Mercedes Mullins
Diesel fuel prices have been a concern for consumers, especially as they haven't dropped as significantly as gasoline prices. While gasoline prices have fallen below $2 in much of the United States, diesel prices remain higher. This disparity is attributed to various factors, including supply and demand, production and distribution costs, and taxes. The demand for diesel fuel is influenced by its use in transportation, with most diesel engines employed for transporting goods and services. Additionally, the transition to less polluting, lower-sulfur diesel fuels has impacted production and distribution costs. The Federal excise tax for on-highway diesel fuel is also higher than that for gasoline, contributing to the price difference.
| Characteristics | Values |
|---|---|
| Retail price components | Costs, profits or losses of production, delivery, overhead, local real estate costs, taxes, traffic patterns, sources of supply, number and location of local competitors, etc. |
| Retail price influencers | Crude oil prices, worldwide crude oil demand and supply, world economic conditions, seasonality, distance from the source of supply, local market conditions, location and ownership of retail outlets, etc. |
| Demand influencers | Economic trends, international demand for distillate fuel, heating oil demand, seasonal swings in farmers' demand, etc. |
| Supply influencers | Petroleum supply, refinery problems, imports, diesel inventories, diesel fuel transportation system, etc. |
| Diesel fuel prices | Higher in California and the West Coast due to taxes and supply issues; average of $4.08 per gallon in Milwaukee, $2.43 per gallon in Bowler, WI |
| Federal excise tax | 24.3 cents per gallon or 24.4 cents per gallon |
| Crude oil contribution | ~50% of the monthly average U.S. retail on-highway diesel fuel prices from 2004 to 2023 |
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What You'll Learn
Diesel prices are influenced by demand for heating oil
Diesel fuel prices are influenced by a variety of factors, including global oil production, refining capacity, geopolitical instability, weather patterns, and demand. Demand for diesel fuel generally follows economic trends, and prices often fluctuate throughout the year.
During the fall and winter, the demand for heating oil can influence diesel fuel prices. Heating oil and diesel fuel are produced simultaneously, so increases in heating oil demand can put pressure on the diesel fuel market. A large cold-weather system can affect supply, demand, and prices. For example, during cold weather and winter storms, people use more fuel, and a winter storm can interrupt delivery systems. This increase in consumption can draw down heating oil reserves faster than they can be replenished, and refineries may struggle to keep up with demand. As a result, wholesale buyers may bid up prices for the available product.
In addition, demand for diesel fuel can fluctuate with the seasons and the overall economy. For example, demand for diesel usually increases during the summer as people travel more, and it typically decreases during economic downturns as people cut back on spending. The demand for diesel fuel is also influenced by the distance between the retail location and the sources of supply. Areas farthest from the Gulf Coast, which accounts for about half of U.S. diesel fuel production, tend to have higher diesel fuel prices due to increased transportation costs.
The cost of refining diesel fuel is impacted by the price of crude oil, the availability of refinery capacity, and environmental regulations. Changes in these factors can cause fluctuations in the cost of refining diesel fuel, which, in turn, affects diesel fuel prices. The cost of crude oil is influenced by production costs, global demand, and political stability. For instance, tensions in the Middle East often lead to spikes in crude oil prices.
Overall, the price of diesel fuel is determined by a complex interplay of supply and demand factors, with the demand for heating oil being a significant influence during the fall and winter months.
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Diesel fuel is a major transportation fuel
In 2023, petroleum products accounted for about 89% of the total U.S. transportation sector energy use. Gasoline is the dominant transportation fuel in the United States, followed by distillate fuels (mostly diesel fuel) and jet fuel. Distillate fuels, mostly diesel (excluding biofuels blended with diesel), accounted for 23% of the total energy consumption by the U.S. transportation sector in 2022.
The U.S. vehicle fleet depends almost entirely on petroleum. Diesel fuel prices in the U.S. are influenced by international demand for distillate fuel. Changes in demand for heating oil, which is produced at the same time as diesel fuel, can also affect diesel fuel prices. During the fall and winter, the demand for heating oil increases and can put pressure on diesel fuel prices.
Prices of transportation fuels in the U.S. are generally more volatile than prices of other commodities. Diesel fuel prices on the West Coast, especially in California, tend to be higher due to taxes and supply issues. As of January 1, 2024, state taxes on retail, on-highway diesel fuel in California totaled 96.32 cents per gallon, compared to an average of 34.74 cents per gallon across all 50 states.
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International demand for distillate fuel affects US diesel prices
International demand for distillate fuel, a category of fuel that includes diesel and heating oil, affects US diesel prices. This is because changes in demand for one fuel can influence the price of the other, as they are practically the same fuels. For instance, Europe, which imports a large amount of its distillate fuel from Russia, faced higher prices due to the possibility of reduced imports after Russia's invasion of Ukraine. This led to higher demand for US distillate, driving up prices.
In many countries, diesel engine cars are more common than in the US, and distillate fuel is used for electricity generation. Hence, international demand for distillate fuel can affect US diesel prices. Additionally, US diesel fuel demand is consistent and reflects economic trends, with prices fluctuating seasonally. During fall and winter, heating oil demand increases, impacting diesel fuel prices as they are produced simultaneously.
Transportation costs also influence diesel prices, with areas farther from the Gulf Coast, a major source of US diesel production, typically paying higher prices. Diesel prices on the West Coast, especially California, are higher due to taxes and supply issues. California's diesel prices were 96.32 cents per gallon in taxes as of January 1, 2024, compared to a national average of 34.74 cents.
Retail outlets' costs, including overhead, local real estate, and taxes, also impact diesel prices. High-volume truck stops usually sell diesel at lower prices than smaller-volume stations. US diesel prices are expected to decline in 2023 and 2024 due to lower demand growth and high production, with on-highway diesel prices forecasted to average $4.23 per gallon in 2023 and $3.70 in 2024.
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Diesel prices are influenced by the cost of crude oil
The price of diesel fuel is influenced by a variety of factors, including the cost of crude oil, global demand, geopolitical instability, and refining capacity. The cost of crude oil is a significant component of diesel fuel prices, accounting for about 50% of the monthly average U.S. retail on-highway diesel fuel prices from 2004 to 2023. Crude oil prices are volatile and influenced by factors such as production costs, global demand, and political stability. For example, tensions in the Middle East often lead to spikes in crude oil prices.
The price of diesel fuel is also impacted by the availability of refinery capacity. Refineries may need to run at reduced rates during periods of oversupply, which can affect the cost of refining diesel fuel. Additionally, environmental regulations can play a role by requiring more expensive processes or additives, thereby influencing the overall cost of refining.
Demand for diesel fuel is another critical factor in determining its price. As a major transportation fuel, the demand for diesel fuel generally follows economic trends. When demand is high, prices tend to increase due to limited supply and increased competition. International demand for distillate fuel, which includes heating oil, can also affect U.S. diesel fuel prices. Seasonal variations in heating oil demand, such as during fall and winter, can put pressure on the diesel fuel market.
Distribution and transportation costs also contribute to diesel fuel prices. Diesel fuel, due to its lower refinement compared to gasoline, incurs higher costs for transportation and storage. The distance between the retail location and the source of supply impacts transportation costs, with areas farther from production sources, such as the Gulf Coast, typically facing higher diesel fuel prices.
Government policies, taxes, and subsidies can also influence diesel fuel prices. Taxes on diesel fuel can vary across states, with California, for instance, having higher taxes and supply issues, leading to increased diesel fuel prices in the state. Additionally, federal and state taxes on diesel fuel can impact the prices of goods and services that rely on diesel for transportation.
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Diesel prices are influenced by local market conditions
The retail price of a gallon of diesel fuel is influenced by the costs and profits (or losses) of producing and delivering the product to customers. The cost of crude oil is a significant factor in diesel prices, accounting for about 50% of the monthly average US retail on-highway diesel fuel price from 2004 to 2023. As such, diesel fuel prices are impacted by the worldwide demand for and supply of crude oil, which is influenced by geopolitical events, global market fundamentals, seasonality, and financial market considerations.
Local market conditions also play a role in diesel prices. The retail price of diesel fuel reflects factors such as the location and ownership of retail outlets. Refiners that own retail outlets may have different costs and pricing strategies compared to independent businesses that purchase diesel fuel on the wholesale market. Even retail stations located near each other can exhibit varying traffic patterns, costs, and sources of supply, leading to differences in pricing. The presence and proximity of local competitors can also impact prices, with high-volume truck stops typically offering lower diesel fuel prices than smaller-volume service stations.
Transportation costs are another factor influencing diesel prices, with areas farther from the Gulf Coast, a major source of US diesel fuel production, generally experiencing higher prices. The availability and efficiency of the diesel fuel transportation system can also affect prices. If the system faces challenges in swiftly transporting supplies between regions, prices may remain high due to supply constraints.
Seasonal variations in demand for heating oil, which is produced alongside diesel fuel, can exert pressure on the diesel fuel market. During fall and winter, increased demand for heating oil can lead to fluctuations in diesel fuel prices. In certain regions, swings in farmers' demand for diesel fuel during different seasons can also influence local pricing.
Additionally, diesel fuel prices in California and the West Coast tend to be higher due to taxes and supply issues. California's market is relatively isolated and heavily reliant on in-region refinery production. As of January 1, 2024, total state taxes on retail, on-highway diesel fuel in California reached 96.32 cents per gallon, significantly higher than the average for all 50 states, which stood at 34.74 cents per gallon.
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Frequently asked questions
There are a few reasons for this:
- The demand for diesel fuel and other distillate fuel oils has been high, especially in Europe, China, India, and the United States.
- The transition to less polluting, lower-sulfur diesel fuels in the United States has affected diesel fuel production and distribution costs.
- The federal excise tax for on-highway diesel fuel is 24.4 cents per gallon, which is six cents higher than the gasoline tax.
The demand for diesel fuel generally follows economic trends. The U.S. vehicle fleet depends almost entirely on petroleum. Diesel fuel is also used for transportation in trains, ships, and over-the-road trucks.
Diesel prices are primarily determined by the cost of crude oil, which regularly accounts for around 50% of end consumer prices. Other factors include transportation costs, local market conditions, and taxes.
During the fall and winter, the demand for heating oil affects diesel fuel prices as they are produced at the same time. In some regions, seasonal swings in farmers' demand for diesel fuel can also influence prices. Prices tend to increase in the spring and summer and decrease in the fall and winter.
