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Diesel fuel explained Factors affecting diesel prices

The retail price of a gallon of diesel fuel reflects the costs and profits (or losses) of producing and delivering the product to customers. The retail price of diesel fuel has four components:

  • The refinery‚Äôs cost for purchasing crude oil
  • Refining costs and profits
  • Distribution, marketing, and retail station costs and profits
  • Taxes (federal, state, county, and local government)

The relative share of these components in the retail price of a gallon of diesel fuel varies over time and by the region of the United States where it is sold.

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The cost of crude oil is the largest component in the retail price of diesel fuel

The cost of crude oil accounted for about 50% of the monthly average U.S. retail on-highway diesel fuel prices from 2003 through 2022.

Worldwide crude oil demand and supply determines crude oil prices. World economic conditions contribute to the demand for the petroleum products made from crude oil. Visit What drives crude oil prices? to learn more about factors that influence crude oil prices. Because diesel fuel is a major transportation fuel, the demand for diesel fuel generally follows economic trends.

International distillate fuel demand can affect U.S. diesel fuel prices

International demand for distillate fuel affects U.S. diesel fuel prices. Because heating oil and diesel fuel are practically the same fuels, changes in demand for one fuel may affect the price of the other fuel. In many countries, diesel engine cars are more common than in the United States and many use distillate fuel for a large share of their electricity generation.

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 depends almost completely on petroleum. If petroleum supply declines unexpectedly as a result of refinery problems or lagging imports, diesel inventories (stocks) may decline rapidly. When stocks are low or 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 enough, prices will remain comparatively high. These fluctuations are normal normal in all commodity markets.

Demand for distillate fuels is seasonal

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, the demand for heating oil affects diesel fuel prices. 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, seasonal swings in farmers' demand for diesel fuel can influence diesel fuel prices.

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 U.S. diesel fuel production, tend to have higher diesel fuel prices.

Regional operating costs and local competition also affect prices

The retail price of diesel fuel also reflects local market conditions and factors such as the location and ownership of retail outlets. Refiners own and operate some retail outlets, while other retail outlets are independent businesses that purchase diesel fuel on the wholesale market.

The cost of doing business, ranging from overhead to local real estate costs and taxes, can vary greatly depending on where a dealer is located. 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.

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Why are West Coast diesel fuel prices higher and more variable?

Diesel fuel prices on the West Coast, especially in California, are higher than in other regions of the country because of taxes and supply issues. As of January 1, 2023, total state taxes on retail, on-highway diesel fuel in California totaled 76.20 cents per gallon, and the average of total state taxes for all 50 states was 33.88 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. Learn more about transportation fuel markets in the West Coast region ( PDF).

Last updated: April 19, 2023