Diesel Fuel and Gasoline Costs

Q: Why does diesel fuel cost more than gasoline?

A: The main reason is rising global demand, but new environmental restrictions and higher federal taxes also are factors.

FULL QUESTION

Diesel fuel used to cost less than the more highly refined gasoline. Is there a real reason for this, or is it price gouging?

FULL ANSWER

Historically, the price of diesel fuel at the pump actually has been higher than that of regular gasoline more often than it has been lower, as can be seen in this chart, which is based on weekly statistics from the federal Energy Information Administration.

Until recently the normal pattern has been for gasoline to cost more than diesel during the summer months, when families use their autos for vacation travel, and for diesel to cost more during the winter months, when demand for home heating oil rises. (Diesel and home heating oil are similar fuels, and the price of home heating oil tends to set a floor for diesel, which could be substituted if it became cheaper.)

Lately, however, that pattern has not held. Since September 2004 there have been few weeks when diesel wasn’t selling for more than gasoline – usually a lot more. For the most recent week, ending May 19, regular gasoline sold for a national average of $3.79 per gallon at the pump, while diesel was $4.50. The price spread reached a record 22.4 percent in favor of diesel during the week ending March 24, 2008. That’s a stark difference from the week of June 19, 2000, when diesel sold for 15.3 percent less than regular gasoline, the cheapest diesel has ever been relative to gasoline. So what’s going on?

Rising Demand

If any illegal price manipulation is going on we’ve seen no evidence of it. The EIA cites other factors, chiefly high "worldwide demand" not only in the U.S., but also in Europe, China and India. In Europe, for example, diesel-powered automobiles have been outselling those with gasoline engines in recent years. According to the European Union’s most recent economic report, diesel autos accounted for 53.3 percent of all new registrations in 2007, a huge increase from the 13.8 percent share recorded in 1990. That’s several million new diesel-consuming vehicles every year.

In India, the number of diesel-powered passenger vehicles is also rising rapidly. The number of all new passenger vehicles sold in India more than doubled in the past five years, according to statistics from the Society of Indian Automobile Manufacturers, hitting more than 1.5 million during the most recent model year. Diesel accounts for more than 30 percent of new vehicles sold in India and is expected to hit 50 percent by 2010. Just this month, Ford India, a subsidiary of Ford Motor Company, started production of diesel engines at a new engine assembly plant to turn out another 50,000 diesel engines a year for the local market. India’s leading environmental group, the Centre for Science and Environment, is fighting what it calls a "mad craze for diesel" in the country, so far with little effect.

In China especially, diesel consumption has been soaring as the economy booms. The country also is reported to be importing diesel fuel for stockpiling, to avoid any interruptions in power during the Olympics in August. Energy traders also say they foresee even more demand for diesel fuel in China to run heavy equipment and emergency generators in the wake of the recent earthquake.

"Cheap" Gasoline

EIA experts also say that the widening spread results in part from a slackening of demand for gasoline due to high prices and a soft economy. "While gasoline prices have increased this winter due to surging crude oil prices, they have not risen as high as they would have if year-on-year gasoline demand growth was unfolding at normal rates," the EIA said in a report dated March 26. One analyst put it this way: "It’s not so much that diesel is expensive; it’s that gas is cheap." He was speaking in relative terms, of course. If motorists were still increasing their consumption as rapidly as they had been until recently, gasoline prices would be even higher than they are, and the gap between gasoline and diesel prices would be smaller.

Environmental Restrictions

Another factor given by the EIA is the transition to ultra lower-sulfur diesel fuels in the United States. New Environmental Protection Agency standards for diesel fuel sulfur content took effect in 2006, requiring that the sulphur content of diesel be reduced drastically, from a maximum of 500 parts per million to no more than 15 parts per million for 80 percent of all diesel sold for road use. By December 1, 2010, that standard will apply to 100 percent of on-highway diesel fuel. New sulphur standards for off-highway diesel fuel (such as fuel for generators, construction machinery and marine use) began to be phased in last year. The added processing is an expensive proposition, and the cost ultimately must be reflected in the selling price of the fuel.

In 2001 the EIA estimated that the new standards for ultra low-sulfur diesel fuel would require refiners to invest from $6.3 billion to $9.3 billion, and they would increase highway diesel fuel prices by 6.5 to 10.7 cents per gallon between 2007 and 2011. The report also held out the possibility of even higher price spikes if the new regulation led to a production bottleneck.

Higher Taxes

Finally, higher federal taxes account for 6 cents per gallon of the price difference at the pump. Gasoline is taxed at 18.4 cents per gallon, and diesel at 24.4 cents per gallon. That’s been true for years and explains why diesel has sold for an average of 1.3 percent more than gasoline over the time period covered by the EIA’s figures. It does not explain why the spread has gotten so wide recently, however. Again, the main factor is demand.

-Brooks Jackson

Sources

Energy Information Administration. "Diesel Fuel Prices: What Consumers Should Know," 24 May 2007.

Energy Information Administration. "This Week in Petroleum," 26 March 2008.

European Union Economic Report. Table: "New Passenger Car Registrations Breakdown by Specifications: Share of Diesel," February 2008; 12.

Society of Indian Automobile Manufacturers. "Domestic Sales Trend," undated Web site accessed 22 May 2008.

Reuters. "Ford Motor launches engine plant in India," 13 May 2008.

Raff, Anna. "Diesel Prices Soar Ahead of Olympics." Wall Street Journal, 19 May 2008.

Internal Revenue Service,Publication 510 (2008). Excise Taxes, Chapter One: "Fuel Taxes," online publication accessed 22 May 2008.

Wall Street Journal. "Oil ends at record above $129; Talk of $150-a-barrel crude and concern about diesel use in China spark another big advance," 20 May 2008.

Energy Information Administration. "The Transition to Ultra-Low-Sulfur Diesel Fuel: Effects on Prices and Supply" Report #: SR-OIAF/2001-01, May 2001.