Regan Brown
The price of diesel fuel is influenced by several factors, including the cost of crude oil, supply and demand dynamics, refinery capacity, and economic conditions. In 2024, diesel prices exhibited a downward trend, with the U.S. Energy Information Administration (EIA) attributing the decline to increased refinery production and inventories, particularly in the Middle East. This led to a forecast of decreasing diesel prices in 2024 and 2025 by the EIA. However, the complex interplay of various factors, such as geopolitical tensions, economic activity, and refinery shutdowns, can cause fluctuations in diesel prices over time. While the annual decline in diesel prices is expected to continue in 2025, quarterly projections suggest a gradual increase in prices throughout the year, with the lowest projection in the first quarter and a higher average expected in the fourth quarter.
| Characteristics | Values |
|---|---|
| Diesel prices in 2024 | Decreased |
| Diesel prices in 2025 | Expected to decrease |
| Diesel price in Q1 2025 | $3.46 |
| Diesel price in Q4 2025 | $3.75 |
| Diesel price in 2025 | $3.50 |
| Diesel consumption | Declined |
| Reason for decline in diesel consumption | Slowdown in economic activity |
| Reason for decline in economic activity | Slowing building and housing construction |
| Reason for decline in economic activity | Liquefied natural gas replacing diesel |
| Diesel prices | Determined by cost of crude oil |
| Crude oil | Accounts for 50% of end consumer prices of diesel |
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What You'll Learn
Geopolitical factors
One notable example is the US-China trade war, which demonstrates how cross-border relationships and supply and demand considerations can affect diesel prices. Additionally, the Organization of Petroleum Exporting Countries and its allies (OPEC+) work to maintain balanced oil market prices. Their actions can influence the supply environment and impact fuel prices.
Venezuela, once a prominent player in the oil industry, now operates a single oil rig despite possessing the world's largest oil reserves. US sanctions and an economic crisis have reduced Venezuela's contribution to the global supply landscape, showcasing how geopolitical disruptions can impact the market.
International demand for distillate fuel, including heating oil and diesel fuel, influences US diesel fuel prices. Changes in demand for one type of distillate fuel can affect the price of the other. Many countries primarily use diesel engine cars, and some rely on distillate fuel for electricity generation. This international demand affects US diesel prices.
Geopolitical tensions can also lead to significant oil price shocks, magnifying price disparities across countries. Government intervention often follows, shifting markets towards more regulated policies and amplifying price uncertainty and country-specific differences.
While geopolitical factors are crucial, it's important to remember that diesel prices are also influenced by various other factors, including refinery capacity, transportation costs, local market conditions, and taxes. These factors collectively shape the complex landscape of diesel fuel pricing.
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Demand and supply
Diesel fuel prices have been on a rollercoaster ride in recent times, with a mix of ups and downs across various regions. As of October 2023, diesel fuel prices showed a slight stabilisation and decrease across all regions, providing some relief after consecutive weeks of price increases. However, it's important to acknowledge that diesel fuel prices are influenced by a range of factors related to demand and supply.
Demand for diesel fuel is driven by its crucial role in various sectors. Diesel powers parts of the supply chain, industrial machinery, agricultural equipment, and transportation of goods and services. Trains, ships, and trucks rely on diesel engines, contributing to the high demand for diesel fuel. Additionally, diesel is used in producing kerosene, jet fuel, and home heating oil, further increasing its demand, especially during colder months.
The supply of diesel fuel is influenced by various factors, including geopolitical tensions, refinery capacity, and economic growth. Geopolitical struggles, such as the conflict between Russia and the West, can impact the availability of diesel fuel on the global market. Refinery capacity plays a significant role, as traders fear that refineries may not be able or willing to sell enough fuel to meet the global demand. This concern has contributed to rising diesel prices.
Economic growth and the transition to less polluting and lower-sulfur diesel fuels have also impacted diesel fuel supply. During periods of high economic growth, such as from 2002 to 2008, the demand for diesel and other distillate fuel oils increased, tightening global refining capacity. The transition to cleaner diesel fuels in the US has influenced production and distribution costs, affecting the overall supply.
Additionally, the price of diesel fuel is influenced by the cost of crude oil and the availability of distillate fuel oil. When crude oil prices rise, diesel prices tend to follow suit. Distillate fuel oil inventories play a crucial role in diesel pricing, and when inventories are low, diesel prices can surge. Fund managers' actions and expectations of economic recessions also impact diesel prices.
In summary, the demand for diesel fuel remains high due to its essential role in transportation, industry, and agriculture. The supply of diesel fuel is influenced by geopolitical factors, refinery capacity constraints, economic growth, and the transition to cleaner fuels. These factors collectively contribute to the fluctuations in diesel fuel prices, and predicting future price movements can be challenging.
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Production and distribution costs
The production and distribution costs of diesel fuel include crude oil costs, refinery processing, marketing and distribution, and retail station operation. The retail pump price reflects the costs and profits (or losses) of the refiners, marketers, distributors, and retail station owners. The cost components of the retail price of diesel fuel vary over time and across different regions of a country.
Crude oil costs are influenced by supply and demand factors, which are determined daily by commodity traders. Diesel fuel is in high demand globally, with strong demand in regions like China, Europe, and the United States. This demand is driven by its use in transportation, industrial machinery, and agricultural equipment. Additionally, diesel is used to produce kerosene, jet fuel, and home heating oil, further increasing its demand during colder seasons.
Refinery processing involves turning crude oil into diesel fuel through refining processes. The transition to lower-sulfur or ultra-low-sulfur diesel fuels, as seen in the United States, has impacted production and distribution costs. These cleaner fuels require additional processing steps, increasing the overall cost of production.
Marketing and distribution costs include the transportation of finished products from refineries to central distribution points and then to retail outlets. Diesel, being a heavier product than gasoline, incurs higher transportation and equipment costs. Distribution methods can include pipelines, railcars, ships, and trucks. The retail cost also includes labour, utilities, and petroleum equipment.
Retail station operation costs refer to the expenses incurred by the retail station owners, such as labour, utilities, and equipment maintenance. These costs can vary depending on the size and location of the retail station.
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Federal excise tax
The federal excise tax on gasoline in the United States is 18.4 cents per gallon, and 24.4 cents per gallon for diesel fuel. Excise taxes are imposed on fuels including gasoline, diesel fuel, diesel-water fuel emulsion, and kerosene. The proceeds from the tax support the Highway Trust Fund, and fund airport and Air Traffic Control operations by the Federal Aviation Administration.
The federal excise tax on diesel fuel is higher than the tax on gasoline due to the higher worldwide demand for diesel fuel. Diesel fuel is used for transportation, as well as to power industrial machinery and agricultural equipment. The demand for diesel is expected to increase as the economy improves and there is more demand for goods, which will result in more trucks on the road. Additionally, diesel is used to produce kerosene, jet fuel, and home heating oil, which increases demand during cold weather.
The federal excise tax on diesel fuel has not been adjusted for inflation since 1993. This has resulted in a decline in the purchasing power of the tax, as the unchanged tax rate provides less real money when adjusted for inflation. Some policy advisors believe that an increase in the tax is necessary to fund and sustain the country's transportation infrastructure.
The federal excise tax on diesel fuel is imposed at the rate of $0.244 per gallon, unless certain requirements are met. These requirements include the fuel being held for its own use by the owner immediately after removal or entry, and the owner having no reason to believe that the evidence for exemption is false. In the case of removal from a terminal, the terminal must be approved.
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Global refining capacity
The world has over 100 million barrels of daily crude oil refining capacity. Middle distillates, including diesel, have the largest refining capacity of any oil product, with diesel being the most prominent commodity. Oil companies extract around 96 million barrels of crude oil per day. While extraction primarily occurs in North America and the Middle East, refining tends to happen closer to consumer centres. As a result, Asia refines more crude than any other region, with China notably increasing its refinery capacities in recent years. China Petroleum and Chemical Corporation (Sinopec) is now one of the largest distillation capacities in the world, with a daily capacity of 5.17 million barrels.
However, China and Europe house the greatest number of high-risk refinery sites, with about 3.9 million barrels per day of refining capacity in jeopardy. More than a fifth of global oil refining capacity is at risk of closure, as pressure to reduce carbon emissions increases. Between 2023 and 2028, global refining capacity is expected to grow by 5.1 million barrels per day, compared to between 0 and 4.6 million barrels per day in demand growth. This capacity increase includes 1.4 million barrels per day of rationalisations, 90% of which are expected to occur in OECD markets.
The US Gulf Coast refining complex is projected to maintain its margins, remaining viable and operational. In contrast, European refining margins are projected to fall in the near and long term, though Russian utilisation remains uncertain. In the Asian hub, refining margins are expected to fall in line with European margins in the near term due to the growth in net new refining capacity in the Middle East and China. However, in the long term, the demand decline is projected to be less pronounced in Asia, resulting in a smaller historical decline compared to Europe.
As the adoption of electric vehicles and energy transition measures increases, motor fuel demand is expected to decrease, leading to low refining margins and investments in future projects.
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Frequently asked questions
Yes, diesel prices are expected to go down in 2024. This is due to increased inventories related to increased refinery capacity.
Diesel prices are expected to continue to decrease in 2025, although they will likely be higher than in 2024.
Diesel prices are primarily determined by the cost of crude oil, which regularly accounts for around 50% of end consumer prices. Other factors include supply restrictions, demand outlooks, and refinery capacity.
Diesel is the main component of freight pricing, so higher diesel costs result in higher freight costs for shippers. This can, in turn, lead to increased prices for consumers.
