Why is diesel fuel more expensive than gasoline?

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Permalink Reply by Jay Forrest on July 31, 2008 at 9:27am

The current price of diesel in the US is driven by several factors. For a start, diesel is denser than gasoline by about ten percent and contains about ten percent more energy per gallon. As a result from a pure energy perspective, $4 gasoline puts a value of $4.40 on diesel. If the price goes below that, refineries can crack the diesel in a hydrocracker to make gasoline. And...they get a 10 percent volume expansion so the $4.40 of diesel becomes $4.40 worth of gasoline (less the cost of hydrocracking). Historically, refineries did not have enough hydrocracking capacity to push diesel above gasoline so it was cheaper due to excess supply.

But that is only part of the reason. Diesel has been selling at not 10% above gasoline, but at 20 to 25% above gasoline. Why? Two key factors...EPA regulations and diesel hydrotreater (desulfurization capacity). Over the years the EPA has placed limits of 500 ppm sulfur, 250 ppm sulfur, 150 ppm sulfur, and recently 10 ppm sulfur on diesel. Each reduction required more investment in desulfurization and made it a little bit harder to make diesel on spec - with the exception that the most recent reduction makes it much more difficult. And two factors are involved. First, some refiners were slow installing desulfurization capacity so that they could not meet the specs and diesel supplies tightened up a bit. But the bigger and long term problem is that refineries can't make 10 ppm and meet spec for the diesel because of the risk of contamination in the distribution system so they typically make 5 to 7 ppm to make sure they meet spec. This alone is not a big deal though it does raise the cost of making diesel a bit. The bigger problem is that WHEN the unit gets out of spec and the product spikes to 20 or 50 ppm, refiners have no (or very limited) ability to blend it off for they can't add much more sulfur to their refinery product without risking missing specs at the terminal. Thus they are forced to reprocess or otherwise use the diesel at increased cost. The net impact is that the new regulations demand very stringent operation with very limited abilit to compensate for an error - and, as a result, the diesel supply/demand balance in the US is very tight and those who installed hydrotreating capacity to meet the specs are receiving a premium that should be expected to erode over time as more diesel hydrotreaters are brought on line.

In any event, the base value of diesel is about 1.1 times the value of gasoline. Lower prices suggest a lack of conversion capacity to gasoline and higher prices suggest a lack of production capacity to meet specifications. (I am not familiar with diesel specs in Europe, Canada, or Mexico but I believe they all have higher sulfur specs than the US. I will try to find out.)

Hope that helps!

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Permalink Reply by Jeff Smoley on July 31, 2008 at 9:43am

Jay, if this is true, why was diesel so much less expensive that gasoline for most of my life? Base value wise.
Not just less than premium, but less than regular. When I was much younger I was told that diesel was a byproduct of making gasoline.
AFAIK, the rules in Europe are at least as tight as here.

Reminds me of the early days of unleaded gasoline. Not putting lead in made the gas more expensive. So someone had to be paying them to put lead in the gas? :-)

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Permalink Reply by Jay Forrest on July 31, 2008 at 11:02am

You are right,. In the old days diesel, kerosene, etc. were byproducts of making gasoline. That is because for years the refiners didn't have much ability to convert one product into another. They basically distilled crude oil into gasoline, diesel, jet, etc. and didn't do much, if any, product conversion. Conversion units are expensive to build...and historically refining has not been the particularly profitable side of an integrated oil company. The main incentive for oil companies to own refineries was to consume crude so the production side (getting oil out of the ground). The integrated oil companies didn't pay much attention or want to spend money on refineries. They would rather drill holes and make the bigger bucks on the crude.

That began to change in the early 70's as crude oil prices started rising and the differential price rose between light crude (that makes a lot of gasoline) and heavy crude (that makes a lot of tar, asphalt, and heavier products, including a higher ratio of diesel to gasoline). In a gasoline driven industry the value of heavy crudes was low for they made little gasoline. As crude prices rose the incentive for cracking the heavy oils to lighter products became justified so refineries began building hydrocrackers. It should be noted that even today not all refineries have hydrocrackers - some still focus on lighter crudes, but once a refinery has a hydrocracker one converts all diesel that is not needed to gasoline for, with the fixed costs already in place, the marginal cost of converting the diesel to gasoline is minor. Over recent years the hydrocracking capacity has reached the point where there is enough conversion (hydrocracking) capacity to process enough diesel that there is no "surplus" diesel to push the price down so it should be selling at about 1.1 times crude for that is effectively the break even point between the two.

I just realized I cited the EPA reg as 10 ppm. The actual EPA spec at the nozzle is 15 ppm but at least most refineries have a 10 ppm spec for product leaving the refinery to reduce the risk of missing the spec at the distribution center. (Locomotive and marine diesel have a 500 ppm spec for sulfur.)

RE: Sulfur specs elsewhere. Europe, until recently Europe was at 350. I can find docs indicating they were considering going to 15 ppm this year but I can't prove that has actually happened. In Europe the price of diesel is generally cheaper than gasoline. That probably reflects lack of conversion capacity in their refineries and the availability of diesel from large, but relatively simple, refineries in the Middle East. Canada and Mexico have enacted sulfur specs that are essentially matched to the US specs.

And...this reminded me of another point. Since Europe has had higher sulfur specs than us, the diesel sold in Europe would not meet US specs. The low specs in the US has meant that global diesel could not be imported. IF Europe goes to a limit of 15 ppm then some global diesel might be able to enter the US and push prices down a bit, and US refiners with hydrocrackers will convert more diesel to gasoline if that happens.

(One other aside, one of the good features of biodiesel is that it is very low in sulfur content so it makes a very clean, good diesel.)

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Permalink Reply by Jeff Smoley on July 31, 2008 at 12:56pm

Hmmm, Am I the only one thinking about mixing higher sulfur diesel with bio-diesel?

Thanks for your research.

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Permalink Reply by Jay Forrest on July 31, 2008 at 1:09pm

Hi Jeff!

Sorry to burst your balloon but off spec diesel isn't widely available. It just gets reprocessed. And...unless you have only marginally off-spec you really couldn't work off much of the off-spec product. IF the off-spec was 50 ppm sulfur you would only be able to add one gallon to about every four or five gallons of biodiesel and have a reasonable product. Nice thought though!

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Permalink Reply by Jeff Smoley on July 31, 2008 at 2:18pm

So I need to find someone interested in straight bio-diesel. Any city with enough restaurants ought to be a place to look at. So. Florida is loaded with restaurants, even though we did loose a number of Bennigan's and Steak & Ales this week. I used to like both those places until they went big corporation and the food quality and service got so poor.

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Permalink Reply by Polly on July 31, 2008 at 5:17pm

Thanks Jay for a really excellent technical explanation of the higher cost of diesel fuel.
In most countries in Europe the selling price of diesel is lower than gasoline because the tax on diesel is high while the tax on gasoline is astronomical.
The main reason why the tax rate differs is that gasoline is taxed as a luxury item while diesel is seen as a utility needed for public transport of goods.
In Britain the situation is even worse where the tax on petrol is astronomical and the tax on diesel is even higher. Currently for diesel we pay about £1.20 per litre, about $ 2.40 per litre or $9 per US gallon. The method in the madness is that Britain is a small over-populated island with severe road congestion. Diesel has higher smog output, so diesel is taxed higher as the primary concern in Britain has been health problems caused by polluted air.

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Permalink Reply by Jay Forrest on July 31, 2008 at 7:48pm

Hi Polly!

Thanks! I thought that was the case and now that you mention it I recall the tax factor but I haven't spent a lot of time in Europe and the details weren't well ingrained in my memory banks and I didn't want to make an incorrect statement about the price differential.

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Permalink Reply by DubleDeuce on July 31, 2008 at 10:40pm

The left coast tree huggers are you big bugaboo in this question. The removal of sulfur and other impurities puts the attention span on the cracking of diesel on par with that of gasoline. Because there is LESS yield of diesel from a standard barrel of crude than gasoline, (you can see it here between motor gasoline and distillate fuel oil) http://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htm
the price to make it must necessarily be spread over less product, ergo, more dollars per gallon. The refining of modern day diesel to the standards dictated by the EPA has also wrung out some btu content. 30 years ago a gallon of diesel was rated at 146,000 btu's of heat energy. Today that same gallon is down to 138,000. More money for the same quantity of liquid, but with less Zippidy Doo Dah.

Is it REALLY true that those extra calories that are being squeezed out of the current diesel product are going straight to Exxon/Mobile's HIPS. (High Industry Profit on Sales)?

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Permalink Reply by Jeff Smoley on April 24, 2009 at 6:20pm

OK, now I have this question. Why is the price of diesel less than the price of premium gasoline for about the last two months? If it costs more to make, what happened? If it is taxed higher, what happened?
BTW, why hasn't the price of food and all the other products that jumped when gas was over $4.00 a gallon come down?
Who is making all the windfall profits now?

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