Why is diesel even more expensive than gas?

We could blame China, or India, or the EU. But the more interesting question is: Why is gas so cheap?

By Andrew Leonard
Published June 2, 2008 9:47PM (EDT)

A reader wonders: Enough with the high price of gas already -- can you explain why diesel is even more expensive? Since my son had asked me exactly the same question yesterday, when he noticed that diesel prices were a full dollar-a-gallon more ouchy than the $4.23-a-gallon regular unleaded price tag I was exclaiming about, I decided to take a stab at it.

There are two aspects of the high price of diesel that are confusing people. The first is that diesel is cheaper to make out of crude oil than gasoline -- essentially, it is less refined -- and so, theoretically, it should be cheaper at the pump. The second is that the normal historical pattern in which diesel is more expensive than gasoline in the winter (because diesel is very similar to heating oil, which is in high demand in the winter) and less expensive in the summer, has been upset for a couple of years. Winter is long over, but diesel prices are continuing to climb.

Felix Salmon approached this question a couple of months ago, and helpfully located the Energy Information Administration's take on the subject:

Until several years ago, the average price of diesel fuel was usually lower than the average price of gasoline. In some winters when the demand for distillate heating oil was high, the price of diesel fuel rose above the gasoline price. Since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline all year round for several reasons. Worldwide demand for diesel fuel and other distillate fuel oils has been increasing steadily, with strong demand in China, Europe, and the U.S., putting more pressure on the tight global refining capacity. In the U.S., the transition to low-sulfur diesel fuel has affected diesel fuel production and distribution costs. Also, the Federal excise tax on diesel fuel is 6 cents higher per gallon (24.4 cents per gallon) than the tax on gasoline.

Worldwide demand seems to be the clincher. For various reasons, the overseas hunger for diesel fuel is growing more vigorously than for gasoline. Factcheck.org, the Annenberg Public Policy Center project more often associated with acting as a watchdog against dubious political assertions, provides an authoritative analysis.

Some key points:

  • "According to the European Union's most recent economic report, diesel autos accounted for 53.3 percent of all new registrations in 2007, a huge increase from the 13.8 percent share recorded in 1990. That's several million new diesel-consuming vehicles every year."

  • "Diesel accounts for more than 30 percent of new vehicles sold in India and is expected to hit 50 percent by 2010."

  • "In China especially, diesel consumption has been soaring as the economy booms. The country also is reported to be importing diesel fuel for stockpiling, to avoid any interruptions in power during the Olympics in August. Energy traders also say they foresee even more demand for diesel fuel in China to run heavy equipment and emergency generators in the wake of the recent earthquake."

But the most interesting part of Factcheck.org's analysis is not its explanation of why diesel prices are relatively high, but its assertion that gas prices are relatively low.

As gasoline prices have risen in the United States, many Americans have responded by cutting back their consumption. I've noted several times such data points as the astonishing slump in miles driven, the plummeting price of used SUVs, and the fact that the Toyota Prius is now the ninth best-selling car in the United States. Paradoxically, by driving less, and therefore reducing gasoline demand, Americans have prevented the price of gasoline from rising as high as it normally would this time of year. I made fun a couple of weeks ago of the Bureau of Labor Statistics for claiming that, after seasonal adjustment, gas prices fell in April, when anyone who was actually buying gas knew that prices were still rising. But I was unfair. If American drivers hadn't cut back on their consumption, the price would have risen much more dramatically.

Which would make the price of gasoline right now much closer to the current price of diesel.

In comparison to gasoline, cutting back on diesel consumption isn't so easy in the United States, where diesel passenger cars are still only a tiny proportion of the overall fleet. Instead, diesel is built into the nuts-and-bolts infrastructure of the industrial economy. Yes, many small, independent trucking companies are going out of business, but goods still need to be shipped across the country. In other words: The demand for gasoline has recently been proven to be "elastic" -- but demand for diesel, so far, is resolutely "inelastic."

So next time we notice that diesel prices are a dollar more a gallon than gas prices, instead of wondering why diesel is so expensive, maybe instead we should breathe a sigh of relief, and thank heaven that gas is still so cheap.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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