Regan Brown
Diesel fuel prices have been consistently higher than regular-grade gasoline prices since 2004, and there are several factors that influence this. Firstly, the demand for diesel fuel and other distillate fuel oils has been relatively high, especially in regions like Europe, China, India, and the United States. Secondly, the transition to less polluting, lower-sulfur diesel fuels has impacted production and distribution costs. Additionally, federal excise taxes for diesel fuel are higher than for gasoline. Diesel fuel prices are also affected by seasonal variations, with higher prices in fall and winter due to increased demand for heating oil, which is produced simultaneously with diesel fuel. Transportation costs, distance from the Gulf Coast (a major source of U.S. diesel fuel production), local market conditions, and taxes also play a role in diesel price fluctuations.
| Characteristics | Values |
|---|---|
| Date | 14th January 2025 |
| US average diesel cost | $3.60/gal |
| US average gas cost | $3.167/gal |
| Previous week's US average diesel cost | $3.56/gal |
| Previous year's US average diesel cost | $3.935/gal |
| Previous year's US average gas cost | $3.446/gal |
| Federal excise tax for on-highway diesel fuel | 24.3 cents per gallon |
| Federal excise tax for gasoline | 18.3 cents per gallon |
| Reasons for high diesel prices | Refinery slowdowns, the pandemic, the war in Ukraine, sanctions against Russia, demand from shipping companies, regulations, and taxes |
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What You'll Learn
Diesel fuel demand remained high during the pandemic
However, diesel fuel sales did not fall as much as jet fuel sales, for example. In April and May 2020, jet fuel sales were 63% and 65% lower than in the same months in 2019. In contrast, sales of No. 2 distillate fuels (primarily consumed as diesel fuel) did not fall as much.
Demand for diesel fuel is generally consistent and reflects the overall health of the economy. During the pandemic, diesel fuel was still in demand due to its use in large commercial vehicles, such as trucks, and its role in transportation and delivery services. For example, in states like Kentucky, where Amazon Air, DHL International, and UPS have major hub operations, jet fuel sales were similar to 2019 sales.
Additionally, the price of diesel fuel is influenced by the cost of crude oil, which accounts for about 50% of the monthly average US retail on-highway diesel fuel prices. As crude oil prices fluctuate due to changes in worldwide demand and supply, they can impact the price of diesel fuel.
Other factors that can affect diesel fuel prices include transportation costs, the distance from the source of supply (such as the Gulf Coast, which is the source of about half of US diesel fuel production), local market conditions, and taxes. For example, diesel fuel prices on the West Coast, especially in California, tend to be higher due to taxes and supply issues.
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Refinery slowdowns
The Gulf Coast is a critical source of diesel fuel production, accounting for about half of the U.S. supply. When refinery utilization drops in this region, it has a substantial impact on overall diesel fuel availability. In addition to planned maintenance, unplanned outages at major refineries, such as the bp refinery in Whiting, Indiana, can also cause a significant reduction in utilization and contribute to the downward pressure on diesel fuel inventories.
The decline in refinery utilization has resulted from reduced plant operations and more intense seasonal patterns. This has led to a decrease in the production of diesel fuel, which, in turn, has increased retail prices. The retail price of diesel fuel is influenced by various factors, including the costs of production and delivery to customers, as well as local market conditions such as the location and ownership of retail outlets. When diesel fuel inventories are low or declining, wholesalers and marketers may bid higher for available supplies, further driving up prices.
Furthermore, the international demand for distillate fuel, which includes diesel fuel, also affects U.S. diesel fuel prices. Changes in demand for heating oil, which is produced alongside diesel fuel, can put additional pressure on diesel fuel prices, especially during the fall and winter seasons. The distance between the retail location and the source of supply also plays a role in transportation costs, with areas farther from the Gulf Coast tending to have higher diesel fuel prices.
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War in Ukraine
The price of diesel fuel is influenced by various factors, including the cost of crude oil, demand, supply, transportation costs, local market conditions, and taxes. The war in Ukraine has significantly impacted diesel prices due to several interconnected reasons:
Impact of Russian Invasion on Oil Prices: The Russian invasion of Ukraine caused oil prices to surge. This increase was driven by a combination of factors, including strong economic recovery, low investment in oil production, and market volatility. The price of oil rose sharply, with both major oil benchmarks trading above $110, representing a further 15% increase in a single week.
Sanctions on Russia: The economic sanctions imposed by the United States and the European Union on Russia following the invasion disrupted the energy market. Many countries stopped purchasing energy exports from Russia, reducing the supply of crude oil and diesel fuel in the market. Diesel fuel is a major transportation fuel, and the decrease in supply, coupled with consistent or increasing demand, led to higher prices.
Scarcity of Diesel Fuel: Diesel fuel is scarcer worldwide compared to other fuels. There are not enough refineries to meet the demand for diesel, especially after the halt in energy imports from Russia. This scarcity drives up the price of diesel fuel as wholesalers and marketers bid higher for available supplies.
Inflation and Consumer Costs: High energy prices have contributed to the increased cost of goods and services, fueling inflation expectations. Consumers are bearing the brunt of these increases at the pump, with higher prices for gasoline and diesel. In countries where taxes on diesel and gasoline are significant, consumers face even greater costs.
Market Volatility: Energy markets are typically volatile, and the war in Ukraine has exacerbated this volatility. While diesel and gasoline prices initially followed similar trends after the Russian invasion, they later diverged, with diesel prices rising higher. This volatility makes it challenging to predict the direction of fuel prices in the short and long term.
The war in Ukraine has disrupted the energy sector, and the impact on diesel fuel prices is a reflection of the complex interplay between supply, demand, market dynamics, and geopolitical events.
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Diesel is taxed at a higher rate than regular gasoline
The price of diesel fuel is influenced by several factors, including the costs and profits of production, delivery, and retail. One significant factor is the higher taxation applied to diesel fuel compared with regular gasoline in some regions. As of January 1, 2024, the total state taxes on retail, on-highway diesel fuel in California were 96.32 cents per gallon, significantly higher than the average of 34.74 cents per gallon across all 50 states.
In 24 states, diesel fuel is taxed at a higher rate than gasoline, typically by a margin of 1 cent or more per gallon. This variation in tax rates seeks to address the greater wear and tear caused by heavy trucks on roads, ensuring they contribute more towards infrastructure maintenance. However, this policy is not consistent across all states, with seven states levying a lower tax rate on diesel fuel, creating a potential imbalance in the contribution of heavy vehicles to road maintenance.
The higher taxation of diesel fuel contributes to its overall higher price compared with gasoline. Diesel engines generally offer better mileage due to their higher energy output, making them a common choice for long-distance transportation and commercial vehicles. By taxing diesel fuel at a higher rate, the intention is to ensure that these heavier vehicles, which exert more pressure on road infrastructure, contribute proportionally to the upkeep of transportation networks.
While the majority of states have similar tax rates for diesel and gasoline, California stands out with notably higher diesel fuel taxes. This disparity can be attributed to a combination of tax policies and supply issues unique to the state. The higher taxes in California reflect a conscious decision to address the specific challenges associated with diesel fuel usage and its impact on infrastructure.
The taxation of diesel fuel is a complex issue, and while higher taxes aim to address road maintenance concerns, they also contribute to the overall higher price of diesel fuel compared with regular gasoline. This taxation policy has a direct impact on the operating costs of diesel vehicles, particularly those used for commercial or long-distance transportation, influencing fuel choices and vehicle usage patterns.
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Seasonal fluctuations
While the demand for diesel fuel in the US is generally consistent, diesel fuel prices tend to fluctuate during the year. One of the main reasons for this is the change in demand for heating oil during the fall and winter months, which affects diesel fuel prices as the two fuels are produced simultaneously. This seasonal increase in heating oil demand can put pressure on the diesel fuel market, leading to price increases.
In some regions, seasonal variations in agricultural demand can also impact diesel prices. For example, during the last quarter of 2024, seasonal slowdowns in construction and agriculture reduced demand in China, prompting refiners to lower diesel prices. Similarly, Latin America's diesel market experienced fluctuations in the fourth quarter of 2023 due to seasonal shifts in agricultural demand.
The price of diesel fuel can also be influenced by the distance between the retail location and the source of supply. Regions farther from the Gulf Coast, which accounts for approximately half of US diesel production, tend to have higher diesel prices due to increased transportation costs.
Additionally, regional market conditions, such as local demand, supply availability, and the number of competitors, can affect diesel prices. For instance, diesel fuel prices on the West Coast of the US, particularly in California, are typically higher due to taxes and supply issues.
The cost of crude oil is another significant factor in diesel pricing. As diesel fuel is a major transportation fuel, its demand and pricing are influenced by economic trends and the worldwide demand for and supply of crude oil.
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Frequently asked questions
The price of diesel fuel has gone up due to a combination of factors, including:
- Demand for diesel fuel has been relatively high, especially in Europe, China, India, and the United States.
- The transition to less polluting, lower-sulfur diesel fuels has affected diesel fuel production and distribution costs.
- Supply issues and transportation costs, especially in regions far from the Gulf Coast, which is the source of about half of US diesel fuel production.
Diesel fuel prices can fluctuate due to various factors, including:
- Seasonal changes: During fall and winter, the demand for heating oil, which is produced alongside diesel fuel, can increase, impacting diesel fuel prices.
- International demand for distillate fuel: As diesel engine cars are common worldwide, changes in demand for distillate fuel can affect diesel fuel prices.
- Crude oil prices: Diesel fuel prices are influenced by worldwide crude oil demand and supply.
Diesel fuel prices can have a significant impact on the economy. As diesel powers trucks, industrial machinery, and agricultural equipment, it affects inflation. Businesses facing higher diesel fuel costs may raise prices on consumer goods, leading to a potential increase in interest rates by central banks. Additionally, diesel fuel prices can reflect economic trends, with demand for diesel fuel generally following economic health.
