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April 12, 2011

Retail prices: diesel outpaces gasoline

Since mid-2009 the price of retail diesel has been consistently higher than the price of retail regular grade gasoline. Strong diesel demand in emerging economies and the U.S. economic recovery both supported this trend.

This price relationship used to be different. Before 2005, gasoline prices were typically higher than diesel fuel prices during the summer when driving peaked, and conversely diesel prices were higher during the winter when driving declined and the price of heating oil (a fuel similar to diesel) increased, pulling up diesel prices.

Starting in 2005 the relationship between the two fuels changed and for the first time diesel prices remained higher than gasoline prices for most of the summer. The diesel premium over gasoline peaked in 2008, but then fell sharply during the recession. However, since mid-2009 diesel fuel prices have exceeded gasoline prices, with a price premium that has tended to increase. The last time regular grade gasoline sold for more than diesel was August 10, 2009. As of March 28, 2011, regular grade gasoline sold for $3.60 per gallon, 33 cents less than diesel at $3.93 per gallon.

Strong global demand for diesel fuel has been a major driver of relatively high domestic diesel prices. Diesel demand growth has been particularly strong among emerging non-Organization for Economic Cooperation and Development (non-OECD) countries where economic growth has been robust in the wake of the global financial crisis.

In these countries, unlike in the United States, diesel/heating oil demand represents a larger portion of total petroleum product demand than gasoline. The International Energy Agency (IEA) estimates that in China, demand for diesel increased 12.0% in 2010, while its gasoline demand grew by only 4.4%. This relative diesel intensity in countries with strong economic growth has helped support global diesel prices.

Closer to the U.S. market, diesel demand has also been strong in Latin America, which has led to an increased demand for U.S. diesel exports. U.S. exports of distillate fuels (of which diesel is a significant portion) reached a record level of 656,000 barrels per day (bbl/d) in 2010, a 12% increase over 2009, and a 145% increase over 2007. A majority of those exports went to Latin American countries. However, exports have not significantly depleted U.S. supplies, as indicated by continued high distillate inventories on the Gulf Coast.

Diesel price strength is not completely an international story; it is also the result of the U.S. economic recovery. In the United States, demand for diesel fuel tends to be more responsive than demand for gasoline to economic conditions. From its peak in 2007, annual product supplied (a proxy for demand) of low-sulfur diesel fell 8.4% by 2009, while gasoline product supplied fell 3.1%. However, in 2010, low-sulfur diesel product supplied rebounded 4.2% versus 2009, while gasoline product supplied was only 0.4% higher.