You asked why diesel fuel prices have become more expensive than gasoline when they have traditionally been less expensive.

SUMMARY

From 1995 to 2005 diesel fuel was typically less expensive than gasoline, according to data from the Energy Information Administration (EIA). Further, the price differential was greatest during the summer driving season and smaller during the winter heating season. Because diesel fuel and home heating oil are similar products, they are made at the same time and the demand for one affects the prices of both products.

Since 2005, diesel fuel has become the more expensive product. Some analysts point to short-term causes, such as the supply disruption caused by the federally-mandated decrease in the allowable amount of sulfur in diesel fuel. Others point to the growing global demand for diesel fuel.

RELATIONSHIP BETWEEN DIESEL AND GASOLINE RETAIL PRICES

The relationship between diesel and gasoline retail prices followed a seasonal pattern from 1994 to 2005, according to the federal Energy Information Agency (EIA). Typically, average retail gasoline prices were higher than average retail diesel prices from April to September. Diesel prices would increase more than gasoline prices during the heating season—from October through March. Diesel fuel and home heating oil are very similar and are made at the same time. This means that the seasonal increase in demand for home heating oil would cause price increases for both home heating oil and diesel fuel.

This pattern ended, possibly due to a variety of causes. In the near term, some have attributed it to a change in federal environmental regulations. The change reduced the maximum allowable amount of sulfur in diesel fuel from 500 parts per million (ppm) to 15 ppm. The purpose of the change is to reduce emissions of nitrous oxides and particulate matter. The transition to lower-sulfur fuel began in June 2006 and must be completed this fall. The transition has a short-time effect on diesel supply and prices. Also in the near term, demand for diesel fuel is typically high in the fall when farmers are harvesting crops and truckers are making pre-season deliveries to retailers.

In the long term, some point to the increased demand in Europe and Asia for diesel fuel for their growing numbers of light-duty diesel vehicles. EIA analysts have stated that the increased demand will lessen diesel fuel's price advantage over gasoline over the next 10 years (Hackworth and Stone, Distillate in Depth—the Supply, Demand and Price Picture, October, 2005). J. D. Power and Associates predicted that global demand for diesel light vehicles, such as automobiles, will nearly double over the next 10 years (enclosed).

RECENT PROJECTIONS

According to the Energy Information Administration (EIA), even though distillate stocks (diesel and home heating oil) were 10 million barrels above the previous 5-year average at the end of August (Gasoline and Distillate Inventories), diesel fuel prices have not fallen as much as gasoline prices have. Global demand for distillate fuels, particularly in Europe and Asia, is expected to keep this market tight. While diesel fuel prices are expected to decline over the next few months, prices are projected to increase as winter demand for heating oil grows (EIA, Short Term Energy Outlook, September 12, 2006).

The EIA, in its weekly publication on petroleum products (This Week in Petroleum, September 13, 2006), stated that the gasoline price drop that normally arrives after Labor Day and usually extends through the end of the year began a few weeks early, probably because there were no hurricanes threatening petroleum infrastructure and that there were enough supplies on hand to get through Labor Day. As a result, they began to decline before Labor Day. Currently, the near-month futures price of a barrel of gasoline is only $ 1 to $ 2 above that of a barrel of crude oil, an unusually low margin.

Diesel prices have not dropped as much as gasoline, mostly because diesel demand tends to be strong in the fall with agricultural use of diesel increasing as crops are harvested, and the similarity of diesel to heating oil often causes diesel prices to rise in conjunction with heating oil as the winter approaches. Thus, declines in diesel prices have been limited to those caused by the decline in crude oil prices.

PRICE HISTORY

Table and Chart 1 display the January and July average monthly gasoline and diesel prices from 1994 to the present. In most years, the price differential between gasoline and diesel was greater in summer than winter. Only in 2005 and 2006 were the January diesel prices higher than the gasoline prices. Price data were extracted from the Weekly Gasoline and Diesel Prices worksheet produced by the EIA.

Table and Chart 1: US Average Monthly Gasoline and Diesel Prices