MAIN FACTORS THAT AFFECT DIESEL PRICES

WHAT ARE THE MAIN FACTORS THAT AFFECT DIESEL PRICES?

Besides excise taxes, the following are the main factors that affect diesel fuel prices:

Cost and supply of crude oil: Crude oil prices are determined by worldwide supply and demand, and over the past few years increasing demand has put intense pressure on available supplies. The Organization of Petroleum Exporting Countries (OPEC) exerts significant influence on prices by setting an upper production limit on its members who produce about 40 percent of the world’s crude oil. OPEC countries have essentially all of the spare production capacity, and possess about two-thirds of the world’s estimated crude oil reserves. Prices spike in response to disruptions in the international and domestic supply of crude oil, such as the Arab oil embargo in 1973, the Iran/Iraq war in 1980, the current war in Iraq, unrest in the Niger River delta region of Nigeria, and the hurricanes in the Gulf of Mexico in 2005.

Tight refining capacity and international diesel fuel demand: U.S. refineries have been operating at around 90-percent capacity over the last 10 years. Most other countries rely even more heavily on distillates and diesel fuel than does the United States, and refining capacity is tight worldwide. U.S. diesel fuel prices are more and more affected by competing international demand for refined distillates.

Figure 3. Diesel Fuel Prices Follow Crude Oil

Product supply/demand imbalances: Prices of transportation fuels are generally more volatile than prices of other commodities because the U.S. vehicle fleet is so heavily dependent on petroleum and few alternative fuels are available. If supply declines unexpectedly due to 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 product. If the diesel fuel transportation system cannot support the flow of surplus supplies from one region to another quickly, prices will remain comparatively high. These are normal price fluctuations experienced in all commodity markets.

Seasonality in the demand for diesel fuel and distillates: While U.S. diesel fuel demand is fairly consistent and generally reflects the overall health of the economy, prices tend to gradually rise during the fall, decline in the late winter, rise through the early spring, and then drop a bit in the summer. Seasonal upward pressure on diesel prices also results from demand by farmers in the summer, cold weather in the winter, and stores building up inventories during the winter holiday season.

Transportation Costs: Transportation costs generally increase with increasing distance between the retail location and distribution terminals and refineries. Areas farthest from the Gulf Coast (the source of nearly half of the diesel fuel produced in the United States) tend to have higher prices.

Regional operating costs and local competition: The cost of doing business by individual dealers can vary greatly depending on where the dealer is located. These costs include wages and salaries, benefits, equipment, lease/rent, insurance, overhead, and State and local fees. Even retail stations next to each other can have different traffic patterns, rents, and sources of supply that affect their prices. The number and location of local competitors can also affect prices.