Why Diesel Usually Costs More Than Gasoline

I recently took the plunge and registered on TikTok. I hadn’t thought it would be worth my time, because my impression had been that younger people didn’t care as much about energy issues.

But then watching TikTok sensation Matt Randolph — known on TikTok as Mr. Global — discuss energy issues with more than 360,000 enthusiastic followers convinced me that I could be missing an important demographic.

So far, I have only recorded a handful of videos, but I am finding that the comments provide good fodder for article ideas.

Recently, several commenters asked about the differences between diesel and gasoline and wanted to know why diesel costs more than gasoline. I made a video explaining the major differences, and also referenced them to an article I wrote in 2018 on the topic. But I recognized from the comments that it is probably time for an update to that article.

Key Differences Between Diesel and Gasoline

First, let’s discuss the differences between diesel and gasoline. Both are derived from crude oil, and both primarily consist of hydrocarbons. Hydrocarbons are made from carbon and hydrogen and range from methane — the simplest hydrocarbon — to complex, long-chain hydrocarbons that are solids are room temperature.

Gasoline is lighter than diesel and consists of hydrocarbons primarily in the range from four carbons (e.g., butane) up through hydrocarbons with around 12 carbons. Octane, with eight carbons, is close to the middle of the gasoline range.

Diesel contains more energy per gallon than gasoline, and on average it has a higher hydrocarbon range. Thus, if you were pricing based on energy content, diesel would cost more. A typical diesel range hydrocarbon would contain 12 to 16 carbon atoms, but there is some overlap between diesel and gasoline. There isn’t a single formulation for either diesel or gasoline.

There are other important differences, particularly in the way they are used, but for the purpose of this discussion those are the key differences.

Charting the Price Differential

Next let’s look at a chart comparing diesel and gasoline prices over the years. This chart is of the difference between the average annual retail price of gasoline minus the average annual retail price of diesel. I used data from the Energy Information Administration (EIA) that you can find here. (EIA’s annual averages of this data only go back to 1995).

Diesel versus Gasoline 1995 to 2023
Gasoline/Diesel Differential 1995 to 2023. ROBERT RAPIER

I chose annual averages because diesel demand is seasonal. There may be times in the year that gasoline is more expensive, but an annual average provides a better overall picture.

You can see in the chart that in the decade before 2005, gasoline traded at a small premium to diesel. Since then, diesel has always traded at a premium, and in 2022 it traded at a record premium. So, what is happening?

What Happened in 2006?

Notably, in 2006 the U.S. began to phase in ultra-low-sulfur diesel (ULSD). Combustion of high-sulfur fuels leads to the production of compounds like sulfur dioxide, which can cause respiratory problems and produce acid rain. Europe began tightening sulfur specifications in the 1990s, and the U.S. significantly lowered the sulfur limit in diesel starting in 2006.

Why might that cause diesel to become more expensive? In the years leading up to 2006, refineries had to invest billions of dollars into equipment to remove the sulfur to meet the new ULSD standards. These changes put upward pressure on diesel prices in several ways.

First, the cost to produce diesel was simply higher due to additional capital and ongoing operating costs. Many people believe that diesel should be cheaper because it is a “less refined” fuel, but the refining requirements increased in 2006.

Some refiners chose not to immediately upgrade equipment to produce ULSD. They could handle the new rule in one of two ways. One, they could stop purchasing high-sulfur (“sour”) crude oils. This reduced the demand for sour crudes and drove up the demand for lower sulfur (“sweet”) crudes, increasing the price differential between the two grades. So, even the refiners that didn’t upgrade saw their costs rise.

A final thing refiners could do was to simply export high sulfur diesel they continued to produce to countries with less stringent sulfur specifications. Exports of higher sulfur diesel especially spiked from 2006 to 2008 as the ULSD went into effect. That placed some limits on domestic supply.

So, refiners either had to pay more for sweet crudes, or they had to invest heavily into new equipment that could remove the sulfur from the sour crudes. The net result was that after 2006, the price differential between gasoline and diesel flipped.

Alternate Explanations

Some commenters suggested that the difference in the price was taxes, or demand related. Diesel taxes are higher than those for gasoline, but the tax rate hasn’t changed since 1993. Taxes wouldn’t explain why the differential flipped in 2005, just as refiners were upgrading to produce ULSD.

Note that taxes also explain why diesel tends to be cheaper than gasoline in Europe. Europeans wanted to provide incentives for motorists to gravitate toward higher-efficiency diesel engines, and they did so by taxing gasoline at a higher rate.

For those suggesting that the shift has been demand-related, EIA data show that U.S. diesel demand increased very slightly from 2005 to 2007, but since then it has fallen and it has yet to recover to the 2007 demand level. So, that would not explain why diesel has been persistently more expensive, starting in 2005.

So, the ULSD change explains why the price differential between gasoline and diesel flipped, but that doesn’t explain why the differential was extremely high in 2022. This was a result of Russia’s invasion of Ukraine, and the Biden Administration’s subsequent decision to stop importing Russian oil.

Although the U.S. didn’t import much crude oil from Russia, we did import diesel and heavy oils that contributed to our diesel supplies. This change caused a substantial disruption at U.S. refiners. Both gasoline and diesel supplies were impacted, but diesel was impacted more. The situation is gradually returning to normal, as year-to-date the differential has fallen to $0.56 versus $0.93 in 2022.

One final factor that impacts the price differential — but more importantly the volatility of prices — is diesel exports. Although U.S. diesel demand has declined somewhat from 2007, diesel exports have steadily increased. Between 2005 and 2017, diesel exports increased by an order of magnitude (source).

Those exports are impacted by global prices, which are in turn impacted by global events. Thus, while it is beyond dispute that the ULSD implementation caused the price differential to flip, other factors have impacted how large and how volatile that differential has been over time.

Follow Robert Rapier on TwitterLinkedIn, or Facebook

One thought on “Why Diesel Usually Costs More Than Gasoline”

Comments are closed.