Why Is Diesel So Expensive? Factors Behind the High Price

The price of diesel fuel often fluctuates due to a complex interplay of global and domestic factors. Its cost is shaped by market forces, production intricacies, logistical challenges, and governmental policies.

Crude Oil and Production Expenses

The cost of crude oil represents the largest component in the retail price of diesel fuel, often accounting for approximately 50% of the total. Global crude oil prices are volatile, influenced by supply and demand, geopolitical stability, and production decisions by major oil-producing entities like OPEC+. For example, OPEC+ can impact prices by adjusting production quotas, with cuts often leading to price increases.

Refining crude oil into diesel also incurs substantial expenses. Its refining process can be more complex and energy-intensive compared to producing gasoline. Environmental regulations, such as the mandate for Ultra-Low Sulfur Diesel (ULSD) in the United States, further add to these production costs, as the process to reduce sulfur content requires additional treatment.

Refiners monitor the “crack spread,” the theoretical profit margin from converting crude oil into refined products like diesel. This spread, the difference between crude oil purchase price and refined product selling price, indicates refiner profitability and influences refining output decisions.

Global Market Demand and Supply

Beyond crude oil, the supply and demand for refined diesel fuel significantly impact its price. Diesel powers commercial trucking, freight transportation, agriculture, construction machinery, and industrial equipment. It is also used as heating oil in some regions.

Economic activity directly influences diesel demand; during periods of growth, the need for transportation and industrial operations increases consumption. Seasonal variations also play a role, with demand for heating oil in colder months affecting diesel prices. Agricultural demand peaks during planting and harvesting seasons.

The supply of refined diesel can face constraints. Refinery outages, whether planned or unexpected, can reduce available supply. Low inventory levels of diesel and global trade flows can also lead to price increases as competition for limited supplies intensifies.

Transportation and Retail Markups

Once refined, diesel fuel must be transported from refineries to distribution terminals and then to retail stations, incurring additional costs. Various transportation methods are utilized, including pipelines, barges, rail, and tanker trucks.

The distance from refineries to end-users also contributes to the final price, with more remote locations facing higher transportation costs. Storage of large volumes of diesel at terminals and retail sites also adds to the overall expense.

Retail markups cover the operating expenses of fueling stations and include a profit margin for the businesses. These operating costs encompass rent, utilities, labor, and equipment maintenance. While profit margins can vary significantly among retailers, they represent a necessary component of the final price consumers pay.

Government Taxes and Regulations

Governmental taxes and regulations represent a quantifiable portion of the final price of diesel fuel. At the federal level, an excise tax of 24.4 cents per gallon is levied on diesel fuel, which is 6 cents higher than the 18.4 cents per gallon federal excise tax on gasoline. This higher tax for diesel is often attributed to its primary use in heavy commercial vehicles, which contribute more to road wear and tear.

In addition to federal taxes, states and local jurisdictions impose their own excise taxes, environmental taxes, and various fees. As of July 2024, the average state and local taxes and fees on diesel fuel were approximately 34.76 cents per gallon, though these rates vary considerably across different regions. Some states may also apply sales tax to fuel purchases, further increasing the cost.

Environmental regulations also influence diesel production costs. Requirements for Ultra-Low Sulfur Diesel (ULSD), for instance, necessitate more intensive and costly refining processes to meet strict emissions standards. These regulatory mandates aim to reduce harmful pollutants but inherently add to the expenses incurred by refiners, which are then passed on to consumers.