ALEXANDRIA, VA -- Since September 2004, retail diesel fuel prices have consistently been higher than retail gasoline prices, a change from historical norms. NACS has developed a new primer looking at the reasons why as part of its 2012 NACS Retail Fuels Report.
Diesel fuel powers most of the country??s buses, trucks, trains and farm equipment. It also powers an increasing number of passenger vehicles. U.S. clean diesel vehicle sales increased 27% in 2011, and demand is even higher in other countries. Diesel fuel had traditionally been less expensive than gasoline, since it was easier to refine from crude oil.
The change in market dynamics, where diesel fuel is consistently more than gasoline, is a function of four broad factors.
The U.S. is a gasoline-dominant motor fuels market. Approximately 98% of passenger vehicles in the United States are powered by gasoline, with fewer than 2 % powered by diesel fuel. Consequently, the refining infrastructure is designed for optimum efficiency in producing gasoline. From a typical 42-gallon barrel of oil, the refining process delivers around 18 to 21 gallons of gasoline and 10 to 12 gallons of distillate, plus some other refined products. Refinery yields can somewhat be tweaked, but to produce significantly more distillate, they would need to undergo significant upgrades costing billions of dollars.
While the U.S. remains predominantly reliant on gasoline, other countries throughout the world are more heavily reliant on diesel fuel. Diesel fuel is used in the majority of new passenger vehicles in Europe. Strong international demand for diesel fuel ?" for both passenger vehicles and for industrial machinery in the rapidly growing developing countries ?" has placed a premium on diesel fuel imports.
As U.S. gasoline demand has decreased since peaking in 2007, demand for diesel fuel has remained strong, propped up by demand for industrial use or by continued strong demand for passenger vehicles in Europe and in developing countries like India and China.
According to the Energy Information Administration, since January 2004 overall gasoline consumption in the U.S. has declined 5.2%. (EIA uses product supplied as a proxy to measure consumption.) Meanwhile, diesel demand has increased 29.0%. In response, over that that same timeframe, refineries have increased their diesel production 15.1%, boosting diesel yield from a barrel of oil from 23.9% to 27.5%.
ULSD is a clean-burning diesel fuel that is defined by the Environmental Protection Agency to have a maximum sulfur content of 15 parts per million (ppm). It was gradually phased into the market between 2006 and 2010, replacing the on-highway diesel fuel, known as Low Sulfur Diesel (LSD), which can have as much as 500 ppm sulfur content. In 2010, on-highway diesel fuel was 100 percent ULSD. ULSD is required for use in model year 2007 and later vehicles, which are equipped with advanced emissions control systems.
There are enormous environmental benefits to ULSD, but there are also logical challenges. Special care was required when transporting both types of diesel fuel during the transition. This included pipelines, bulk terminals and tankers. A batch of ULSD that has even slight contamination with LSD could lead to significant fines if the batch of ULSD exceeded a certain level. In addition, to produce ULSD the refining industry had to invest approximately $8 billion in infrastructure upgrades and the daily production costs for ULSD are higher than LSD, since the fuel requires more refining. This influences the cost of all diesel and results in a premium for ULSD, which is estimated to add about 10 cents per gallon to the cost of diesel fuel.
The third factor in why diesel fuel prices are higher is taxes. The federal tax on diesel fuel is 6 cents more than gasoline per gallon (24.4 cents vs. 18.4 cents). The last increase in the federal tax was in the early 1990s, back when diesel fuel was usually less expensive than gasoline. Taxes do not factor into why diesel fuel prices are higher than gasoline today ?" strong demand and USLD are the causes ?" but taxes are a factor in overall prices.
The complete primer is available online.