Why are diesel fuel prices higher than gasoline prices?
Until several years ago, the average price of diesel fuel was usually lower than the average price of gasoline. In some winters when the demand for distillate heating oil was high, the price of diesel fuel rose above the gasoline price. Since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline all year round for several reasons. Worldwide demand for diesel fuel and other distillate fuel oils has been increasing steadily, with strong demand in China, Europe, and the U.S., putting more pressure on the tight global refining capacity. In the U.S., the transition to low-sulfur diesel fuel has affected diesel fuel production and distribution costs. Also, the Federal excise tax on diesel fuel is 6 cents higher per gallon (24.4 cents per gallon) than the tax on gasoline.
WHAT ARE THE MAIN FACTORS THAT AFFECT DIESEL PRICES?
Besides excise taxes, the following are the main factors that affect diesel fuel prices:
Cost and supply of crude oil: Crude oil prices are determined by worldwide supply and demand, and over the past few years increasing demand has put intense pressure on available supplies. The Organization of Petroleum Exporting Countries (OPEC) has significant influence on prices by setting an upper production limit on its members who produce about 40% of the world’s crude oil, have essentially all of the spare production capacity, and possess about two-thirds of the world’s estimated crude oil reserves. Prices spike in response to disruptions in the international and domestic supply of crude oil, such as the Arab oil embargo in 1973, the Iran/Iraq war in 1980, the current war in Iraq, unrest in the Niger River delta region of Nigeria, and the hurricanes in the Gulf of Mexico in 2005.
Tight refining capacity and international diesel fuel demand: U.S. refineries have been operating at above 90% capacity over the last ten years. Most other countries rely even more heavily on distillates and diesel for overall transportation than does the U.S., and refining capacity is tight worldwide. U.S. diesel fuel prices are more and more affected by competing international demand for refined distillates.
Product supply/demand imbalances: Prices of transportation fuels are generally more volatile than prices of other commodities because the U.S. transportation fleet is so heavily dependent on petroleum and few alternative fuels are available. If supply declines unexpectedly due to refinery problems or lagging imports, diesel inventories (stocks) may decline rapidly. When stocks are low and falling, some wholesalers and marketers may bid higher for available product. If the transportation system cannot support the flow of surplus supplies from one region to another quickly, prices will remain comparatively high. These are normal price fluctuations experienced in all commodity markets.
Seasonality in the demand for diesel fuel and distillates: While U.S. diesel fuel demand is fairly consistent and generally reflects the overall health of the economy, prices tend to gradually rise during the fall, decline in the late winter, rise through the early spring, and then drop a bit in the summer. Diesel fuel use by farmers and for transporting goods for stores to build inventories during the winter holiday season, and cold weather in the North East, where most heating fuel oil is consumed, can apply upward pressure on diesel prices.
Transportation Costs: Transportation costs generally increase with increasing distance between the retail location and distribution terminals and refineries. Areas farthest from the Gulf Coast (the source of nearly half of the diesel fuel produced in the U.S.) tend to have higher prices.
Regional operating costs and local competition: The cost of doing business by individual dealers can vary greatly depending on where the dealer is located. These costs include wages and salaries, benefits, equipment, lease/rent, insurance, overhead, and state and local fees. Even retail stations next to each other can have different traffic patterns, rents, and sources of supply that affect their prices. The number and location of local competitors can also affect prices.