New York (CNN Business) — Most drivers today focus on the high cost of filling their tanks with normal fuel. But there is another major fuel on the gas station price board, and its national median price currently dwarfs gasoline by more than a dollar a gallon: diesel.
“Diesel is the engine of trucking. It’s what drives our global economy,” said Joseph Sykora, equity analyst at Aptus Capital Advisors.
But diesel is not only crucial for road transport, it is essential for international transport as a whole, because the engines of heavy-duty vehicles, such as freight trucks, cargo planes and barges, run with diesel. So when it becomes more expensive to ship products around the country and the world, the prices of the products carried by those transportation vehicles also go up, compounding inflation.
Diesel prices have long been more expensive than gasoline prices, long before current factors such as the ongoing war in Ukraine, scarce refinery capacity and energy demand after the covid crisis , caused the world supply of oil to shrink and prices to rise. But why?
There are three main reasons for the price discrepancy: the transition to cleaner diesel blends, increased state and federal taxes, and diesel supply and demand.
In 2006, the US Environmental Protection Agency (EPA) began introducing regulations that significantly limited the sulfur content of diesel. The agency did this because aggravated levels of sulfur matter in the air are toxic to both humans and the environment.
And since 2014, the EPA has ruled that all diesel sold and produced in the United States must be ULSD (ultra-low-sulfur diesel), a diesel standard that limits sulfur content to 15 parts per million. Regulations on sulfur content have reduced toxic emissions by at least 90%, according to the agency.
EPA regulations are very beneficial for the environment. But the reduction in the sulfur content of diesel led to lower energy density (less fuel savings per gallon) and increased production costs at the refinery, putting upward pressure on prices.
The diesel tax
The administration of President Joe Biden recently asked Congress to suspend the federal tax on diesel and gasoline. Regardless of whether the tax suspension proposal is effective, it draws attention to the tax itself.
The federal motor fuel tax, which has not changed since 1993, imposes an additional tax of 18.3 cents on gasoline and 24.3 cents on diesel. The revenue from this tax is used to finance the Highway Trust Fund, a federal fund that finances the construction and maintenance of highways and other mass transportation projects.
In addition to the federal tax, each state has its own additional tax on both fuels: the average tax on diesel is 7.55 cents higher.
Taxes on diesel are higher because the main diesel-powered vehicles, trucks and buses, are much heavier and damage roads considerably more than the average car.
Finally, the high price of diesel is attributed to the basic economic principle of supply and demand: insufficient supply, combined with barrels and barrels of demand.
On the supply side, diesel is produced at a reduced rate compared to gasoline. In the United States, for every barrel of refined crude oil, between 19 and 20 gallons of gasoline are produced. In the case of diesel, this figure is reduced to only 11 or 12 gallons.
On the demand side, diesel and its molecular siblings help make, grow, and transport almost all consumer products. The fuel powers the engines of trucks, trains, industrial machines, construction and farm equipment, buses, generators, home heating systems, ships, and military vehicles.
Gasoline may power American cars, but since diesel fuels the American economy, its price also affects our daily lives.