The retail price of a gallon of diesel fuel reflects the costs and profits (or losses) of producing and delivering the product to customers. There are four main components that contribute to the retail price of a gallon of diesel fuel:
- The cost of crude oil purchased by refineries
- Refining costs and profits
- Distribution, marketing, and retail station costs and profits
- Taxes
The relative share of these components to the retail price of a gallon of diesel fuel varies over time and varies depending on the region of the country it is from.
The price consumers pay at the pump includes federal, state, and local taxes. At the end of 2014, federal excise taxes were 24.4 cents per gallon, and state excise taxes averaged about 23 cents per gallon. Some state, county, and city governments also levy additional taxes.
The cost of crude oil is the largest component of the retail price of diesel fuel
The cost of crude oil is the largest component of the retail price of diesel fuel, accounting for about 58% of the U.S. retail on-highway diesel fuel prices from 2005 to 2014.
Crude oil prices are determined by worldwide demand and supply. World economic conditions contribute to the demand for the petroleum products made from crude oil. Since diesel fuel is a major transportation fuel, the demand for diesel fuel generally follows economic trends. A major factor on the supply side is the Organization of the Petroleum Exporting Countries (OPEC). Combined, OPEC members produce about 40% of the world's crude oil. OPEC can sometimes exert significant influence on crude oil prices by determining how much oil is supplied to the market. OPEC can adjust production targets to put upward or downward pressure on world crude oil prices. Visit oil prices and outlook to learn more about specific factors that can influence crude oil prices.
International diesel fuel demand can affect U.S. prices
U.S. diesel fuel prices are increasingly affected by international demand for distillate fuel. Heating oil and diesel fuel are distillate fuels. Many countries rely more heavily on distillate fuels, especially diesel fuel, than the United States. In Europe, demand for diesel fuel has grown as diesel-fueled vehicles account for a large share of new car and light-duty truck sales. Europe uses about a fourth of the world's distillate fuel (heating oil and diesel fuel), so it is a significant contributor to world distillate demand. Heavy-duty vehicle use of diesel fuel worldwide, especially in China, has added to increased world distillate demand as economies expand. Use of distillate fuel for electric power generation in many parts of the world also contributes to demand.
U.S. diesel fuel supply and demand imbalances can cause price fluctuations
Prices of transportation fuels in the United States are generally more volatile than prices of other commodities. The U.S. vehicle fleet is almost completely dependent on petroleum. If supply declines unexpectedly, as a result of refinery problems or lagging imports, diesel inventories (stocks) may decline rapidly. When stocks are low and falling, some wholesalers and marketers may bid higher for available supplies. If the diesel fuel transportation system cannot support the flow of supplies from one region to another quickly, prices will remain comparatively high. These are normal price fluctuations experienced in all commodity markets.
Seasonality in the demand for distillate fuels
Although U.S. diesel fuel demand is fairly consistent and generally reflects the overall health of the economy, diesel fuel prices often fluctuate during the year. During the fall and winter, diesel fuel prices are affected by the demand for heating oil. Because heating oil and diesel fuel are produced at the same time, seasonal increases in heating oil demand can also put pressure on the diesel fuel market. In some regions, diesel fuel prices can also be influenced by seasonal swings in demand for diesel fuel from farmers.
Transportation costs affect prices
Transportation costs generally increase based on the distance between the retail location and the sources of supply. Areas farthest from the Gulf Coast, the source of about half of the diesel fuel produced in the United States, tend to have higher diesel fuel prices.
Regional operating costs and local competition
The retail price of diesel fuel also reflects local market conditions and factors such as the location of retail outlets. Some outlets are owned and operated by refiners, while others are independent businesses that purchase diesel fuel on the wholesale market.
The cost of doing business can vary greatly depending on where a dealer is located. These costs include wages, salaries and benefits, equipment, lease/rent, insurance, overhead, and state and local fees and taxes. Even retail stations near each other can have different traffic patterns, costs, and sources of supply. The number and location of local competitors can also affect prices. High-volume truck stops that cater to large commercial vehicles tend to sell diesel fuel at lower prices than smaller-volume service stations.
Why are West Coast diesel fuel prices higher and more variable?
Diesel fuel prices on the West Coast, especially in California, are relatively higher than other regions of the country because of taxes, supply issues, and the unique specifications for diesel fuel sold in California. At the beginning of 2015, the amount of the federal and state taxes on retail, on-highway diesel fuel in California equaled about 65 cents per gallon. The average for the United States was about 52 cents per gallon.
California is especially sensitive to West Coast supply conditions. Unlike other U.S. markets, which are interconnected by pipelines and river systems, the West Coast liquid fuels market is relatively isolated and largely supplied by in-region refinery production. Because of this relative isolation, it can be costly to transport supply from outside the region when a refinery outage occurs.
California has more stringent specifications and requirements for diesel and other transportation fuels intended to reduce air pollution from vehicles. These standards are generally more costly to meet than federal fuel standards.