Why are diesel prices lagging gasoline prices?

  • Why are diesel prices lagging gasoline prices?

    There’s a terrific article in the Emporia Gazette, a publication in Emporia, Kansas, about why diesel prices are dramatically lagging the drop of gasoline prices we’ve seen over the past months.

    In June, US crude was trading at just over $106 bbl, its peak of the year. Since then, the price of crude has dropped about 35%. Gasoline prices have fallen roughly 24% over that same time period. That’s not unusual, since it always takes time for crude price changes to make their way down the supply chain to the retail channel. What does seem odd is that diesel prices have only fallen about 9%. In some areas, the spread between regular unleaded gasoline and diesel is $0.81 a gallon, in other areas the spread is nearing $1 a gallon.

    As the article explains, the reason for this gap can be summarized in five points:

    1. The US federal tax on diesel fuel is 6 cents more per gallon than gasoline, so the fixed cost of diesel will always be higher.

    2. The US demand for fuel used for traffic is changing. The year over year demand for gasoline in the US has been gradually trending downward, in large part due to increased gas mileage efficiency of fleet cars. But the US demand for diesel this year has been much stronger, in large part due to the increase in truck traffic caused by a stronger US economy.

    3. Diesel needs to be considered its own commodity, independent of gasoline, because there is substantial demand for diesel outside of car and truck traffic. More equipment is burning diesel, most notably the equipment that fracks crude out of shale formations, and with the rise in US oil production, that equates to a big deal. Also, it has been a late harvest in the Midwest US, and busy farmers make for busy equipment that demands more diesel. Finally, since heating oil and diesel are essentially the same, the recent cold weather and heavy snow across the US has led to a corresponding increase in demand for home heating oil.

    4. US refineries are built to primarily produce gasoline, not diesel. From each barrel of oil, US refineries produce 18 to 21 gallons of gasoline vs. 10 to 12 gallons of diesel fuel. It would take billions of dollars to pay for the significant upgrades needed for refineries to create a higher percentage of diesel.

    From a fuel price management perspective, it’s unlikely we’ll see any short term dramatic diesel cost decreases, since diesel demand should hold steady as the US economy continues to grow, winter has set in, and there is no end in sight for fracking. When comparing year over year demand for diesel, you may see a positive volume trend, depending on the customer type at your locations.

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