Factors Affecting Diesel Prices

The retail price of a gallon of diesel fuel reflects the underlying costs and profits (or losses) of producing and delivering the product to customers. As shown on the chart, the price of diesel at the pump reflects the costs and profits of the entire production and distribution chain, including:

• The cost of crude oil to refineries
• Refining costs and profits
• Distribution and marketing costs and profits and retail station operation
• Taxes

The relative share of these components to the retail price varies over time and among regions of the country.

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Data for this figure: Weekly diesel prices data and weekly crude oil.

The price at the pump also includes Federal, State, and local taxes. In 2008, Federal excise taxes were 24.4 cents per gallon, and State excise taxes averaged about 22 cents per gallon. Some States, counties, 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 on the wholesale market for resale to the public.

Crude oil prices are determined by worldwide supply and demand. On the demand side of the equation, world economic growth is the biggest factor. One of the major factors on the supply side is the Organization of the Petroleum Exporting Countries (OPEC) which can sometimes exert significant influence on prices by setting an upper production limit on its members, which produce about 40% of the world’s crude oil. OPEC countries have essentially all of the world’s spare oil production capacity, and possess about two-thirds of the world’s estimated crude oil reserves. Oil prices have often spiked in response to disruptions in the international and domestic supply of crude oil.

International Diesel Fuel Demand Can Affect U.S. Prices

Many other countries rely even more heavily on distillate fuels, specifically diesel fuel, than the United States does. This is the case in Europe, where demand for diesel has grown rapidly as cars and light-duty trucks have been moving from gasoline to diesel fuel. Diesel-fueled vehicles now represent over half of new car and light-duty truck sales in that region of the world. Europe uses about a quarter of the world’s distillate (heating oil and diesel), so it represents a significant factor in the high growth of world distillate demand. As in the United States, heavy-duty vehicle use of diesel fuel worldwide has been adding to world distillate demand growth as economies have been expanding. And use of diesel for growing electric power generation in many parts of the world such as China and South America also is contributing to demand growth. U.S. diesel fuel prices are increasingly affected not just by U.S. distillate demand growth, but by the growth in competing international demand for distillate products.

U.S. Diesel Fuel Supply and Demand Imbalances Can Cause Price Fluctuations

Prices of transportation fuels are generally more volatile than prices of other commodities because the U.S. vehicle 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 diesel fuel transportation system cannot support the flow of 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 Distillate Fuels

While U.S. diesel fuel demand is fairly consistent and generally reflects the overall health of the economy, there is often a seasonal aspect to diesel fuel price movements. During the fall and winter, diesel fuel prices are affected by the demand for heating oil. Heating oil and diesel fuel make up the product category “distillate fuel.” They are closely related products, with the main difference being that diesel fuel has lower sulfur content than heating oil. As a result, diesel and heating oil are produced together, and seasonal increases in heating oil demand can put pressure on the diesel fuel market as well. In some regions, diesel fuel prices can also be influenced by seasonal swings in demand for diesel fuel used by farmers.

Transportation Costs Affect Prices

Transportation costs generally increase with 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 United States) tend to have higher prices.

Regional Operating Costs and Local Competition

The cost of doing business can vary greatly depending on where a 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. Also, high-volume truck stops that cater to fill-ups by large commercial vehicles tend to offer diesel fuel at a lower price than small-volume service stations that mostly deal with privately-owned gasoline-powered automobiles.