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DIESEL FUEL PRICES : Why are they rising and what does this mean for current and prospective diesel car owners?
What is happening with diesel fuel prices?
For many years, diesel fuel prices tended to be lower than gasoline. Since September 2004, this trend has disappeared, with diesel fuel prices tracking or exceeding gasoline. In May 1998 the national average diesel fuel price was $1.069; and gasoline was $1.038; in May 2008 gasoline was $3.72 and diesel $4.33.
 This price differential is due to a variety of factors – global and domestic, economic and political. Both gasoline and diesel fuel prices will increase as the price of crude oil rises, however other influences have worked to accelerate diesel’s price relative to gasoline. To understand the cause of this increase and its implications for the future, this paper provides a brief summary of the production process and the elements contributing to the current price spread between gasoline and diesel fuel.
Fuel production
Each barrel of oil is 42 gallons, approximately 19 percent of which is generally dedicated to the production of diesel fuel. This compares to approximately 47 percent used for gasoline and 10 percent for kerosene-type jet fuel. The remaining 24 percent is split among a variety of oils and gases. While refiners have some ability to alter these percentages, they are unlikely to swing more than 7-8 percent in any direction. As a result, each barrel of crude oil will always produce more gasoline than diesel fuel.
Why have diesel prices risen so significantly in the last few years?
Fuel demand
Demand for distillates – such as diesel and jet fuel – in Europe, Asia, and the Middle East has continued to grow at a fast pace. In Europe, financial incentives continue to promote the transition from gasoline-powered to diesel-powered cars and light trucks, while a growing economy has lifted transportation sector consumption overall.
In the U.S., meanwhile, weakness in the economy has led to a softening in gasoline demand. So while gasoline prices 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. As a result, the gap between U.S. gas and diesel prices has grown.
These shifting patterns have even affected seasonal changes in diesel fuel prices. According to the Energy Information Administration (EIA), gasoline is usually more expensive than diesel in the spring and summer, the peak driving season. In the autumn, demand for distillate fuels (heating oil and diesel) picks up due to farm use and trucking of goods ahead of the holidays while the demand for gasoline begins to soften.
Inventories and supply balances
As Europe’s demand for diesel has grown through the dieselization of the passenger fleet, economic growth, tighter emissions standards and other factors, Europe’s supply capacity has been strained. At the same time, a supply shortage also developed in the U.S due in part to U.S. exports of distillate fuel to Latin America and Europe to meet their high demand, leaving diesel fuel inventories at their lowest level in five years.
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How much diesel fuel is produced relative to other petroleum products?
U.S. Refiner and Blender Net Production of Refined Petroleum Products in 2006 (Total=
6.56 Billion Barrels) |
Source: US Energy Information Administration www.eia.doe.gov
Economic, political and other factors driving up diesel fuel prices
In addition to the law of supply and demand, there are a number or other factors affecting the price of diesel. These include:
- A weakened U.S. dollar buys less crude oil on the global market than in past years.
- As energy prices rise, investors are putting more dollars into energy stocks and predictions of future crude oil prices, which helps drive up future energy prices.
- The stockpiling of diesel by China for the Olympics and to aid earthquake victims. Click here to view EIA's "This Week In Petroleum," June 4, 2008.
Fuel taxes
Another factor in diesel and gasoline costs are motor fuel taxes collected at the federal, state and sometimes the local level. The federal motor fuels tax goes toward the highway trust fund; a fund established to repair and maintain the nation’s highway infrastructure. State taxes are used for a variety of purposes.
Since October 1, 1997, the federal government has imposed a 24.4 cents-per-gallon tax on diesel fuel compared to an 18.4 cents-per-gallon tax on gasoline. Every state also levies a diesel tax the average of which is 22 cents per gallon (ranging from 8 cents in Alaska to 32.9 cents in Wisconsin). Some states levy the same tax rate on gasoline and diesel fuel, however 15 taxes currently tax diesel more than gasoline with only 6 states imposing higher gasoline taxes. More information on state fuel taxes can be found here.
Future diesel fuel prices
All energy prices are expected to remain high in the near future. EIA’s Short-Term Energy Outlook is projecting that diesel fuel will continue to sell at a higher price than gasoline through the 2008 summer, although the price differential between the two fuels is expected to narrow. Retail diesel fuel prices in 2008 are projected to average $3.94 per gallon, and then drop to an average of $3.67 per gallon in 2009.
Continuing or expanding economic growth in developing countries like India and China will add pressure to crude oil and finished distillate product prices. However, there are several key U.S. policy influences and market developments that could reduce the demand for crude oil and petroleum products in the U.S. – particularly gasoline.
- Oil companies are responding to the increasing demand for diesel fuel through new refining capacity and shifts in production.
- The Renewable Fuel Standard and the higher fuel economy standards in the Energy Independence and Security Act of 2007 (EISA07) will reduce crude oil and gasoline use.
- Although the U.S. diesel passenger car market is expected to double or triple in the next 5-10 years, diesel vehicles are 20-40 percent more fuel efficient, leading the EIA to project that existing diesel fuel supplies will be able to meet this demand. Click here for the full EIA presentation.
What does all this mean for consumers driving diesel cars or considering a new diesel car?
Higher diesel fuel prices in the short term may lengthen the payback period for diesel owners to get a return on their investment. If a diesel car is 30 percent more fuel efficient than a gasoline car, with gasoline at $3.75 a gallon, diesel can cost up to $1.13 more per gallon (or $4.88 in this example) and a diesel driver will still break even with gasoline in terms of fuel cost. (See table below for additional examples and assumptions.)
Making any personal car choice requires taking the long term view on all the factors involved, including performance, purchase price, owning and operating costs, useful life, resale value, fuel economy and fuel prices. The next generation of clean diesel cars offers consumers the best overall value equation, considering driving performance, fuel efficiency, environmental footprint and resale prices.
Beginning in 2008, consumers will have more fuel-efficient diesel choices than ever before. Thirteen new models were announced by 12 manufacturers at the Detroit Auto Show in January 2008. In addition to a superior driving performance and low-emissions, clean diesel is a technology that provides proven real-world fuel economy benefits under any mix of vehicle operation. New clean diesel cars coming out in 2008-2010 will likely be eligible for a federal fuel tax credit of $300 to $3400 dollars, depending on fuel economy ratings. For more info, click here.
Diesel Vehicle Fuel Economy Improvement |
| Retail Gasoline |
55% |
50% |
45% |
40% |
35% |
30% |
25% |
20% |
15% |
10% |
Diesel fuel can cost this much more than gasoline and still
break-even with gasoline fuel cost |
$2.00 |
$1.10 |
$1.00 |
$0.90 |
$0.80 |
$0.70 |
$0.60 |
$0.50 |
$0.40 |
$0.30 |
$0.20 |
$2.25 |
$1.24 |
$1.13 |
$1.01 |
$0.90 |
$0.79 |
$0.68 |
$0.56 |
$0.45 |
$0.34 |
$0.23 |
$2.50 |
$1.38 |
$1.25 |
$1.13 |
$1.00 |
$0.88 |
$0.75 |
$0.63 |
$0.50 |
$0.38 |
$0.25 |
$2.75 |
$1.51 |
$1.38 |
$1.24 |
$1.10 |
$0.96 |
$0.83 |
$0.69 |
$0.55 |
$0.41 |
$0.28 |
$3.00 |
$1.65 |
$1.50 |
$1.35 |
$1.20 |
$1.05 |
$0.90 |
$0.75 |
$0.60 |
$0.45 |
$0.30 |
$3.25 |
$1.79 |
$1.63 |
$1.46 |
$1.30 |
$1.14 |
$0.98 |
$0.81 |
$0.65 |
$0.49 |
$0.33 |
$3.50 |
$1.93 |
$1.75 |
$1.58 |
$1.40 |
$1.23 |
$1.05 |
$0.88 |
$0.70 |
$0.52 |
$0.35 |
$3.75 |
$2.06 |
$1.88 |
$1.69 |
$1.50 |
$1.31 |
$1.13 |
$0.94 |
$0.75 |
$0.56 |
$0.38 |
$4.00 |
$2.20 |
$2.00 |
$1.80 |
$1.60 |
$1.40 |
$1.20 |
$1.00 |
$0.80 |
$0.60 |
$0.40 |
$4.25 |
$2.34 |
$2.13 |
$1.91 |
$1.70 |
$1.49 |
$1.28 |
$1.06 |
$0.85 |
$0.64 |
$0.43 |
$4.50 |
$2.48 |
$2.25 |
$2.03 |
$1.80 |
$1.58 |
$1.35 |
$1.13 |
$0.90 |
$0.68 |
$0.45 |
$4.75 |
$2.61 |
$2.38 |
$2.14 |
$1.90 |
$1.66 |
$1.43 |
$1.19 |
$0.95 |
$0.71 |
$0.48 |
$5.00 |
$2.75 |
$2.50 |
$2.25 |
$2.00 |
$1.75 |
$1.50 |
$1.25 |
$1.00 |
$0.75 |
$0.50 |
Example:
Diesel cost 53 cents more / gallon than regular grade gasoline. (Source CEC Weekly Transportation Fuels Trend 4/10/08) (Diesel $4.18/gal - regular gasoline $3.68/gal = diesel is 53 cents/gallon more than gasoline)
Assume the diesel Acura gets 45% higher fuel economy (actual: 52% city, 46% highway, 48% combined)
Using the above table and $3.50 for gasoline and 45% diesel improvement you get $1.58 / gallon break even price.
The diesel Acura saves $1.05 / gallon compared to the gasoline Accura $1.58 (fuel economy benefit) - 0.53 (higher retail price) = $1.05 cents /gallon.
For more information, visit www.dieselforum.org
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