Saturday, February 26, 2022

Understanding the Increase in Diesel Fuel Prices

It was only in recent years that diesel fuel prices soared above gas prices. These two fuel categories used to have different peak seasons, with gasoline prices enjoying greater primacy in pricing over longer months. Gasoline then had the biggest gap in prices from diesel fuel during the summer months, when demand for gasoline peaked as a result of families taking long drives across states.Meanwhile, diesel fuels scored higher prices during the winter months, when the demand for distilled heating oils used at home increases as well. This is because distilled heating oil and diesel fuels are refined in the same facility using the same process, causing the demand for diesel fuel and distilled heating oil to act in a parallel manner.

The increase in the base price levels of both gasoline and diesel fuel has been primarily driven by the worldwide increase in crude oil prices. Crude oil is the basic ingredient from where different forms of fuels are derived from.

However, there are three particular reasons why the demand for diesel fuel have increased over time, the first being increasing demand, the second being the slackening demand for gasoline, and third being new environmental restrictions on gasoline.

First, there has been an increasing demand all over the world for diesel because of the increase in number of diesel-powered engines. In years when gasoline prices soared over diesel prices, car manufacturers produced cheaper diesel-powered vehicles in order to capture the market of consumers who wanted to save on gasoline prices. However, the fact that these diesel-powered vehicles have outsold gasoline-powered ones has obviously caused more people demanding diesel fuel to run their engines. This trend is true not only in the United States, but also in China, Europe, and India. With a limited supply of diesel fuel produced annually, increases in demand causes the price to distort upward.

In addition, the relative increase of prices of diesel fuel products have made gas prices appear much cheaper, especially with less people choosing to buy gasoline. Increasing consumption of diesel fuel has driven up its prices, whereas a near steady to decreasing consumption of gasoline has led to its price to remain stable, if not decreasing as well over time. This increases the relative price gap between the two.

Lastly, government legislation has caused the regulation that requires the reduction of sulphur content in diesel from 500 million parts per gallon to 15 parts per gallon. The process of reducing sulphur in diesel to this extent will cause greater expense in refining and producing retail-ready diesel fuel for consumption. In the year 2006, the goal was to have 80% of motorist traffic complying with this ordinance; by 2010, 100% of diesel available in the market must comply. As with all industries, the cost of additional stages of processing will be levied on the final retail prices of diesel fuels, causing a greater increase in prices above the already significant impact that high demand has on it.

When looking at diesel prices, it is important to appreciate what drives the increases in prices, and even the standards for when people say prices have increased. For the latter, the relative increase in diesel prices in conjunction to the relative stability or decrease of gasoline prices has increased the perception of more expensive diesel prices. The drivers for increases in diesel fuel prices, however, remain to be that of increasing demand for the limited supply of diesel fuel, as well as costly processing of diesel in order for it to comply with environmental standards.