Mercedes Mullins
Diesel fuel prices have been a topic of interest for many, especially with the recent fluctuations in the market. Historically, diesel fuel prices followed a seasonal pattern, with average retail gasoline prices higher from April to September and diesel prices increasing during the colder months from October through March. However, this pattern changed, and since 2004, diesel fuel prices have been higher than regular gasoline prices in the United States, with a few exceptions. This shift can be attributed to various factors, including increased demand, changes in environmental regulations, supply constraints, and taxes. With the growing popularity of light-duty diesel vehicles globally, particularly in Europe, China, India, and the United States, the demand for diesel fuel has surged. Additionally, the transition to less polluting, low-sulfur diesel fuels has impacted production and distribution costs, further contributing to the rise in diesel prices. Supply chain issues, refinery closures, and geopolitical events, such as the war in Ukraine and sanctions on Russia, have also played a role in the changing diesel fuel market dynamics.
| Characteristics | Values |
|---|---|
| Date when diesel fuel became more expensive than gas | September 2004 |
| Reason for the switch | Demand for diesel fuel and other distillate fuel oils has been relatively high, especially in Europe, China, India, and the United States |
| Transition to less polluting, lower-sulfur diesel fuels in the United States affected diesel fuel production and distribution costs | |
| Federal excise tax for on-highway diesel fuel is higher than that for gasoline | |
| Other reasons for high diesel prices | U.S. refinery closures and the war in Ukraine have impacted the supply |
| Increased demand for some of its components to be used in fuel for marine vessels | |
| Demand for diesel from shipping companies and online shopping during the pandemic | |
| Sanctions against Russia have kept diesel reserves lower than average | |
| Production of diesel is more expensive due to additional capital and ongoing operating costs |
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What You'll Learn
Diesel fuel is taxed higher than gasoline in the US
On-highway diesel fuel prices have been more expensive than regular-grade gasoline prices in the US since September 2004. This is a break from the previous historical pattern, where diesel fuel prices were typically lower than gasoline prices, except during cold winters when demand for heating oil was high.
There are several reasons why diesel fuel prices have been higher than gasoline prices in recent years. Firstly, the demand for diesel fuel and other distillate fuel oils has been relatively high, especially in Europe, China, India, and the United States. The transition to less polluting, low-sulfur diesel fuels in the United States has also affected diesel fuel production and distribution costs.
Additionally, diesel fuel is taxed higher than gasoline in the US. The federal excise tax for on-highway diesel fuel is 24.4 cents per gallon, which is 6 cents per gallon higher than the federal excise tax on gasoline, which is 18.4 cents per gallon. As of April 2019, state and local taxes and fees add an average of 34.24 cents to gasoline and 35.89 cents to diesel, resulting in a total US volume-weighted average fuel tax of 52.64 cents per gallon for gasoline and 60.29 cents per gallon for diesel.
The higher tax rate on diesel fuel is not a recent development. Historical data shows that in 1939, the average fuel tax on gasoline was 3.8 cents per gallon, while the current federal excise tax on gasoline is 18.4 cents per gallon, indicating that the tax rate on gasoline has increased over time. However, the diesel fuel tax rate has also likely increased, as the federal tax rates are not indexed to inflation, which can impact the purchasing power of the taxes collected.
The higher tax on diesel fuel in the US is not a common practice globally, as only a few countries, including Switzerland, Iceland, Mexico, and the United States, have higher taxes on diesel than gasoline. This unique taxation policy in the US contributes to the higher prices of diesel fuel compared to gasoline, and it will be interesting to see if this trend continues in the future.
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Demand for diesel is high in Europe and Asia
On-highway diesel fuel prices have been higher than regular-grade gasoline prices since September 2004. This is a break from the previous pattern, where diesel prices were usually lower than gasoline prices, except during cold winters when demand for heating oil was high.
Demand for diesel fuel has been relatively high, especially in Europe, China, India, and the United States. In 2005, EIA analysts predicted that the increased demand for diesel in Europe and Asia would lessen diesel fuel's price advantage over gasoline over the next 10 years. This prediction was made in light of the growing numbers of light-duty diesel vehicles in these regions.
The high demand for diesel in Europe has resulted in an increase in exports from Asia. In 2016, at least two companies planned to ship diesel in larger-than-usual tankers from Asia to Europe to meet this demand. More recently, in September 2022, exports from Asia swelled to near a three-year high of 306,000 barrels per day, according to Vortexa Ltd. data.
While diesel fuel prices are projected to increase with the winter demand for heating oil, the global demand for diesel, particularly in Europe and Asia, is expected to keep the market tight. However, there are signs that the demand for diesel is starting to slacken in these regions due to high prices, slowing manufacturing, and freight activity. Interest rate rises and a deeper slowdown in manufacturing and freight are expected to result in a cyclical slowdown, which will allow distillate fuel oil inventories to rebuild.
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Diesel is a component of marine vessel fuel
Marine vessels use bunker fuels to power their motors, and depending on the vessel type, the fuel used may be diesel or marine gas oil (MGO). Marine gas oil is considered a low-sulphur fuel oil (LSFO). Marine diesel oil (MDO), a very-low-sulphur fuel, is crafted from refinery leftovers by blending residual products with low-sulphur distillates. This process creates a high-quality fuel that adheres to the International Maritime Organization's (IMO) sulphur cap of 0.5%.
The IMO has set strict standards for marine fuels used in ships' engines and boilers under the ISO 8217 standard. Marine fuels are divided into two main types: heavy fuel oil (HFO) and distillates, with HFO being about 30% cheaper than distillates like MGO. However, HFO emits high levels of sulphur oxide, posing environmental and health risks. To address this, the IMO has implemented sulphur emission limits, reducing the allowable sulphur content in marine fuels to 0.5% by 2020.
The demand for diesel fuel has been relatively high, especially in Europe, China, India, and the United States, contributing to its higher cost compared to gasoline. The transition to less polluting, lower-sulphur diesel fuels has also impacted diesel fuel production and distribution costs. Additionally, the federal excise tax for on-highway diesel fuel is higher than that for gasoline.
While diesel offers an unmatched range and reliability for marine vessels, its higher cost might not be suitable for all operators. Biodiesel, derived from natural oils and fats, is compatible with most diesel engines, but its lower energy density leads to more frequent refueling. Overall, the choice of marine fuel depends on various factors, including vessel size, cost, availability, and operational requirements.
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US refinery closures have impacted supply
Since 2004, diesel fuel prices have been higher than gasoline prices, breaking the previous historical pattern. This shift can be attributed to several factors, including increased demand for diesel fuel, the transition to less polluting and lower-sulfur diesel, and higher federal excise taxes on diesel fuel.
US refinery closures have significantly impacted the supply of diesel fuel. The shutdown of large refineries, such as LyondellBasell's Houston refinery, constrains supply and affects fuel exports. The loss of refining capacity due to closures results in tighter diesel supplies and potentially lower export volumes. This reduction in diesel production capacity contributes to an already strained situation, as global demand for distillate fuels, particularly in Europe and Asia, is expected to keep the market tight.
The impact of refinery closures on diesel supply is particularly notable in regions dependent on exports from the Gulf Coast, a hub for US fuel exports. The closure of Lyondell's refinery alone resulted in a decrease of 100,000 barrels per day (bpd) of diesel production, affecting the US's combined export total for diesel and gasoline fuels. With growing demand for diesel fuel in the US and globally, the tightening of supply due to refinery closures is expected to impact fuel markets both domestically and internationally.
According to the Energy Information Administration (EIA), refinery closures will contribute to fuel inventories falling to their lowest levels since 2000. The EIA also predicts that biodiesel and renewable diesel will comprise about 9% of US distillate fuel oil consumption in 2026, up from 5% in 2021. This increase in biofuel substitution is another factor influencing diesel fuel supplies and prices.
While diesel fuel prices are projected to decline in the short term, they are expected to increase again as winter demand for heating oil grows. The seasonal increase in demand for home heating oil typically causes price increases for both heating oil and diesel fuel. Therefore, refinery closures, combined with seasonal demand fluctuations, are likely to further impact the supply and prices of diesel fuel in the US.
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Diesel demand is seasonal
Diesel fuel demand is seasonal, with prices fluctuating throughout the year. Generally, diesel sales peak in spring and autumn, with a slight dip in sales during the summer driving season.
The period between the US holidays of Memorial Day and Labor Day is known as the driving season, a time of heightened gasoline demand. While gasoline demand and prices tend to increase during the summer, diesel demand does not peak at the same time. Instead, diesel demand typically increases in spring and autumn due to agricultural production.
In the spring, agricultural production ramps up, leading to higher diesel demand and prices. As the summer driving season ends, diesel demand from agriculture and other industries, such as retail, increases again. This increase in diesel demand from various sources towards the end of the driving season contributes to upward price pressure for diesel.
The seasonal nature of diesel demand also has price implications during the winter months. Diesel fuel is similar to home heating oil, and the increased demand for heating during the colder months can drive up diesel prices. This demand for heating oil has historically caused price increases for both home heating oil and diesel fuel during the winter season.
The relationship between diesel and gasoline prices has evolved over time. From 2004 onwards, diesel fuel prices were often higher than gasoline prices, a departure from the previous pattern. Various factors, including global demand, production costs, and fuel taxes, have contributed to this shift in the relative pricing of diesel and gasoline.
In summary, diesel demand exhibits seasonal variations, with spring and autumn typically being the peak seasons. The interplay between diesel and gasoline demand and production, along with other market forces, influences the pricing dynamics of diesel fuel throughout the year.
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Frequently asked questions
Diesel fuel has been more expensive than regular-grade gasoline since around 2004/2005.
There are several reasons why diesel fuel is more expensive than gas. Firstly, the demand for diesel fuel has been relatively high, especially in Europe, China, India, and the United States. Secondly, the transition to less-polluting, lower-sulfur diesel fuels has affected diesel fuel production and distribution costs. Finally, the federal excise tax for on-highway diesel fuel is higher than that for gasoline.
It is difficult to predict if diesel fuel will always be more expensive than gas, as prices fluctuate over time due to various factors such as supply and demand, regulations, and taxes. However, some sources suggest that the price of diesel fuel is expected to decline in the future, while others predict that the global demand for diesel will increase, which may impact prices.
