Regan Brown
Diesel prices have been higher than regular gasoline prices for almost two decades. This is due to a multitude of factors, including higher taxes, the transition to less polluting fuels, and more recently, the war in Ukraine, and U.S. refinery closures and slowdowns. The price of diesel fuel is a concern for businesses and consumers alike, as it impacts the cost of goods and travel. With supply problems and geopolitical tensions, diesel prices are expected to remain high, affecting inflation and central bank policies.
| Characteristics | Values |
|---|---|
| Diesel prices | High |
| Reasons for high prices | U.S. refinery closures, the war in Ukraine, higher taxes, demand for components in marine vessel fuel, transition to less polluting fuels, geopolitical struggle between Russia and the West, supply problems |
| Predictions for the future | Demand for diesel is expected to increase slightly this year, but the EIA forecasted the annual average cost of diesel fuel to decline in 2025 to $3.85 per gallon |
| Impact of diesel prices | Businesses facing higher fuel costs may raise prices on groceries, consumer goods, etc., which could force central banks to raise interest rates or keep them high for longer |
| Government influence | U.S. presidents can enact policies that encourage low fuel prices, but they cannot control how much voters pay at the pump |
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What You'll Learn
Geopolitical tensions between Russia and the West
The war in Ukraine has also impacted diesel fuel production and distribution costs in the West. The transition to lower-sulfur diesel fuels, such as VLSFO (very low sulfur fuel oil), has already increased production and distribution costs. The conflict has further strained the availability of the necessary distillate molecules, as some are now being used to produce VLSFO for the shipping industry. This has resulted in higher prices for diesel fuel, as the availability of key components has decreased.
Additionally, geopolitical tensions and conflicts often lead to uncertainty and volatility in the oil market. The Russia-Ukraine war has heightened trading volumes and intensified oil price fluctuations. Geopolitical risk is considered a primary factor affecting crude oil prices, and the conflict has caused a significant deviation in oil prices compared to non-event periods. The impact of the war on oil prices has been analyzed through various methods, including the Geopolitical Conflict Index (GPR) and event analysis approaches, which help assess the causal relationships and degree of impact on oil prices.
The West's sanctions on Russia and the resulting supply concerns have contributed to the upward trend in diesel fuel prices. While the long-term impact of the Russia-Ukraine conflict on oil prices may be mitigated by the resilience of Russian oil exports and the strengthening of the US dollar index, the current tensions have undoubtedly played a role in the diesel fuel price dynamics. The complex interplay of geopolitical factors, supply and demand dynamics, and production costs continues to influence diesel fuel prices globally.
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Demand for diesel components in marine vessel fuel
Diesel prices are influenced by a multitude of factors, including refinery closures and slowdowns, geopolitical conflicts, and taxation policies. One notable factor contributing to the high cost of diesel is the demand for some of its components in marine vessel fuel.
In 2020, the International Maritime Organization (IMO) tightened fuel regulations for ships and other vessels, imposing stricter sulfur emission limits. To comply with these regulations, shipping companies turned to a new type of fuel known as very low sulfur fuel oil (VLSFO). The production of VLSFO utilizes distillate molecules that are also essential in the creation of diesel fuel. As a result, some of the distillate molecules intended for diesel fuel production were diverted to VLSFO manufacturing. This shift in the allocation of distillate molecules contributed to the increased demand for diesel components and influenced the overall diesel fuel prices.
The marine fuel market is experiencing significant changes due to rising traditional fuel costs and evolving maritime regulations. Heavy Fuel Oil (HFO), also known as bunker fuel, has been a widely used option in the shipping industry due to its cost advantages, being about 30% cheaper than distillate fuels. However, HFO emits high levels of sulfur oxide, which has raised environmental and health concerns. To address these issues, the IMO implemented sulfur emission limits, reducing the allowable sulfur content in HFO to 0.5% by 2020. Despite these restrictions, HFO continues to be used with the aid of technologies like marine scrubbers that mitigate sulfur emissions.
As the shipping industry navigates the challenges posed by rising fuel costs and stricter environmental regulations, alternative fuels are gaining traction. Biodiesel, derived from natural oils and fats, offers a potential reduction in dependence on traditional fossil fuels. While biodiesel is compatible with most diesel engines, its lower energy density results in more frequent refueling stops. Additionally, the maritime industry is exploring other alternative fuels, such as methanol, liquefied natural gas (LNG), LPG, and ammonia. The development of hybrid marine diesel engines is also underway, offering vessel owners greater fuel efficiency and the ability to operate silently and emissions-free during berthing and low-speed maneuvering.
The demand for diesel components in marine vessel fuel is influenced by various factors, including the need to comply with emissions regulations, the availability of alternative fuels, and the cost-effectiveness of different fuel options. While the use of VLSFO and alternative fuels may contribute to a slight increase in the demand for diesel components, the overall diesel fuel prices are determined by a multitude of complex factors affecting the global market.
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U.S. refinery closures and slowdowns
The COVID-19 pandemic significantly impacted the U.S. refining sector, leading to a substantial decrease in demand for motor fuels and refined petroleum products. This resulted in challenging market conditions for refinery operators, with refinery closures and slowdowns occurring across the country.
According to the U.S. Energy Information Administration (EIA), U.S. operable atmospheric crude oil distillation capacity, the primary measure of refinery capacity, dropped by 4.5% at the start of 2021 compared to the previous year. This decrease was due to several refinery closures, including the 335,000-barrel-per-calendar-day (b/cd) Philadelphia Energy Solutions (PES) refinery in Philadelphia, Pennsylvania, which experienced a major incident in 2019 and has remained idle since.
The EIA reported a further decline in U.S. refinery capacity in 2021, marking the second consecutive year of decreases. By December 2021, the EIA reported a loss of 1.1 million barrels per day (BPD) of refining capacity since the start of the pandemic, highlighting the significant impact of refinery closures and slowdowns.
In addition to the pandemic, other factors contributing to the loss of refining capacity include the increasing market interest in renewable diesel production and long-term projections of declining fuel demand. Companies are hesitant to invest billions of dollars in refining infrastructure that may take decades to pay off, especially with the growing popularity of electric vehicles and the push for renewable energy sources.
The state of California provides a notable example of the challenges facing the fuel market. Despite being the second-largest consumer of gasoline in the U.S., California has seen regional refiners struggle with profitability due to the increased penetration of renewable diesel, reducing demand for petroleum diesel. Additionally, California's gasoline inventories have consistently been lower than the national average, impacting the availability of petroleum products and contributing to price volatility in the state.
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Transition to less polluting diesel fuels
Diesel prices have been impacted by several factors, including refinery closures and slowdowns, the war in Ukraine, and demand for some of its components in marine vessel fuel. The transition to less polluting diesel fuels, such as renewable diesel and biodiesel, has also played a role in the changing diesel fuel landscape.
Renewable diesel is a sustainable alternative to traditional diesel, offering environmental, economic, and sustainability benefits. It is produced from renewable sources, such as soybean oil, animal proteins, and used cooking oil, through various technology pathways, including hydrotreating, biological sugar upgrading, and catalytic conversion of sugars. This process turns waste into fuel, reducing emissions and providing a cleaner-burning alternative to petroleum diesel.
In 2020, the transition to renewable diesel and biodiesel in California eliminated almost 7 million tons of GHG emissions, according to the California Air Resources Board. Renewable diesel can be used as a drop-in replacement fuel or blended with petroleum diesel, offering flexibility and compatibility with existing diesel engines and infrastructure.
New York City has taken a significant step towards reducing its carbon footprint by transitioning its entire fleet of 12,500 heavy-duty and off-road vehicles to renewable diesel. This initiative is expected to prevent 162 million pounds of carbon dioxide emissions annually and serves as a bridge to electric vehicle technology.
The transition to less polluting diesel fuels, such as renewable diesel and biodiesel, is a crucial step in reducing greenhouse gas emissions and addressing climate change. It offers a viable alternative to traditional diesel, with the potential to reduce emissions and improve air quality, especially in the transportation sector, which contributes significantly to greenhouse gas emissions.
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Higher taxes on diesel
Diesel prices are higher than regular gasoline prices due to several factors, including higher taxes. In the United States, the federal excise tax on diesel fuel is higher than that of regular gasoline. As of 2024, the federal tax on diesel fuel was 24.3 or 24.4 cents per gallon, while the tax on regular gasoline was 18.3 or 18.4 cents per gallon. This difference in taxation contributes to the overall higher price of diesel fuel.
The higher taxation on diesel fuel is due to various reasons, including the greater demand for diesel fuel, particularly in Europe, China, India, and the United States. Diesel vehicles also tend to use more roads and contribute more to road maintenance costs, justifying a higher tax rate. Additionally, the transition to less polluting, lower-sulfur diesel fuels has increased production and distribution costs, which are partially offset by the higher tax revenue.
Furthermore, environmental regulations influence fuel taxes. When there is a higher risk of pollution due to increasing numbers of vehicles emitting harmful gases, regulatory authorities may propose raising diesel taxes to incentivize a shift to alternative options, such as hybrid or electric vehicles. This increase in fuel costs can help reduce pollution and encourage the use of fuel-efficient cars or public transit.
While the federal tax on diesel fuel is uniform across the United States, state fuel taxes vary. States with higher infrastructure requirements and transportation budgets tend to have higher fuel taxes to generate the necessary capital. For example, California had one of the highest fuel tax rates in 2024, at 68.1 or 69.8 cents per gallon, while Alaska had one of the lowest, at 9.0 or 8.95 cents per gallon. These state fuel taxes add to the overall tax burden on diesel fuel, further contributing to its higher price.
The impact of higher diesel fuel taxes extends beyond the pump, affecting consumers, businesses, and the transportation industry. Higher fuel taxes lead to increased commuting costs for consumers and higher operating costs for businesses. As a result, the transportation industry may pass on some of these costs to consumers in the form of higher service charges.
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Frequently asked questions
Diesel prices are high due to several factors, including refinery closures and slowdowns, the war in Ukraine, high demand, and the transition to less polluting fuels.
Diesel prices are influenced by global supply and demand dynamics, production costs, taxes, and geopolitical factors.
High diesel prices contribute to inflation as businesses pass on their increased fuel costs to consumers through higher prices for goods and services.
Diesel prices are expected to remain high but may fluctuate due to geopolitical tensions and supply constraints. The EIA forecasts a slight decline in diesel prices in 2025.
Diesel fuel is generally more expensive than gasoline due to higher taxes and production costs associated with the transition to low-sulfur fuels.
