As the price of gasoline has leveled off or slightly declined in some areas, the price of diesel has continued to rise. According to the Energy Information Administration, the average retail price for diesel this week in the U.S. is $5.16 per gallon, up six cents from last week, and up nine cents from two weeks ago.
Diesel is more important than gasoline for supply chains, since it powers the trucks and freight trains that deliver our goods. As the price of diesel rises, life gets harder for trucking companies and railroads, transportation costs increase, and those costs can get passed on to consumers as higher prices for a variety of goods.
Here’s a graph showing the weekly retail prices for diesel (in black) and gasoline (in red) since 1994. You can use your cursor to hover over the lines to see exact dates and prices.
Some media reports are saying the current diesel prices are record highs. That’s not right, for two reasons. First, the EIA data show that the price was slightly higher a few weeks ago; the maximum for the entire time series is $5.185 on March 28. Second, and more importantly, that graph shows nominal prices, i.e., not adjusted for inflation. In real terms, the diesel price was significantly higher during the spike in the summer of 2008 in the middle of the graph. That peak of $4.764 on July 14, 2008, would be the same as $6.22 today when adjusted for inflation. The $4.09 price on March 5, 2012, is about the same as today’s prices in real terms. We’ve seen diesel prices at this level before, relative to the rest of the economy.
What’s more concerning is not the level of prices, but the spread between diesel and gasoline. As you can see, in the ’90s, there was little difference between the price of diesel and the price of gasoline. In fact, the price of gasoline sometimes exceeded the price of diesel.
But in the mid ’00s, the gap began to widen. During the recovery from the Great Recession in the ’10s, the spread between diesel and gasoline sometimes became as wide as 70 or 80 cents per gallon at times.
The fracking boom begins in 2015 and 2016, which increases the supply of crude oil and sends the price of both gasoline and diesel down. The spread declines some. But as the price of crude returns to more historically normal levels in the following years, the spread reemerges.
Now, it’s at a record high. A gallon of diesel is currently about $1.20 more expensive than a gallon of gasoline. That, not the supposed record high in the diesel price, is the greater cause for concern right now.
One reason for the record-high spread is a short squeeze in the diesel market this week. Traders on the futures market who thought the price was going to fall turned out to be very wrong, which means they need to buy diesel this week because the May futures contract expires today. That’s commodity-market drama and will get sorted out in due course.
But there are more important, long-lasting structural issues at play, as John Kingston explains at FreightWaves. Since the start of the year, he points out, gasoline prices are up 26 percent, but diesel prices are up 43 percent. That’s not just because of a short squeeze.
It’s not just because of the war in Ukraine, either, although that is a contributing factor. (Russia was a major supplier of diesel in Europe, and in its absence, diesel imports from the Middle East have soared, with India and the U.S. chipping in as well.) Kingston looks to a report from energy economist Philip Verleger that argues that chemistry, government regulation, and other energy trends will keep the spread between diesel and gasoline larger for years to come.
Diesel is less refined than gasoline, so it might seem strange that the price for diesel is higher to begin with. One of the reasons diesel is more expensive, though, is that while one barrel of crude oil yields 20 gallons of gasoline, it yields only 12.5 gallons of distillate, which is mostly turned into diesel, but also into heating oil. That means it takes over 60 percent more barrels of crude oil to produce a certain amount of diesel than it does to produce the same amount of gasoline.
Given that chemistry problem, refiners look for specific kinds of crude oil that are better suited for diesel production. Government regulation plays a role as well. Different types of crude oil have different levels of naturally occurring sulfur content. The EPA began stricter regulation of the sulfur content in diesel in 2006. Regulations for highway diesel were phased in by 2010. Regulations for locomotive and marine diesel were phased in by 2014. (You’ll notice that this was right around the time the spread between diesel and gasoline really began to assert itself.)
International regulations for shipping also played a role. Verleger points to the International Maritime Organization fuel standards, which also mandated lower sulfur levels. Container ships aren’t powered by diesel, but the IMO regulations had the same effect as the EPA regulations: increasing the demand among refiners for low-sulfur varieties of crude oil.
Some of the best low-sulfur oil in the world comes from Nigeria. But Nigerian oil has been harder to come by in recent years due to militancy and vandalism. An OPEC member, Nigeria is about 300,000 barrels per day below its production quotas.
With less Nigerian oil, Verleger argues, refiners are forced to make up the difference with other crudes that have more sulfur. Desulfurization is possible, but it’s expensive, and there’s only so much capacity for it currently, he says. That contributes to a higher price for diesel.
Additionally, Verleger points to the use of gasoil in Europe for electricity generation. Gasoil is another distillate, and it’s cheaper than natural gas in Europe, so it’s an attractive energy source. As Europe seeks to wean itself off Russian natural gas, expect higher demand for gasoil in the short term as a substitute.
Verleger sees all of these factors combining to a sustained increase in demand for distillates, which will lead to sustained increase in the price of diesel. His analysis passes the smell test of reasonability, but obviously, markets are very unpredictable, and general claims should be taken with a grain of salt.
Nonetheless, the high price for diesel right now could exacerbate a possible freight recession. Key indicators of trucking demand have continued to decline in recent weeks, and the cost of diesel is one of the top input prices that make or break carriers. When the freight market was booming last year, lots of new trucking companies entered the market to get a slice of the profits. Soaring costs, led by diesel, combined with weaker demand will turn those profits into losses quickly.
For railroads, diesel costs are also a huge concern. For example, CSX operates about 3,100 freight locomotives, each with fuel tanks that hold thousands of gallons of diesel, so even relatively small changes in diesel prices add up fast. In 2021, total expenses for CSX increased by $707 million over the previous year, and $372 million of that was just on fuel. Freight railroads are already facing problems maintaining levels of service, and higher fuel prices will only make things worse.
What can help? As always, nuclear power. Not for trucks or trains, of course, but to reduce the demand for distillates in electricity production. Replacing gasoil-generated electricity with nuclear-generated electricity leaves more low-sulfur crude oil to refine into diesel.
Higher levels of investment in desulfurization at refineries would also help. Sulfur is much worse for air quality in the here and now than carbon dioxide, yet carbon dioxide gets all the attention because of its contribution to global warming. As a consequence of the demonization of fossil fuels, it’s harder for oil and gas companies to attract investors who are taken by the ESG fad. That, in turn, hinders their ability to invest in technologies like desulfurization. We need more energy investment, even in fossil fuels, if we want cleaner energy.
Finally, if diesel prices really do stay high for the long run, that only increases the incentive to develop alternative fuels. We never have to worry about running out of diesel, so long as there are free markets with functioning price signals and scientists who are able to develop new technologies freely. Energy transitions don’t happen overnight, and they don’t happen because central planners make them happen.