Diesel Pricing

It would be difficult to find a consumer who was insensitive to fuel prices. Commercial truckers are well aware of the role diesel prices play in their bottom line. According to the Trucker’s Report, fuel is the largest operating expense for a commercial truck, accounting for 39% of total cost. A commercial truck can consume over $70,000 worth of diesel per year. The second-largest cost component, 26%, is driver salary. Large fleets tend to have advanced fuel management strategies. Independent truckers often monitor prices closely while traveling, and a portion of their time is spent hunting for the least expensive refueling options.

From time to time, diesel consumers blame high prices on the government and/or refiners. However, the main determinant of the U.S. retail diesel price is the price of crude, which is set in the international marketplace. As shown in Figure 4, in November 2019, the cost of crude oil accounted for 44.2% of the built-up diesel price. This was followed by distribution and marketing costs, which accounted for 19.4% of the retail price. Refining costs and taxes both accounted for 18.2% of the price. As the year 2020 begins, there is a range of opinion on where crude prices will go, and therefore, where diesel prices will go. Currently, crude prices are weighed down by oversupply. OPEC and other producer countries have extended their oil production cut agreement, but this is more of a formalization of existing production levels, rather than a deeper cut. U.S. crude production reached a record-high level of 12.9 mmbpd by the end of 2019, and production is expected to increase in 2020.

In 2019, U.S. diesel was a relative bargain to the consumer. Figure 5 calculates the difference between weekly retail diesel prices in 2019 relative to the same week in 2018. For most of January and February 2019, retail prices were lower than they were in the previous year. In March and April, diesel prices were above their levels from last year. Then from May until the last week of December 2019, diesel prices were below last year’s levels. As the year 2020 begins, retail diesel prices are above their levels from the prior year, but not by a large margin. As of the week ended January 13, 2020, the last week before this issue went to press, retail diesel prices were only 8.8 cents/gallon above their levels for the same week last year.

The tax burden on diesel is also relatively low in the United States. U.S. consumers often are astonished when they travel overseas and experience what other consumers pay. Figure 6 compares U.S. diesel prices, including taxes, with prices in other key International Energy Agency (IEA) countries. In November 2019, the IEA reported that the average diesel price in the U.S. was $3.07/gallon including taxes. The price in the United Kingdom (U.K.) was over twice this at $6.35/gallon. Diesel prices were over $6/gallon also in Italy and France. The chief difference is the tax burden. In the U.S., taxes accounted for 18.2% of the final price, while in the U.K., the tax burden was a massive 61.2%. Indeed, the November 2019 pre-tax price in the U.K. was slightly below the pre-tax price in the U.S. The IEA reported that the U.K. diesel price excluding taxes was $0.652/liter (approximately $2.47/gallon) while the U.S. price excluding taxes was $0.663/liter (approximately $2.51/gallon).

In fairness, U.S. diesel prices are low compared to other IEA countries, but they are not among the lowest in the world. Some governments subsidize diesel prices, particularly in oil-producing countries where prices are directly administered. Access to inexpensive fuel may be viewed as a means of sharing oil wealth with the people. Iran offers an extreme example. In 2018, Iranian diesel cost a mere 34 U.S. cents per gallon. Gasoline also has been heavily subsidized, and the process of gradually reducing the subsidies caused riots. Venezuela also subsidizes retail fuel prices, but the hyperinflation of the past year makes it impossible to convert to U.S. dollars. Government manipulation of prices has often caused lopsided demand patterns that ultimately create market inefficiencies.