Diesel fuel is the common term for the motor vehicle fuel used in the compression ignition engines named for their inventor, the German engineer Rudolf Diesel, who patented his original design in 1892. While diesel engines are capable of burning a wide variety of fuels (see Biodiesel below), diesel fuel refined from crude oil is the most widely used today. Diesel fuel is important to America’s economy, quality of life, and national security. This Energy Information Administration (EIA) brochure discusses the factors that affect and determine diesel fuel prices.
How Diesel Fuel Is Made Petroleum diesel is a “distillate” refined from crude oil. There are various grades or types of distillates, but Number 2 (No. 2) distillate is the primary source for the motor diesel fuel consumed in the U.S. It is also used as a fuel oil for heating buildings and by industry.
Diesel fuel is No. 2 distillate with a relatively low sulfur content. New U.S. Environmental Protection Agency (EPA) standards for diesel fuel sulfur content started in 2006. By June 1, 2006, 80 percent of the on-highway diesel fuel sold in the U.S. had to be Ultra-Low Sulfur Diesel (ULSD) fuel with a sulfur content of no more that 15 ppm, replacing most Low Sulfur Diesel (LSD) fuel, which contains a maximum of 500 ppm sulfur. By December 1, 2010, all on-highway diesel fuel must be ULSD fuel. New standards for diesel fuels for off-highway consumption will begin to phase-in in 2007. U.S. petroleum refineries produce an average of 7 to 8 gallons of diesel fuel from each 42-gallon barrel of crude oil.
How Diesel is Used Nearly all semi-trucks, delivery vehicles, buses, trains, ships, boats and barges, farm, construction and military vehicles and equipment have diesel engines. In 2006, diesel fuel accounted for about 16% of total refined petroleum products and 77% of the total distillate consumed in the U.S. On-highway motor vehicles use about 75% of total diesel fuel, with the rest consumed by “off-highway” construction, farming equipment, military and railroad vehicles and equipment, and marine craft.1
Where Diesel Fuel Comes From and How It’s Supplied to Retailers Most diesel fuel consumed in the U.S. is produced in U.S refineries. In 2006, about 5.7% was imported from foreign countries, mainly Canada and the Virgin Islands. U.S. refineries produce diesel fuel from domestically produced and imported crude oil, of which about 66% was imported in 2006. Most diesel fuel is transported by pipeline (some by barge and rail) from refineries and ports to terminals near major consuming areas, where it is loaded into tanker trucks for delivery to individual refueling stations.
WHAT ARE THE COMPONENTS OF THE RETAIL PRICE OF DIESEL FUEL? The cost to produce and deliver diesel fuel to consumers includes the costs of crude oil, refinery processing, marketing and distribution, and retail station operation. The retail pump price reflects these costs and the profits (and sometimes losses) of the refiners, marketers, distributors, and retail station owners. The relative share of these cost components to the retail price varies over time and among regions of the country. Figure 3 illustrates the percentage share for each major cost element of the national average retail price in 2006. The price on the pump also includes Federal, State, and local taxes. In 2006, Federal excise taxes were 24.4 cents per gallon and State excise taxes averaged about 21.8 cents per gallon.2 Some States and county and city governments levy additional taxes. The retail price also reflects local market conditions and factors such as the location and the marketing strategy of the owner. Some retail outlets are owned and operated by refiners, while others are independent businesses that purchase diesel fuel for resale to the public.
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.