Understanding the price gap between gasoline and diesel fuel
Both gasoline and diesel fuel are produced from crude oil and therefore the cost of crude oil is the main factor influencing gasoline and diesel prices. However, fuel prices also reflect refining costs, taxes, and distribution and marketing costs. Additionally, retail prices are affected by market demand. These factors lead to a price spread between gasoline and diesel.
Refining costs: During the process of refining, crude oil is separated into different components and these components are converted through further treatments into gasoline, diesel fuel, and other petroleum products. Diesel fuel is heavier and less volatile than gasoline, which makes it simpler to refine from crude oil. As a result, diesel tends to be cheaper than gasoline in most countries around the world. However, the introduction of Ultra-Low Sulfur Diesel (ULSD) between 2006 and 2010 increased diesel production costs since ULSD requires more refining.
Taxes: Many countries tax diesel and gasoline differently. For example in the USA the federal excise tax on gasoline is 18.4 cents per gallon and 24.4 cents per gallon for diesel fuel. In contrast, most European countries tax diesel more lightly than gasoline. Since taxes are one of the major components of the final consumer prices of fuels, tax policy determines to a great extent the cross-country differences in gasoline and diesel prices.
The spread between diesel and gasoline prices also varies over time with the following factors:
Demand: In contrast to gasoline, diesel fuel is used to power not only cars but also public transportation vehicles, large delivery trucks, off road vehicles, boats, machinery, generators, etc. During periods of economic expansion industrial sector energy demand increases significantly and diesel prices rise more than gasoline prices. If the demand for diesel fuel is higher, the price spread will widen.
Seasonality: Fuel oil used for home heating is made from the same basic components as diesel fuel. As a consequence diesel prices are affected by heating oil demand. In winter, the demand for heating oil rises and this tends to increase diesel retail prices. As a result, the price spread between gasoline and diesel exhibits seasonal variations.