Mercedes Mullins
Diesel fuel prices have been increasing, and there are several factors contributing to this rise. Firstly, the demand for diesel fuel is generally correlated with economic trends, and the improving economic conditions have led to an increase in demand for transportation and, consequently, diesel fuel. Secondly, the transition to lower-sulfur diesel fuels has impacted production and distribution costs, making diesel fuel more expensive than regular gasoline. Additionally, taxes and supply issues, especially on the West Coast and in California, have contributed to higher diesel fuel prices in these regions. The conflict between Russia and Ukraine has also played a role in rising fuel costs, exacerbating the already escalating prices due to supply shocks. These factors have collectively led to the upward trend in diesel fuel prices, and experts predict that high fuel prices will persist in the foreseeable future.
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What You'll Learn
Demand for diesel fuel is high
Diesel fuel is a significant transportation fuel, and its demand typically aligns with economic trends. As economies recover from the pandemic, manufacturing, travel, and consumer goods purchases have increased, boosting fuel demand. Additionally, diesel fuel is used for heating during the fall and winter, leading to seasonal fluctuations in prices. The interaction between heating oil and diesel fuel production further influences the market.
Geographic factors also play a role in diesel demand and pricing. Regions farther from the Gulf Coast, a significant source of U.S. diesel fuel production, tend to have higher prices due to increased transportation costs. California, in particular, faces higher diesel prices due to taxes and supply issues. The West Coast liquid fuels market is relatively isolated, relying primarily on in-region refinery production, making it costly to transport supplies during refinery outages.
International demand for diesel and other distillate fuel oils is also strong, especially in Europe, China, India, and the United States. The transition to lower-sulfur diesel fuels in the U.S. has impacted production and distribution costs, contributing to higher prices.
With diesel prices increasing by 74% over the last year, managing fuel costs has become a critical concern for individuals, industries, and economies.
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The transition to lower-sulfur diesel fuels
The price of diesel fuel is influenced by several factors, including crude oil prices, seasonal demand, transportation costs, and local market conditions. In 2025, diesel prices in the US continued an upward trend, while gasoline prices remained relatively stable. This trend can be attributed to various factors, including the transition to lower-sulfur diesel fuels, which has been taking place globally to reduce harmful emissions.
Ultra-low-sulfur diesel (ULSD) is a type of diesel fuel with a significantly reduced sulfur content, typically below 15 parts per million (ppm). This transition to ULSD began in the early 1990s, with the European Union mandating the reduction of diesel sulfur content in 1993 and implementing modern ULSD specifications in 1999. The United States followed suit, starting to phase in ULSD requirements for highway vehicles in 2006, and for off-highway applications such as locomotive and marine fuel in 2007. Since then, almost all petroleum-based diesel fuel available in Europe and North America has been of the ULSD type.
The move to lower sulfur content in diesel fuels enables the use of advanced emissions control technologies, which substantially reduce harmful emissions from diesel combustion. Engine manufacturers and regulatory bodies have found that using emissions control devices in conjunction with ULSD can decrease the exhaust output of ozone precursors and particulate matter to near-zero levels. This transition is particularly important in highly polluted areas, such as cities and confined spaces, where diesel combustion can contribute significantly to air pollution.
The processing required to reduce sulfur content also removes naturally occurring lubricity agents in diesel fuel. To address this, ASTM International adopted the lubricity specification defined in ASTM D975 for all diesel fuels, which came into effect on January 1, 2005. This standard defines two ULSD grades: Grade No. 2-D S15 (regular ULSD) and Grade No. 1-D S15 (a higher volatility fuel with lower gelling temperature). While the transition to ULSD comes with substantial costs, it is an important step towards reducing emissions and improving air quality, particularly in highly polluted areas.
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Taxes in certain states
The price of diesel fuel in the US is influenced by various factors, including federal and state taxes, which can vary across states. As of January 1, 2025, the average state taxes on diesel fuel were $0.35 per gallon, with some states having higher rates and others lower. For instance, Connecticut saw an increase of $0.032, resulting in a rate of $0.524 per gallon, while Michigan's diesel tax decreased by $0.036.
Five states charge sales tax on diesel, which is calculated as a percentage of the fuel purchase and varies based on fuel price. The federal excise tax on diesel fuel is currently $0.244 per gallon, and this tax rate has not been adjusted for inflation since 1993, impacting its purchasing power. To compensate for this loss of purchasing power, there have been recommendations to increase the diesel tax and tie it to inflation.
California, a state with higher diesel fuel prices, had a total state tax of 96.32 cents per gallon as of January 1, 2024. This is due partly to taxes and supply issues unique to the West Coast. California's isolation from interconnected fuel supply systems in other regions makes it costly to transport fuel to the West Coast when refinery outages occur.
The impact of taxes on diesel prices is also influenced by factors such as crude oil prices, economic trends, and seasonal demand for heating oil, which can cause price fluctuations throughout the year.
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Supply issues
Diesel fuel prices are influenced by a variety of supply-related factors. Firstly, the cost of crude oil is a significant contributor, accounting for about 50% of the monthly average US retail on-highway diesel fuel prices from 2004 to 2023. The price of crude oil is determined by global demand and supply dynamics. International demand for distillate fuel oils, such as diesel, also impacts US diesel fuel prices. Strong demand for diesel in major economies like Europe, China, India, and the United States can drive up prices.
Geographic factors also play a role in supply issues. Diesel fuel prices on the West Coast, particularly in California, tend to be higher than in other regions due to taxes and supply conditions. The West Coast liquid fuels market is relatively isolated and primarily supplied by in-region refinery production. When a refinery outage occurs, it can be costly to transport supplies from outside the region, affecting prices.
Seasonal variations in demand for heating oil, which is produced simultaneously with diesel, can also influence diesel fuel prices. During fall and winter, the increased demand for heating oil can put pressure on the diesel fuel market. Additionally, transportation costs tend to increase with the distance from the source of supply, in this case, the Gulf Coast, which produces about half of US diesel fuel.
Other supply-related considerations include the transition to lower-sulfur diesel fuels, which has impacted production and distribution costs. Finally, external factors such as the war in Ukraine and the COVID-19 pandemic have disrupted supply chains and contributed to rising diesel prices.
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The war in Ukraine
- Supply Disruptions: The invasion of Ukraine by Russia in February 2022 led to immediate increases in diesel prices. This spike was due to supply disruptions as Russia is a significant energy exporter. When the US and other countries stopped purchasing energy exports from Russia, there were not enough refineries to meet the global demand for diesel fuel, driving up prices.
- Crude Oil Prices: Diesel fuel prices are closely linked to crude oil prices. The conflict in Ukraine caused crude oil prices to soar, which had a direct impact on diesel prices. This effect was exacerbated by a strong economic recovery coupled with low investment in oil production before the war.
- Sanctions and Economic Factors: Economic sanctions imposed on Russia by the European Union and the United States also played a role in price increases. Additionally, high energy prices resulting from the war contributed to broader inflation, driving up the cost of goods and services, including transportation costs.
- Regional Variations: The war's impact on diesel prices varies across different regions in the US. For example, areas farthest from the Gulf Coast, a major source of US diesel fuel production, tend to have higher diesel prices due to increased transportation costs. California, with its unique supply conditions and higher taxes, also experiences higher diesel prices than other states.
- Seasonal Demand: Seasonal variations in demand, such as increased demand for heating oil during winter, continue to influence diesel fuel prices. The war's impact on energy prices, combined with these seasonal fluctuations, has resulted in higher prices for consumers.
While diesel prices have decreased since their peak in June 2022, the war in Ukraine initially caused significant disruptions to energy markets, contributing to the upward trend in diesel fuel prices.
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