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Fuel for Thought
The Energy Information Administration Discusses Diesel
Distribution and Pricing
Compiled by UC Staff |
The main fuel for your trucks and construction equipment is called diesel, and the cost to produce and deliver this distillate fuel to customers includes a myriad of factors — the costs of crude oil, refinery processing, marketing and distribution and retail station operation, among others. The retail pump price reflects these costs and the profits (and sometimes losses) of the refiners, marketers, distributors and retail station owners.
According to the Energy Information Administration (EIA), an independent statistical agency within the U.S. Department of Energy, the relative share of these cost components to the retail price varies over time and among regions of the country. For one thing, the price at the pump includes federal, state and local taxes. In 2008, federal excise taxes were 24.4 cents per gallon and state excise taxes averaged about 22 cents per gallon. Some states and county and city governments levy additional taxes. The retail price also reflects local market conditions and factors such as the location and the marketing strategy of the owner. Some retail outlets are owned and operated by refiners, while others are independent businesses that purchase diesel fuel for resale to the public.
Historically, the average price of diesel fuel has been lower than the average price of gasoline. However, this is not always the case. In some winters, where the demand for distillate heating oil is high, the price of diesel fuel has risen above the gasoline price. Since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline all year round for several reasons. Worldwide demand for diesel and other distillate fuel oils has been increasing steadily, with strong demand in China, Europe and the United States, putting more pressure on the tight global refining capacity. In the United States, the transition to ultra-low-sulfur diesel (ULSD) fuel has affected production and distribution costs. Also, the federal excise tax on diesel fuel is 6 cents higher per gallon (24.4 cents per gallon) than the tax on gasoline.
Retail diesel fuel prices are likely to remain elevated as long as crude oil prices and world demand for distillate fuels remain high. According to EIA’s 2008 Short-Term Energy Outlook, national average retail diesel fuel prices peaked in the third quarter of 2008 at $4.75 per gallon but might fall to $4.11 per gallon by the fourth quarter of 2009, primarily due to the forecast for the price of West Texas Intermediate crude oil to average between $121 and $133 per barrel during this same period. However, the recent volatility seen in crude oil and petroleum product prices, if continued, may significantly alter these price projections.
The phase-in of the U.S. Environmental Protection Agency’s (EPA) sulfur standards for diesel fuels has the potential to continue to influence diesel fuel prices. The logistics of delivery of ULSD to retail service stations can be a challenge. Most ULSD travels through pipelines on the way to bulk terminals for final transfer by tanker truck to retail stations. Other diesel fuels and petroleum products with a higher sulfur content in the pipeline, storage and local distribution systems might contaminate ULSD (jet fuel, for example, can have 3,000 ppm of sulfur). If contaminated, it may not be possible to correct a ULSD fuel batch by blending with additional low-sulfur product, and contaminated batches have to be returned to a refinery for reprocessing, a difficult and expensive problem. Even without potential delivery problems, it costs relatively more to produce ULSD fuel.
Diesel prices on the West Coast, especially in California, are relatively higher than other regions of the country, partly because of taxes, but mainly because of supply issues. The state of California assesses a combined state and local sales and use tax of 7.25 percent on top of the 24.4 cents per gallon federal excise tax and an 18 cents per gallon state tax. Washington’s tax of 34 cents per gallon is one of the highest in the country.
Besides taxes, West Coast retail prices are more variable than others because there are relatively few supply sources: 21 of the 36 refineries located in West Coast states are in California. California refineries need to be running at near full capacity just to meet in-state demand. If more than one refinery in the region experiences operating difficulties at the same time, the diesel supply may become very tight and prices may spike. The West Coast’s substantial distance from Gulf Coast and foreign refineries is such that any unusual increase in demand or reduction in supply results in a large price response in the market before relief supplies can be delivered. The farther away the necessary relief supplies are, the higher and longer the price spike will be.
For more information on diesel fuel, visit the Energy Information Administration, the official energy statistics association for the U.S. government at www.eia.doe.gov/bookshelf/brochures/diesel/index.html.
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