Over the past five years, retail diesel fuel prices have consistently averaged higher than retail gasoline prices. This is a change from historic norms, and there are several reasons why.
Diesel fuel powers most of the country’s buses, trucks, trains and farm equipment. With prices increasing over the past few years at a faster rate than those for gasoline, it has put more pressure on truckers and others who depend upon diesel fuel for their businesses. While diesel fuel has traditionally been less expensive than gasoline, since it was easier to refine from crude oil, there were exceptions, largely weather related. Diesel fuel, also known as number 2 distillate, is essentially the same as home heating oil (the major difference is that diesel fuel contains less sulfur), so in winters when home heating oil is in more demand, diesel prices typically climbed faster than those for gasoline. But since September 2004, factors have changed the relationship between gasoline and diesel fuel prices.
(There are some differences between the more common distillate fuels. Off-road diesel, intended for farm machinery and other not-transportation purposes, is dyed red to distinguish it from on-road diesel, which has both state and federal transportation taxes. Home heating oil is very similar to both diesel fuels but contains more particulates, which would damage a sensitive diesel engine if used in a vehicle.)
The U.S. historically is a gasoline dominant motor fuel market. Consequently, the refining infrastructure is designed for optimum efficiency in producing gasoline. This compromises the efficient production of diesel fuel. Further, the country’s refiners have been operating at over 90 percent capacity for the better part of a decade, leaving little room for increased production as diesel demand in the U.S. has increased. However, refinery production has been retooled and the amount of diesel fuel produced from a barrel of oil has increased. In 2002, 23.2 percent of the refined product from a barrel of oil was distillate fuel; by 2007, this percentage had increased to 26.1.
This increase in refining capacity has not kept up with demand. According to the U.S. Energy Information Administration, diesel fuel demand in the United States has increased approximately 30 percent since 2002. This growth rate, more than double the 14 percent increase in demand for gasoline over the same period, has forced the United States to increasingly rely upon imports.
While the U.S. remains predominantly reliant on gasoline, other countries throughout the world are more heavily reliant on diesel fuel. Because of refining capacity issues, the U.S. is dependent upon imports of not just crude oil, but refined products including gasoline and diesel fuel. Since many other countries have a large fleet of passenger vehicles that are not powered by gasoline but by diesel fuel, the supply of gasoline that can be imported from other countries is usually sufficient to meet demand.
However, strong international demand for diesel fuel – for both passenger vehicles and for industrial machinery in the rapidly growing developing countries – have placed a premium on diesel fuel imports. U.S. diesel fuel prices reflect this heightened international demand.
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). Beginning in 2006, ULSD replaced 80 percent of the on-highway diesel fuel, known as Low Sulfur Diesel (LSD), which can have as much as 500 ppm sulfur content. By 2010, on-highway diesel fuel will be 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 must be taken in transporting both types of diesel fuel during the transition. This includes 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 exceeds a certain level. In addition, the cost to produce ULSD is more than for LSD, since the fuel requires more refining. This influences the cost of all diesel and results in a premium for ULSD, which has averaged 10 cents per gallon more than LSD at retail in each of 2007 and 2008.
The improved distillate yield per barrel of oil has not come without complications. As the use of ethanol has increased, it has reduced the rate at which gasoline production has increased — one of the intended effects of the renewable fuels mandate. Since both gasoline and diesel fuel are products of refined crude oil, a reduced rate of growth for gasoline negatively affects the production of diesel fuel.
Complicating this situation is the fact that hydrogen – a byproduct of gasoline production – is necessary to remove sulfur from diesel fuel. As gasoline production growth slows, the availability of hydrogen also declines. Meanwhile, the introduction of ULSD in 2006 increased the demand for hydrogen to remove the excess sulfur from the diesel fuel. This combination – the reduced rate of hydrogen production due to slowing of gasoline demand and the increased demand for hydrogen – has increased the costs of diesel fuel production.