Factors Affecting Diesel Fuel Prices

With diesel fuel prices stabling a bit, there are still looming concerns about its future. This makes sense. If the record-high price of diesel happened before it will likely to happen again. But why diesel fuel prices went so high?

If you are going to conduct a survey, many would say that it is the greed of oil companies that drove fuel prices including gas and diesel to record highs in July. While everyone is free to speculate, it is always proper to steer away from opinions and look on hard facts.

Many do not realize that weather and seasons affect the demand for fuel. For example, during summer, many families drive their vehicles for vacation. One or two families cannot affect the price of diesel but summer vacations happen globally. This increases the demand for oil and drives the prices up. Winter is no different. While most people living in cold areas choose to stay at home, they use heating systems which draw energy from heating oil. Heating oil tends to set the prices of diesel so when the demand for heating oil is up, diesel prices are also up.

Another factor that affects the fuel prices is the demand. Demand drives the prices of any commodity up (including fuel). During the past few years, consumers have demanded for diesel engine vehicles since diesel is cheaper than gasoline. The increase in the production as well as the growing demand for diesel engine vehicles in countries including the United States, China, India and Europe has contributed to the spike in diesel fuel prices. In 2007, 50% of the total registrations in the United Stated are diesel engine vehicles. In China, the demand for vehicles is related to its growing economy. In India, there is a substantial increase in vehicle sales in recent years – 30% are diesel vehicles. In Europe, more diesel vehicles were sold in the past years than gasoline.

Now, we have seen a steep drop on world crude prices which reflects to low pump prices. From its record high of around $140 in July, crude oil is selling at about $40 to $60 per barrel. One reason is the decease on fuel demand as an effect of the global financial crisis.

Higher federal tax is imposed on diesel than on regular gasoline which is reflected to the price at the pump. This explains why on a certain period in time, diesel was sold higher than gasoline. (The federal excise tax on diesel fuel is 6 cents higher than on gasoline.)

Environmental restrictions also play a role in driving the prices up. The United States has shifted to ultra-low sulfur diesel fuel – a project that is going on since 2006. The process of converting into ultra-low sulfur diesel fuel is very expensive and refiners will have to impose this added cost on the consumers.

Transportation cost also increases the price of diesel. Generally, the prices of fuel increase if the distance between the retailer and the distributor increases. This is the reason why some areas have slightly different prices than others. Areas farther from the Gulf Coast have higher fuel prices.

Understanding the factors that affect the prices of diesel give you knowledge on how the pricing works. This knowledge will then help you find ways to go around the negative effects of unstable diesel fuel prices.