The retail price of a gallon of diesel fuel reflects the costs and profits (or losses) of producing and delivering the product to customers. Four main components contribute to the retail price of a gallon of diesel fuel:
- The cost of crude oil purchased by refineries
- 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 country where it is sold.
The cost of crude oil is the largest component of the retail price of diesel fuel
The cost of crude oil accounted for about 55% of the monthly average U.S. retail on-highway diesel fuel prices from 2008 through 2017.
Worldwide 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 diesel fuel demand can affect U.S. prices
International demand for distillate fuel affects U.S. diesel fuel prices. Heating oil and diesel fuel are distillate fuels. Many countries rely more heavily on distillate fuels, especially diesel fuel, than the United States does. Europe uses about one-fourth of the world's distillate fuel and is a significant contributor to world distillate demand. Diesel fuel use for transportation worldwide, especially in China, has increased world distillate demand as economies expand. Use of distillate fuel for electric power generation in many parts of the world also contributes to demand.
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 is almost completely dependent 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 and 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, prices will remain comparatively high. These fluctuations are normal price fluctuations experienced in all commodity markets.
Seasonality in the demand for distillate fuels
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
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 can vary greatly depending on where a dealer is located. These costs include wages, salaries and benefits, equipment, lease/rent, insurance, overhead, and state and local fees and taxes. 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.
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. At the beginning of 2018, state taxes on retail, on-highway diesel fuel in California totaled 63.16 cents per gallon, and the average of total state taxes for all 50 states was 29.33 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.