Why Diesel Fuel Is More Expensive Than Gasoline

History has it that the gasoline prices have been higher than the diesel fuel prices.  But then again, this does not always hold true.  During some winters, the demand for distillate heating oil increases which also raises the price of diesel fuel—so much so that is becomes more expensive than gasoline.

In the United States since September 2004, the price of diesel fuel has been by and large higher than the price of gasoline all year round and this is due to numerous reasons.  The worldwide steady increase of demand for diesel fuel and other distillate fuel oils has put pressure on the tight global refining capacity—more so with the strong demand of such products in China, Europe, and the United States.

The transition from low sulfur diesel (LSD) fuel to ultra-low sulfur diesel (ULSD) fuel in the United States has affected the diesel fuel production and distribution costs.  This is due to the new Environmental Protection Agency (EPA) standards for diesel fuel sulfur content.

Another reason for this shift in the norm between gasoline and diesel fuel prices is that the federal excise tax on the latter is higher than the tax on gasoline.

The Primary Factors Affecting The Price Of Diesel

Cost and supply of crude oil – The worldwide supply and demand of crude oil determines its price, and the rising demand has put great pressure on the supply.  The Organization of Petroleum Exporting Countries (OPEC) has all of the spare production capacity and possesses a significant percentage of the world’s crude oil reserves.  The prices spike as a response to the disorder in the international and domestic crude oil supply.

Tight refining capacity and international diesel fuel demand – Refineries in the United States have been in operations at around 90-percent capacity.  Other countries depend more heavily on distillates and diesel fuel than does United States, thus making the refining capacity tight worldwide.  Competing international demand for refined distillates affects the price of diesel fuel in the United States.

Product supply/demand imbalances – The prices of other commodities are more stable as compared to the prices of fuels because of the dependence on petroleum and because there are few alternative fuels in the market.  The stocks decline fast if the supply declines unexpectedly.  When stocks are low and declining, some players may bid higher for the product.  Prices will stay high if the diesel fuel transportation system cannot support the flow of surplus supplies.

Seasonality in the demand for diesel fuel and distillates – The price of diesel fuel slowly rises during the fall, declines in the late winter, rises through the early spring, and then declines in the summer.  The demand by farmers during the different seasons creates an upward pressure on the diesel prices.

Transportation costs – The distance between the retail location and distribution terminals and refineries has a direct relationship with the transportation cost—that is, an increase in one increases the other.

Regional operating costs and local competition – Depending on the location of the dealer, the cost of doing business varies which include wages and salaries, benefits, equipment, lease, insurance, overhead, and state and local fees.  Even if retail stations are in close proximity to one another, they still have differing costs.  Another factor that affects diesel fuel prices is the number and location of the local competitors.

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