Why Does Diesel Fuel Cost More Than Gasoline?
The seemingly unpredictable price fluctuation between gasoline and diesel is a tale as old as the internal combustion engine, but the prices we have seen when filling up at the pump only tell part of the story.
For fuel wholesalers, there are several other factors to consider. DTN FastRacks rapidly adapts to changing market conditions to provide you with real-time price alerts and accurate data so you can make better customer and contract pricing decisions.
Why is fuel pricing not simply a mathematical equation, making it simple to understand? While that would certainly make things easier for many of us, unfortunately, fuel pricing is not always so straightforward.
Gasoline and diesel are two different, fundamentally incompatible hydrocarbon compounds with optional additives for various scenarios such as different climates and environmental laws. Therefore, fuel pricing is based on several contributing factors.
What factors contribute to fuel pricing?
The price of crude oil, changes to refining processes and subsequent costs, distribution costs, consumer demands, and applicable taxes all influence gasoline and diesel prices to differing degrees, contributing to a price difference between the two refined fuels. Take a look at each of these influential factors in more detail to better understand why diesel fuel is more expensive than gasoline.
The cost of crude oil
Crude oil is the primary component of both fuel types and is, therefore, an essential pricing factor. So naturally, fuel pricing will then follow any increase in crude oil prices. However, the crude oil market can be erratic and subject to a lengthy and confusing supply chain.
Crude oil pricing is subject to a variety of global conditions like exploration and transportation costs. Additionally, demand and storage capacity in the market influence these costs. Disruptions in the supply chain (such as regional political tension or conflict or a logjam at a port of call or short-term storage facility) also influence the price of crude.
Refining costs are typically influenced by two significant factors: seasonality and processing technologies available and approved by different regions. For example, environmental laws in certain countries are enforced to maintain low air pollution levels to protect the quality of life for humans and the earth.
These environmental requirements mean that facilities will have more expensive refining processes; thus, the costs will be higher. Or, they require additives such as ethanol to be blended into gasoline to allow the fuel to burn more completely, resulting in fewer emissions.
Additional refining processes are necessary to produce ultra-low sulfur diesel fuel (ULSD). These extra steps result in higher refining costs for diesel than gasoline, especially considering that many refineries are optimized for gasoline production rather than diesel.
Distribution and marketing make up over 10% of fuel costs. Gasoline and diesel are transported via pipelines from refineries and ports to storage terminals, where tanker trucks are filled to deliver fuel to individual fueling stations. Fueling stations can either be owned by a refinery or operate independently.
Where a fueling station is located can also affect the price of diesel and gasoline. If it is in an ideal location with easy transportation access, the price could be lower. Whereas if it is in a distant location on a deserted stretch of highway, costs will increase and often be passed on to the consumer.
Seasonality is a major factor in demand for diesel, which in turn affects consumer costs. In the cold winter months, many areas of the world use fuel made from the same essential components of diesel fuel to heat their homes. So, the colder the winter, the higher the demand and thus the higher diesel price. In the summer, gas prices increase when travel is more common, and therefore the demand for gasoline increases.
Federal, state, and local taxes influence gasoline and diesel prices, with some governments increasing sales taxes applicable to fuel sales. Others have imposed additional carbon taxes on fuel to reduce fuel consumption and incentivize increased use of public transportation. As a general rule, diesel fuel is subject to a much higher federal tax than gasoline in the US, which obviously yields increased diesel prices to the consumer.
The evolution of diesel fuel
In years previous, a diesel engine most likely conjured an image of a loud, obnoxious vehicle spewing black smoke with every gun of the engine. Today, though, this is no longer the typical case. Extensive research has been conducted and analyzed by top chemists worldwide to develop clean diesel engines that are almost indistinguishable from gasoline engines. But all this research comes at a monetary cost.
Diesel engines can boast a greater fuel mileage as they are 25% – 30% more fuel-efficient than gasoline engines, and they have a significantly longer lifespan. In addition, diesel engines are built to a much more robust standard due to the engine’s increased compression and pressure levels. These more robust standards require less routine maintenance than gasoline counterparts and experience fewer mechanical failures resulting in repair costs.
They are often highly revered by long-distance truck drivers and weekend holiday trailer towers as their impressive amount of torque and acceleration power far supersede those of gasoline engines. So, while it may seem you are paying more upfront for diesel than gasoline, looking at a more encompassing budgetary picture, a diesel engine can pack more energy in every gallon. Furthermore, this bigger picture considers that the lifelong costs will be far less than gasoline-powered vehicles due to higher mileage and fewer repair costs.
While diesel still costs more than gasoline, it is becoming cheaper and is often the preferred fuel source in many parts of the world. In addition, diesel-powered vehicles run much cleaner and efficiently than their historically bad reputation may indicate, and diesel fuel is more commonly available now that the demand for diesel has increased.
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