U.S. retail diesel prices have recently fallen rapidly – by more than 65 cents per gallon during October alone, and by nearly $1.50 since mid-July. Yet recent retail diesel prices have still averaged higher than for gasoline by anywhere from under 20 cents to nearly 60 cents per gallon, according to the Energy Information Administration. Historically, diesel prices had tended to be lower than for gasoline.
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.
More recent factors have been strong 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 diesel prices have sometimes been higher than gasoline prices, and sometimes lower. In fact, 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 recent price differences 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 53.6 cents for diesel compared with 48.4 cents for gasoline.
Strong U.S. demand growth
In recent years, U.S. demand for highway diesel has risen at roughly triple the rate of gasoline – 3 percent per year over the past five years through 2007, compared with 1 percent annually for gasoline. As a result, diesel now accounts for more than one-fifth of all U.S. highway fuel used, and even as gasoline demand has weakened so far in 2008, year-to-date demand for diesel has held steady versus a year ago. Stronger demand growth for diesel has helped tighten the balance between domestic demand and supply for diesel.
Furthermore, the demand for highway diesel fuel has tended to be less responsive to higher 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.
Relative scarcity of diesel imports due to strong diesel demand elsewhere
Demand for diesel has been growing strongly throughout the world in recent years, so finding additional diesel fuel to import has become more difficult. 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. 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 22 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 disruption caused by 2005’s hurricanes, which hobbled a significant portion of U.S. refining capacity in the nation’s major refining area on the Gulf Coast. Gasoline imports also increased following Hurricanes Gustav and Ike this year.
Reflecting the relative unavailability of diesel for import, and in response to the surging demand for diesel, domestic refineries managed to increase production of diesel and heating oil (which are grouped together in available data) by 15 percent from 2002 to 2007. So far in 2008, refineries have continued to set new production records for the time of year. For the first nine months of 2008, the industry supplied over 11 percent more ultra-low sulfur diesel, the main type required for on-highway use, to the U.S. market than for the same period the year before.
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 – international comparisons
Excluding taxes, diesel fuel is also more costly than gasoline in many other major industrial countries. In much of Europe, for example, retail prices, excluding tax, in September 2008 were roughly 50 cents to 70 cents per gallon greater than for gasoline, according to the International Energy Agency. At the pump, consumers paid less for diesel in some countries only because these countries tax gasoline much more heavily than diesel. For example, in France, consumers paid over $1 more per gallon in taxes for gasoline versus diesel, resulting in retail prices of $7.72 per gallon for gasoline and $7.13 per gallon for diesel.