Diesel Fuel Prices: A Changing Landscape

Diesel fuel prices have fluctuated in recent years, with a mix of increases and decreases across different regions. In the United States, the retail diesel price per gallon stood at $3.503 in the week of December 30, 2024, reflecting a slight increase from the previous week but a decrease compared to a year prior. Diesel prices tend to be influenced by oil prices, and factors such as seasonal demand, supply chain disruptions, and taxes also play a role in price changes. In Europe, diesel-fueled cars made up around 28% of passenger car purchases in the first quarter of 2020, while in the US, diesel cars account for approximately 3% of the car market.

The impact of the Russia-Ukraine war on diesel prices

The Russia-Ukraine war has had a significant impact on diesel prices, with prices rising sharply following the Russian invasion in February 2022. As Russia is the second-largest oil producer and a significant exporter of natural gas, the conflict has severely disrupted the energy market and caused crude oil prices to surge. This, in turn, has affected diesel prices, which are closely linked to oil prices.

In the United States, the producer price index (PPI) for diesel fuel jumped 109% in June 2022 compared to the previous year. This increase was even higher than the 85% rise in gasoline prices over the same period. The main reason for the larger increase in diesel prices is the scarcity of diesel fuel worldwide. There were not enough refineries to meet the demand, especially after the US and other countries stopped purchasing energy exports from Russia due to economic sanctions.

The impact of the war on diesel prices has been felt globally. Europe, in particular, has been affected as it imports a significant amount of its energy from Russia. The conflict has led to a supply crisis and caused a sharp increase in Brent crude oil prices, which are the benchmark for European oil prices. The price difference between Brent crude oil and West Texas Intermediate (WTI) crude oil, the US benchmark, also widened during the war.

The war has also amplified the volatility of the crude oil market, with short-term fluctuations in prices becoming more frequent and drastic. This has had a knock-on effect on diesel prices, which tend to follow similar trends as oil prices.

Overall, the Russia-Ukraine war has significantly impacted diesel prices, contributing to higher costs for consumers and businesses that rely on diesel fuel for transportation, construction, and other industries. The scarcity of diesel fuel and the volatile energy market have made it challenging to predict future price movements, but it is clear that the conflict has played a major role in driving up diesel prices globally.

How diesel prices are calculated

Diesel prices, like other commodities, are priced in real-time based on the balance of supply and demand. Retail prices are what consumers are charged at the pump for diesel. Retailers, also known as truck or fuel stops, mark up the current price of wholesale diesel with a margin. The formula for this is: wholesale price + retail markup + fuel taxes. The markup is established based on what the retailer believes the market will bear and their ability to maximise price at that moment. Retailers will set their markups based on competitive factors, such as local competition and market demand. All retail prices include fuel taxes, which fluctuate depending on the state and municipality of the fuel stop.

Wholesale prices are driven by how oil and diesel contracts trade on commodity exchanges. Commodity exchanges are regulated financial markets where hedgers and speculators bet on or derisk their exposure to the future price of oil or diesel. The base number for diesel prices in the US is the ultra-low-sulphur diesel (ULSD) contract on the NYMEX division of CME, the former Chicago Mercantile Exchange. ULSD trades there along with two other key domestic contracts: West Texas Intermediate (WTI) crude and RBOB gasoline. There are five key spot markets in the US where physical petroleum products are traded among market participants: New York Harbour, Gulf Coast, Chicago, West Coast and a Mid-continent area known as Group 3, which includes Oklahoma and Kansas. These markets are traded as a differential to the NYMEX ULSD price. Price reporting agencies such as S&P Global Platts then publish those prices daily.

The wholesale distribution point, known as the rack, sets a price for diesel each day, which is drawn heavily from the physical market to which it is linked. For example, Atlanta prices will be linked to the Gulf Coast, and Boston prices will be linked to New York Harbour. The physical market reflected by price reporting agencies (PRAs) will serve as the starting point for those wholesale suppliers to set their prices in their respective locations. The PRA price will often be used as the base in a contract between the wholesale buyer and seller, with other costs added on top of it.

Retail prices do not always reflect wholesale prices. Retail pricing decisions are made by individual station owners, and they may choose to hold a price up even as wholesale prices decline. However, this risks competitors using lower wholesale prices to grab market share.

In India, fuel prices are decided by oil marketing companies like IOCL, BP and HPCL. Central and state taxes make up about 60% of the price of petrol. Fuel prices in India are revised daily based on changing crude oil prices globally. As global crude oil prices go up, the import cost also increases. However, the remainder of the amount is made up of state and central government taxes, which are among the highest in the world. As of June 1, 2021, the base price of petrol in Delhi was Rs. 36.04 per litre. The central government charges 35.35% as Excise Duty, and the state government charges 23%. Including dealer commission and value-added tax, consumers pay about 60% tax on the retail price of one litre of petrol. Similarly, the base diesel price in Delhi stands at Rs. 38.54 per litre, which increases with the central government tax of 38.21% and the state government tax of 14.64%, along with additional air ambience charges. This makes up about 54% of taxes in the retail price of diesel.

Why diesel prices are higher than gasoline prices

Diesel prices have been higher than gasoline prices for a number of reasons. Firstly, diesel fuel is crucial for international transport, as the engines of freight trucks, cargo jets, and barges run on diesel. This means that when the cost of sending products around the world increases, the prices of the goods being transported also rise, impacting inflation.

Secondly, diesel prices are influenced by the transition to cleaner blends. Since 2014, the US Environmental Protection Agency (EPA) has mandated that all diesel sold and produced in the United States must be ultra-low sulfur diesel (ULSD), which reduces sulfur content to 15 parts per million. While this has significantly reduced toxic emissions, it has also led to decreased energy density and increased production costs, driving up prices.

Thirdly, diesel fuel faces higher state and federal taxes than gasoline. The federal motor fuel excise tax in the United States includes an extra 24.3-cent tax on diesel compared to gasoline's 18.3-cent tax. State taxes further contribute to the price discrepancy, with diesel taxes averaging 7.55 cents higher than gasoline. These higher taxes are due to the greater weight of diesel-powered vehicles, such as freight trucks and buses, which causes more road deterioration.

Finally, the basic economic principle of supply and demand also contributes to the higher price of diesel. Diesel is produced at a lower rate than gasoline, with approximately 11-12 gallons of diesel produced from one barrel of crude oil, compared to 19-20 gallons of gasoline. At the same time, diesel has a high demand due to its use in manufacturing, agriculture, transportation, and power generation.

How diesel fuel prices are projected

The projection of diesel fuel prices is a complex and challenging task, influenced by various factors and subject to constant change. Here are some key considerations for how diesel fuel prices are projected:

Supply and Demand

The law of supply and demand plays a fundamental role in diesel fuel price projections. When global demand for diesel fuel increases, prices tend to rise as well. This is particularly true for diesel fuel, which is a crucial energy source for transportation sectors such as barges, trains, trucks, and boats. On the other hand, when demand decreases or alternative energy sources gain popularity, diesel fuel prices may experience a downward trend.

Geopolitical Factors

Geopolitical events and crises can significantly impact diesel fuel prices. For example, the Russia-Ukraine conflict caused supply constraints, leading to a significant rise in diesel prices in 2022. Similarly, any event that affects oil production in the Middle East or other oil-rich regions can cause price fluctuations.

Crude Oil Prices

The cost of crude oil is a critical factor in diesel fuel price projections. When crude oil prices are low, diesel fuel prices tend to follow suit. For instance, in 2024, diesel fuel prices decreased due to lower crude oil costs and weaker fuel demand after the summer travel season. Conversely, when crude oil prices rise, diesel fuel prices often rise as well.

Seasonal Variations

Seasonal variations can also influence diesel fuel price projections. Typically, winter is associated with lower driving activity, leading to decreased fuel demand and potentially lower prices. In contrast, as spring and summer approach, refiners prepare for the travel season, resulting in an expected rise in diesel fuel prices.

Industry Trends

The fuel industry is constantly evolving, and trends in oil and gas production, consumption, and investments can impact diesel fuel prices. For example, the increasing demand for clean energy and the shift towards achieving climate goals are influencing the industry's focus on strategic investments and cleaner energy sources.

Economic Factors

Economic factors, such as interest rates, material costs, and exchange rates, can also play a role in diesel fuel price projections. High interest rates and increasing material costs for refining and transportation can contribute to higher diesel fuel prices.

Regulatory and Policy Changes

Changes in regulations and policies, especially those related to the environment and energy sector, can significantly impact diesel fuel prices. For instance, the implementation of carbon taxes or emission reduction initiatives may influence the cost of producing and consuming diesel fuel.

Regional Differences

Diesel fuel prices can vary significantly between different regions and countries. For example, within the United States, diesel fuel prices may differ due to varying local taxes, distribution costs, and competition among suppliers.

Market Competition

The level of competition in the diesel fuel market can also influence price projections. If there is increased competition among suppliers, it may lead to more competitive pricing.

Forecasting Techniques

Organizations like the U.S. Energy Information Administration (EIA) and GlobalPetrolPrices.com use data and projections to forecast diesel fuel prices. These forecasts are based on historical data, oil price developments, and various economic and industry-specific factors.

In summary, projecting diesel fuel prices involves a complex interplay of numerous factors, and even small changes in these variables can have significant impacts on the final price. Therefore, diesel fuel price projections should be treated as estimates that are subject to constant revision as new data emerges.

The difference in diesel prices across US regions

The price of diesel fuel in the US varies across different regions. Several factors contribute to these regional differences, including state and local taxes, distance from supply sources, supply disruptions, retail competition, and operating costs.

For instance, in the week of December 30, 2024, the US retail diesel price was 3.503 USD/gal, while prices in specific regions like New England (PADD1A), the Central Atlantic (PADD1B), and the Lower Atlantic (PADD1C) may differ. Diesel prices are important to analyze due to their significant consumption by the trucking, freight, and construction industries, and they tend to closely follow oil price trends.

One notable factor influencing regional price discrepancies is the distance from supply sources. Retail prices tend to be higher in locations farther away from refineries, ports, or pipeline and blending terminals, as transportation costs are a contributing factor. Additionally, supply disruptions, such as pipeline issues or refinery maintenance, can lead to increased prices as a result of higher bidding for available supplies.

Retail competition and operating costs also play a role in diesel prices. Locations with fewer gas stations often have higher prices. Even stations in close proximity may have different traffic patterns, rental costs, and supply sources, all of which can impact the prices they set.

It's worth noting that environmental programs, such as the use of reformulated gasoline with additives to reduce emissions, can also contribute to higher production, storage, and distribution costs, which are then reflected in the retail prices of diesel fuel across different US regions.

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