Why does diesel fuel cost so much?

Part two of a two-part series. Also read “Can diesels save money and oil?”

There are three main reasons diesel fuel costs so much, according to the petroleum experts we interviewed:

Diesel prices track the economy – only with a sizeable lag, says Sal Gilbertie, senior vice president of energy and renewable fuels at NewEdge LLC in New York. Almost all truck, train, and barge transit relies on diesel fuel (and related heavy petroleum distillates). So as the economy grows, and more goods are shipped, demand for diesel fuel grows, too. That drives up prices. Since companies plan in advance for this shipping, the demand (and thus prices) for diesel lag behind the overall economy. That’s why once the recession started, diesel prices dropped quickly, says Mr. Gilbertie. This long-term trend fluctuates.

An immediate, but lasting, supply squeeze jolted diesel prices up last summer. As oil supplies tightened after years of rising demand, European countries, which used to export diesel fuel to the U.S., no longer had excess supplies to export. European governments have long favored diesel fuel with lower taxes to encourage fuel savings. The effect has become so pronounced that in countries such as Britain and Italy, that more than 50 percent of all new cars sold there are diesel-powered. Thus demand for diesel fuel is rising faster in Europe than demand for gasoline. So European oil refineries, which used to have excess capacity, no longer did. Since the U.S. has no excess refining capacity of its own, this caused a sharp spike in diesel prices, added on top of an already-rising trend.

Taxes. Unlike Europe, the U.S. government charges a higher tax on diesel fuel than on gasoline: 24 cents per gallon, vs. 18 cents. Since trucks use lots of diesel fuel, and wear out roads faster than cars, this may increase revenue for road construction. But it begs the question: If we want consumers to save oil and produce less CO2, why not swap the extra tax to gasoline, to improve diesels’ payoff equation for consumers and encourage them to burn less gas?

Our tests have shown the latest diesels to easily match the comfort, convenience, and performance of gasoline-powered cars. We think it would be easy for consumers to make the switch if it were cost effective although finding gas stations with a diesel pump can be difficult if you don’t live near an interstate highway. Fiddling with fuel taxes usually runs the risk of disrupting highway funding in the United Sates. But a Federal Highway Administration spokesman Douglas Hecox says he doesn’t expect that switching the extra six cents in tax from diesel to gasoline would have any effect on the highway fund’s shortfall. 

Now that a new crop of diesels is coming on the market from Acura, BMW, Mercedes-Benz, Nissan, and others, the question of how to make saving fuel be cost effective for consumers is taking on increasing urgency. We hope the Obama administration will keep this in mind as it wrestles with saving the U.S. auto industry and finding new money for the highway fund.

—Eric Evarts

Learn more about driving green in the Consumer Reports special fuel economy section

Comments

[Cale]

A very thoughtful post and relevant topic. I hope you will continue to keep the "diesel" issue near the top of your list of important car blog topics.

I can't help but wonder what the net effect of switching gas and diesel taxes would be? If the diesel fuel tax is lowered before mainstream diesel-powered cars are available (not the expensive offerings from VW, Audi, BMW, Mercedes-Benz, Acura, etc) won't businesses be the primary beneficiary? After all, transportation costs are factored into the pricing of food, clothing, medical, and just about all other products. When prices for diesel spiked last summer, businesses were quick to raise prices with "energy" related surcharges. Since then prices have remained high while the fuel costs have gone down. I suspect that businesses are pocketing the savings to compensate themselves for any transportation expenses they weren't able to pass along to consumers last year. The cost of energy in the marketplace for products is no more efficiently managed on the demand side than it is on the supply side, as noted in your blog.

I've said this before and it should be said again. How wise is it to advocate diesel fuel when it comes from the same source and suppliers as the gasoline that we're currently consuming? Diesel fuel might offer higher mileage but there's little reason to believe it will reduce the number of miles we drive (in fact, there is every reason to believe that consumers might be tempted to drive even more if they think they're spending less per mile, see what happens with cell phone usage when per minute costs are cut) and it won't increase energy independence.

I hope you will continue to blog on this subject so the issues are properly aired before action is taken in Washington.

Cale

[Jason]

I think it's about time we get caught up with the rest of the world as far as diesel goes. There a terrible aura surrounding diesels in this country, which completely confuses me. I've gone as far as asking friends and family what they think of when there hear "diesel powered" and they immediately start talking of smokey, leaky, noisy, stinky, oversized trucks. Not the clean burning, fuel efficient cars they could be.

I've got my fingers crossed, and I'm waiting for a diesel powered small pickup truck. Like the diesel Ford Ranger you could buy if you lived anywhere else in the world.

[Arariel]

Oil & Gas operate in a false market and it's all done behind closed doors. There is nothing open, or honest about the gas, or the power industries for that matter. Just when America didn't need it, the 'Drill Baby Drill' campaign was implemented. Gas & diesel prices were raised with out regard to what it would do to the American people, or our economy. Billions in unprecedented profits were made with these predators, while Americans suffered. This helped in a huge way to bring down capitalism throughout the world. That's no small deal to be sure. These corrupt and greedy corporate criminals, in conjunction with their PAC money and the corrupt politicians have hurt America in a big way and even brought down the very heart of the American financial system. As for diesel, gasoline is a derivative of diesel. Diesel is cheaper to manufacture and produce than gasoline. Prices are up, purely because the big oil companies can get away with this false market and PAC campaign finance rhetoric by politicians . Oil executives, along with all the corrupt politicians that conceived and promoted 'Drill Baby Drill' should be in jail. The new mantra in America should be 'Jail Baby, Jail!'

[Borax Johnson]

Here is the fundamental question: Diesel is a less refined product than gasoline (meaning it should be cheaper to produce than gas), yet for years, diesel prices in N. California (where I drive a diesel car) have been above the price of regular gas and often above premium.

That's way more than a $0.06 spread.

[Bill V.]

Another diesel article that completely ignores the mandate for low sulfer diesel as a leading factor in its rise in cost.

[rids]

hey very informative and nice post but normally in india diesel is less than petrol..!!!

[David Brodbeck]

Borax: Diesel is a distillate fuel, and you're correct that it in theory requires less processing -- or did, at least, before the low sulfur fuel mandate arrived.

I think part of the issue is that gasoline has traditionally been more profitable, so refineries use catalytic cracking to make more of it. This converts some of the heavier fractions that would normally become diesel, home heating oil, kerosene, etc. into gasoline instead. So we have a supply/demand problem -- the supply of diesel is less.

[David Lawrence]

This brings up the question as to why the cost of fuel oil ($2.40 gal) is now higher than the cost of diesel($1.90 gal). Take out the tax and the spread is 0.74 cents a gallon. A few years ago people were putting in oil tanks to fuel their diesel cars and avoid the fuel tax. What happened?

[Manuel]

Since diesel takes less cracking than gasoline it stands to reason that the manufacture of diesel is substantially less costly than gasoline. This is made obvious by the price of diesel in most of the world except for the U.S.A. Could you clarify?

[Larry Stivers]

During a recent conversation, Rock Doc (my friend and a geologist for the petroleum industry), explained that the low-sulfur requirement for today's diesel fuel is the main reason for the high price. Given the present minuscule difference between diesel and regular gasoline prices, I wonder if his opinion remains firm?

Where are the diesel-electric hybrids? They've efficiently powered most of our trains and ships for decades. They would make and excellent interim power source (at 60+ mpg) on the way to plug-in electric power.

[David hogard]

The energy savings are accumulated during the different stops and starts that the vehicle might experience as the automobile moves toward its destination. Whenever the gas powered engine is not engaged there is a cost savings realized in its lax state of operation. The hybrid motor is quite capable of consuming energy and generating the right amount of power at the same time. These moments of non-engagement will save the consumer money in gas cost every time the automobile is driven down the road.