If you've been watching the steady decrease in gas prices over the last couple of months, you've probably been a very happy camper...unless you happen to drive a vehicle that runs on Diesel. Although the price of diesel has decreased in step with the price of crude oil, diesel still costs between $.50 and $.75 per gallon more than regular unleaded gasoline.
Take a look at this chart comparing the price of unleaded gas to diesel:
Notice that the price of diesel was almost identical to the price of unleaded gasoline until around 2006. And if you go back even further, you would notice that diesel was often much cheaper than gas over the last 30 years.
Over the last few years, new environmental standards coupled with changes in the market fundamentals, mainly due to increased demand, have caused this price disparity between diesel and gas. Those factors, combined with some that have existed for a long time, make up the main reasons for the higher price of diesel compared to gasoline.
The cost to produce diesel fuel from crude oil as well as the cost to market and deliver this product to consumers has several different components: The cost of crude oil, the cost to refine that oil and extract diesel, the cost to deliver and market this product to consumers and, of course, taxes. Within these components, there are some factors that have tipped the scale towards higher prices for diesel. These include:
HIGHER INTERNATIONAL DEMAND
Demand for diesel fuel has increased internationally for many reasons. For starters, many auto manufacturers have developed highly fuel efficient engines with some Volkswagen models getting as much as 41 highway miles per gallon. With the spike in the cost of oil worldwide, consumers all over the globe are now demanding more bang for their buck. And that's tipping the supply and demand undamentals in the direction of higher prices. Consumers all over the world are buying diesel cars at a staggering rate. It's estimated that half of the cars on the road in Europe run on diesel. There is also a stronger demand in Latin America. And the United States is actually EXPORTING diesel fuel to many of these countries now that our higher standards for diesel meet many of theirs. Although many advancements have been made in fuel efficiecy for diesel engines, the true cost benefit over gasoline may be lost in some cases because of the higher cost per gallon.
NEW ENVIRONMENTAL STANDARDS FOR DIESEL IN THE U.S.
As of January 1, 2006, the EPA requires the sulfur content in diesel fuel to be below 15 parts per million. And all cars manufactured as 2007 models or later require this ultra low emission diesel to operate properly. This new standard makes the refining process much more expensive, which drives up the cost. There are several new laws that will also be phased in over the next several years regarding sulfur content in fuel for diesel-powered trains and heavy machinery, and these may serve to drive the price even higher.
LESS COMPETITION AMONG OIL COMPANIES AND REFINERS
There is much less competition among oil companies and refineries for diesel than there is for regular gasoline, and less competition for a product with growing demand equials higher prices. The next time you stop to get gas, check to see if the gas station also sells diesel. Many stations do not. This is the result of less competition.
DEMAND FOR HEATING OIL
Diesel and heating oil have a very similar type of chemical structure, and the refineries experience higher demand for heating oil in the winter.
HIGHER FEDERAL EXCISE TAX ON DIESEL
The Federal Excise tax on diesel is six cents higher than for gasoline. It's worth noting that this has been true for a long time and isn't necessarily a reason why the price is higher than gas, but does make it higher once the other factors are added into the equation.
So what about the cost savings to consumers who choose a diesel powered vehicle over gasoline? Is the increased fuel efficiency of many diesel engines enough to balance the higher fuel cost? Perhaps not in many cases, but there are other long term costs to consider. Diesel engines can last much longer than gasoline engines and often have lower maintenance costs. It is not unusual to see a diesel engine last several hundred thousand miles. You will typically not see that kind of life with a gasoline engine. Their exhaust systems tend to last longer since diesel exhaust is not nearly as corrosive as gasoline exhaust. And they do burn less fuel simply because it takes less diesel to produce the same energy output as gas, which creates less quantity demand for fuel per mile. There are obviously some down sides to diesel engines, mainly the lower acceleration rate and they tend to be noisier than gasoline engines in general.
John Jones, Realtor(R)
JR Premier Properties
18170 Dallas Parkway, Suite 303
Dallas, TX 75287
Dallas, TX Real Estate and surrounding areas of Richardson, Plano, Addison, Frisco, Carrollton, Farmers Branch, Garland, Allen and Irving.
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John,
I understand part of your arguement but the part that I disagree with is the "world demand" component of your model. Simply said, world demand has nothing to do with regional production of diesel. Regional refinerys produce for regional markets. I very much doubt that the US sells diesel to europe ( I've been there and know that's true). I understand the increase cost of removing sulfur but the base cost is still cheaper than gas based on dramatically reduce engery costs per gallon of diesel fracturing compared to gas (much less all the new fangled additives). So I still don't understand what's going on. (And yes the fed tax rate for diesel is only 6 cents higher for diesel).
thanks,
RoyW
Roy,
The U.S. didn't export much diesel to other countries before the switch to ultra-low sulfur diesel happened a couple of years ago, but that has changed. Now we are apparently exporting a fair amount of diesel since our environmental regulations match that of foreign nations in Europe and South America. I should have referenced this more in my original blog, but here are some articles to reference:
http://uk.reuters.com/article/oilRpt/idUKN1151397820080211?pageNumber=2&virtualBrandChannel=0
http://www.cattlenetwork.com/content.asp?contentid=243882
Fossil fuels are global commodities, and refiners are going to sell to anyone as long as there is a demand.
Hello John - I had no idea about the cost difference of diesel versus gasoline. Very informtive post. I believe here in Canada our fuel is still more expesive than yours. I also belive there isn't a good rason for it besides oil company greed, as recent disclosures reveal.
In Michigan Diesel is running $1.20 above regular gas. It just can not be justified it is just greed.
I Agree with Deborah that this is all about greed. That is what supply and demand is. The problem with diesel is that it is a hot commodity and the traders are going to make as much money on it as they can which increases the profits back to the oil company. I just do not think that fuel should have ever been allowed on the futures market for other greedy people to make money off of us.
As long as diesel stays high it is going to hurt the american economy. Most products and construction use diesel to get things shipped and built.
One has to wonder about the timing of the increase of US diesel and the Iraq ware. We buy oil from Iraq and/or the Middle East, ship it back to the US to refine it to produce diesel, ship it back to Iraq to fuel the military vehicles, virtually all of which run on diesel. Why not refine Iraqi oil in Iraq and use that to supply our military diesel needs. Oh yeah, I forgot, that won't make the Cheney's and Halliburton's as rich on the backs of the American consumer.
Do yep, as Tom and Deborah conclude, it's greed. But maybe with Cheney leaving office (after all he's really been the Pres, not Bush Jr.) we'll see diesel prices go down (and the US War in Iraq end).
I'm glad to see this discussion and the fact presented. Hope to read more as folks respond, new ones come on board, etc.