Why Diesel Fuel Prices Are High

Diesel fuel prices used to be less than gasoline prices. But a lot of people are now wondering why diesel fuel costs higher than gasoline. The primary reason is the increasing global demand. The other factors would be environmental restrictions and higher federal taxes. (All of these will be tackled in detail below.)

What people do not realize is that the pattern shifts. During the summer, people tend to use their vehicles for vacations; this in turn increases the cost of gasoline. During the winter, people tend to stay at home and generate a high demand for heating oil; this in turn increases the cost of diesel fuel. The correlation between heating oil and diesel is that they are similar fuel and that the price of the heating oil tends to set a floor for diesel.

The widening spread between the prices of diesel fuel and gasoline is partly due to the lull in the demand for gasoline, which can be attributed to high prices and soft economy. If people would just increase their consumption as rapidly as before, then the prices of gasoline would be higher. In return, the spread between the prices of diesel fuel and gasoline will not be as wide as it is now.

Increasing Global Demand

There is an increasing demand for diesel fuel worldwide—that is, in the United States, Europe, China, and India. In Europe, more vehicles with diesel engines were sold in the past few years. More than 50 percent of new registrations for 2007 were diesel-consuming vehicles. In India, the same trend applies: the numbers of new vehicles sold have doubled in five years, and 30 percent of which is diesel-powered. This percentage is projected to reach 50 percent by 2010. In China, the increasing demand for diesel fuel is in direct proportion with its economy. With them hosting the Olympics plus the earthquake that hit them recently, higher demand for diesel fuel is foreseen to avoid interruptions and to run heavy equipment and emergency generators.

Environmental Restrictions

The shift to ultra-low sulfur diesel fuel in the United States is an ongoing project since 2006. Its goal is to apply this standard to all on-highway diesel fuel by December 2010. There are also standards for off-highway diesel fuel such as fuel for generators, construction machinery, and marine use. This drastic change is an expensive process altogether as it will target the production of all diesel fuel, which in turn has affected the selling price of diesel fuel. A projection has it that this expensive process would require refiners to invest a large amount of money, and this will make them increase the prices of diesel fuel between 2007 and 2011. Moreover, a production bottleneck will probably result in higher price spikes.

Higher Federal Taxes

The tax for diesel fuel is higher than the tax for gasoline. And naturally, the higher the tax, the higher will be the price at the pump. This has been the trend for several years, and this is the explanation why diesel has sold for an average of 1.3 percent more than gasoline over a specific period of time.

There are more factors affecting diesel fuel prices. Having an understanding how the pricing works will help you find ways to go around the soaring prices. And with this knowledge, you can have a grasp of the trends and create your own projection to aid your budget planning.