources to fuel tank inspections and fuel sampling investigations represents the best use" of its resources, the official said.

State laws

Trump cannot defer state excise taxes, which can be higher than the federal obligation, at a national average of 35.5 cents per gallon. Some states have taken independent action to give relief to diesel users.

Although Trump is waiving federal penalties for using off-road diesel on highways, states in principle could enforce their local laws prohibiting the red-dyed fuel on the road.

"It's not like every state trooper is going to pull over the truck and look at your diesel fuel, but you're a trucker — do you need that aggravation?" Lipow said.

'No good options'

Trump's executive order comes as he faces political pressure to take action on diesel prices ahead of midterm elections on Nov. 3, when Republicans face competitive races in farm states such as Iowa. Retail diesel prices hit a record high in September and currently average $6.30 a gallon nationally, according to AAA.

The president flirted with a diesel export ban last month but ultimately abandoned the idea, telling reporters Friday that "it was never really on the table." The oil industry and big business groups were staunchly opposed. Trump publicly voiced concerns that a diesel export ban would raise gasoline prices.

Diesel futures dropped overnight Monday into Tuesday morning after Trump's executive order, but ultimately turned higher. Futures were up more than 1% Wednesday.

"What it shows you is there are no good options for the administration or any administration to bring down the price of fuel, because the bottleneck is refineries," Lipow said.

Diesel prices are high around the world because Ukraine is bombarding Russian refineries and strikes by Iran and its allies have taken capacity offline in the Middle East.

G7 countries led by France, facing pressure from the Trump administration, agreed Friday to release diesel stocks, though it's unclear in what quantities.

"They're pulling every every lever they can," Jeff Currie, CEO of Real Macro and a senior advisor at Carlyle, told CNBC's "Squawk Box" on Tuesday.

But Trump's executive order allowing red-dyed diesel on the road "won't have a profound impact" on fuel prices, Currie said.

There is one action the administration could take that would be effective, Lipow said. "End the conflict."

"The Strait [of Hormuz] reopens, oil flows, those refineries in the Middle East start kicking up runs, more refined products make it to the market," the analyst said. "The market will react to that."