Recent U.S. retail diesel prices have continued to be much lower than at their peak last July of $4.76 per gallon – they were down by roughly $2.22 per gallon as of the middle of July of this year. Further, the national average for diesel actually fell below gasoline’s average price in mid-May and continued the trend through the end of June, based on data from the Energy Information Administration. With gasoline prices falling faster than diesel in July, the diesel price average rose above that of gasoline. The national average of diesel prices was $2.542 while that of gasoline was $2.528 as of July 13.

Longer-term factors that have been tied to variations in gasoline versus diesel prices include the different seasonal price variations for the two fuels, and differing tax rates. Factors in more recent years have included at-times strong growth in U.S and world diesel demand, the relative unavailability of diesel imports, and the introduction of ultra-low sulfur diesel in 2006, which is contributing to improved air quality but costs more to manufacture. These factors are detailed below.

Seasonal price variations

Historically, gasoline prices (other things being equal) have tended to be higher in the summer when demand is strongest. Summer formulations also tend to require more expensive ingredients for improved air quality and for reliable engine performance during warm weather. Meanwhile, diesel prices have tended to be highest in the fall and winter, during higher demand periods for diesel and heating oil linked to such activities as crop harvests and heating seasons(Heating oil and diesel fuel are very closely related fuels, and thus developments in the market for heating oil can affect diesel, and vice versa).

The seasonal variation in diesel and gasoline prices has been far from a simple, predictable pattern, since so many other things (including crude oil prices) can also affect retail prices. Nevertheless, the result of all these factors has been that historically, diesel prices have sometimes been higher than gasoline prices, and sometimes lower. In fact, almost every year for at least the past 10 years, average national diesel prices have been higher than gasoline prices in at least some months. Still, the price differences in recent years have been larger than experienced in earlier years, so seasonal variation alone does not explain recent diesel prices.

Tax rates 

Federal excise taxes, included in the pump price, are higher for diesel than for gasoline. For diesel, the per-gallon federal tax is 24.4 cents, compared with 18.4 cents for gasoline. State and local taxes may differ among fuels as well, resulting in a national average per gallon tax of 51.4 cents for diesel compared with 47.0 cents for gasoline.

U.S. demand trends

For sustained periods in recent years, U.S. demand for highway diesel has risen much more strongly than for gasoline. From 2002 through 2007, for example, it grew at roughly triple the rate of gasoline – 3 percent per year over the five-year period, compared with 1 percent annually for gasoline. As a result, diesel’s share rose to more than one-fifth of all U.S. highway fuel used. Even though demand weakened for both fuels in 2008, highway diesel’s larger share is estimated to have continued. Thus, stronger demand growth for diesel relative to gasoline over the longer term helped tighten the balance between domestic demand and supply for diesel.

Also, highway diesel demand has historically tended to be less responsive to prices than has gasoline demand, because it is often just one link in a larger ongoing process of manufacturing and distribution. That means that, compared with gasoline markets, if there is a tight supply situation, market forces may bid up diesel prices to a higher level before consumption begins to slow.

On the other hand, demand for diesel has historically been more sensitive than for gasoline to economic conditions, and data for 2009 through June suggest that the current economic downturn has had a greater effect so far on highway diesel demand than on gasoline. This may have taken some of the pressure off the U.S. diesel market.

Reflecting the relative unavailability of diesel for import, and in response to the surging demand for diesel, domestic refineries in the U.S. managed to increase production of diesel and heating oil (which are grouped together in available data) by nearly 20 percent from 2002 to 2008. In 2008 alone, the industry produced nearly 11 percent more ultra-low sulfur diesel, the main type required for on-highway use, than for the year before. During the first six months of 2009, despite the double-digit, recession-induced dropoff in demand, production came within less than 2.3 percent of the all-time record for the period.

Gasoline and Diesel trends elsewhere

Strong economic growth in developing countries, droughts in some areas that spurred a need for greater back-up generation, and a short-term surge in preparation for the Olympics in Beijing have all at times added to world demand for diesel.

• OECD: Europe has also been moving steadily towards greater use of diesel. Diesel vehicles made up only 22 percent of new car sales in Europe in 1995, but their share has shifted to more than 50 percent more recently. Understandably, over the past ten years, European diesel demand has risen more than 15 percent, while gasoline demand has actually fallen 21 percent. Increased European diesel demand has also meant that European refineries have had more gasoline available for export. This has helped increase gasoline supply availability in this country, which imports about 12 percent of its gasoline.Increased gasoline imports were especially helpful in smoothing out the hurricane-related disruptions to U.S. Gulf Coast refining capacity in both 2005 and 2008.
• Non-OECD:According to BP’s Statistical Review of World Energy 2009, with the non-OECD, middle distillates annual consumption growth has been highly concentrated in three regions – Asia (4.3 percent in 2008 and 3.8 percent in 2007), Latin America (4.2 percent in 2008 and 8.1 percent in 2007) and the Middle-East (5.5 percent in 2008 and 3.1 percent in 2007). China accounted for the biggest annual growth for middle distillates in the past two years. China’s demand growth of 10.4 percent growth in 2008 was the highest among both OECD and non-OECD countries. However in view of the global economic slowdown, middle distillates demand probably slowed down in 2009.

Ultra-low sulfur diesel

Ultra-low sulfur diesel, also known as ULSD or “clean diesel,” was introduced for on-highway use in 2006. This fuel, which meets the exacting government specification of only 15 parts per million of sulfur, accounts for more than 70 percent of all U.S. production of distillate fuel oil (diesel and heating oil). More than $8 billion in capital investments for the new equipment required to produce and distribute this clean diesel has added to production and distribution costs. Further, in 2007, off-highway diesel for locomotive, marine and non-road equipment came under more stringent specifications, as well.

Other considerations – Taxes and international comparisons

Excluding taxes, diesel fuel is more costly than gasoline in many other major industrial countries. At the pump, consumers paid less for diesel in some countries only because these countries tax gasoline much more heavily than diesel. For example, for the month of May, in France and Germany, consumers paid $1 per gallon more in taxes for gasoline versus diesel, resulting in retail prices of $6.21 per gallon of gasoline versus $5.02 per gallon of diesel in France and $6.53 per gallon of gasoline versus $5.43 per gallon of diesel in Germany.