Why are prices so high?
Why Are Diesel Prices So High?
Even as retail gasoline prices have fallen below pre-hurricane levels, retail diesel fuel prices remain much higher. Whereas retail diesel prices averaged 2 cents per gallon below gasoline on August 29, before the impacts of Hurricanes Katrina and Rita were felt at the pump, as of October 24, they averaged more than 55 cents per gallon higher across the United States (see graph below). What has changed between the two markets that might help explain the divergence in retail prices?
While the price of crude oil certainly has an impact on the price of refined products, the actual cost of refining crude oil into various products has little to do with price differentials across products. When comparing the retail price of one particular product to another, it is important to look at the supply/demand situation for both products. In the case of gasoline, over the last four weeks, a record volume of imports arrived in three of those weeks, while gasoline production climbed to near pre-hurricane levels, despite significant refinery capacity remaining shut down.
This large surge in supply is coming at a time (late September and early October) when gasoline demand usually drops, with few people taking vacations during this time of year. When supplies rise as demand falls, prices should fall, as they have with gasoline.
However, the supply/demand balance is much different for diesel fuel. Diesel fuel and heating oil are both included in a category labeled distillate fuel in our weekly surveys. These products are very similar, with the notable exception that diesel fuel for highway use has less sulfur in it. To the extent that diesel fuel can be used as a substitute for heating oil, the two products often find their prices moving in similar directions. Since heating oil prices are generally highest when demand for the product peaks, diesel prices also often peak as cold weather occurs, as owners of diesel-fuel-powered vehicles will tell you. As can be seen from EIA’s data, demand for distillate fuel often increases from September to October. This is typically a result of slightly colder weather in October, but it also relates to increased use of diesel fuel in the agriculture sector during harvest time. While demand for distillate fuel seasonally increases over this period, supplies have grown substantially less than those of gasoline.
While distillate fuel production has increased some as a result of most refineries coming returning to normal operating levels following the hurricanes, it has not grown by nearly as much as gasoline production. We have not seen record imports for distillate fuel either. In fact, up until last week (the week ending October 21), distillate fuel imports were possibly even lower than they typically would be, as strong global demand for diesel may have limited available supplies from other countries. As a result, retail prices for both diesel fuel and heating oil have not dropped like those for gasoline. Nevertheless, with distillate fuel imports last week reaching their highest level since January 2005, and with most of the increase in refinery production seen in distillate fuel rather than gasoline, there may be signs that the distillate fuel supply situation is improving.
But with the first bout of much colder-than-normal weather hitting the East Coast this week (where most of the heating oil use occurs), demand is likely to increase as well. How fast supply and demand for distillate fuel rise will be the largest determinant for the future path of diesel fuel prices.
Official Energy Statistics from the U. S. Government
http://www.eia.doe.gov
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