Widening spread between $5 diesel and lower gasoline prices baffles truckers

It’s on display at virtually every gasoline station, the price of gasoline in red and the price of diesel in green. It’s as clear as day. But for operators using diesel fuel—including about 3.5 million long-haul truck drivers—it is maddening.

There has been an ever-widening gap of as much as $2 or more between the price of gasoline and diesel. While the price of gasoline has plummeted more than 35% from a summer high of just over $5 a gallon nationally to around $3.44 in early December, diesel has remained stubbornly high.

Diesel nationally was pegged around $5.40 nationally last week—a spread of nearly $2 a gallon over gasoline—and up over $1.40 a gallon from diesel prices a year ago.

Shippers know this—they’re the ones paying the fuel surcharges. For a typical truckload move, fuel surcharges are around 82 cents per mile. On a typical less-than-truckload (LTL) move, fuel surcharges have been around 41%—compared with 27.82% average one year ago.

Since January 2022, the Energy Information Administration's reported average price for a gallon of gasoline has climbed from $3.14 to $3.49. While gasoline prices were rising about 10%, in that same period diesel rose from $3.61 to $5.31—a 38% jump.

Ironically (and cruelly for shippers), compared to gasoline, diesel is a less-refined product. Until about 2004, it typically sold at a lower price compared to gasoline. At first the gap was barely noticeable, a few pennies perhaps.

But except for brief periods since, diesel has been more expensive than gasoline. And it’s only in industrialized countries. According to GlobalPetrolPrices.com, gasoline now costs more than diesel in nearly all of the 161 countries it tracks, with diesel about 9.8% cheaper on average. (By the way, if it’s low diesel prices you crave, perhaps move to Iran: diesel costs four cents a gallon there, according to GlobalPetrolPrices.com).

Fuel prices can rise or fall basically on four factors:

• Most importantly, the price of crude oil;
• Refining costs;
• Distribution costs; and
• Taxes – excise, sales and Value-Add Taxes (VATs)

So why is a product that's easier to make and more vital to essential economic activities like construction and trucking, sell at a premium over another that's harder to make?

The Energy Information Agency (EIA), a unit of the U.S. Federal Statistical System, cites three causes:

• Diesel demand has grown—the trucking industry uses more than 36 billion gallons of diesel in a year, according to American Trucking Associations estimates. Plus, trucking consumes another 9 billion gallons of gasoline;
• The transition to cleaner, lower-sulfur diesel has raised production costs; and
• Federal excise tax for on-highway diesel is higher—24.3 cents per gallon while it's only 6 cents on gasoline—unchanged since 1993

Another factor is Russia's invasion of Ukraine. That has battered traders' outlook for natural gas and other heat sources, focusing attention on diesel at a time of historically low supply.

In fact, inventories of diesel in the U.S. are the lowest they have been in 70 years. Recently in the Southeast, Mansfield Energy, a major national supplier, issued a “Code Red” warning that some terminals were running out of diesel. In fact, the nation has about 27 days’ worth of diesel on hand, an historically low amount.

Demand for home heating oil is another factor. In the Northeast, where about 18% of households heat with oil, supplies are 32% below last year’s levels, according to the EIA.

Western sanctions on imports of Russian oil could worsen in February. That’s when the European Union’s proposed ban on Russian petroleum products is supposed to take effect. The U.S. could find itself competing with EU countries for fuel by then.

But that 18-cent tax difference on diesel hardly explains the yawning chasm between the two prices in today's world. Ideally a free market would adapt to market changes to provide diesel at a lower cost.

Tom Kloza, the global head of energy analysis at Oil Price Information Service, has called diesel “the profitable part of the barrel.” And at least for now, it's a part of the barrel in tight supply.

While diesel molecules can be broken down and refined into gasoline, the reverse cannot happen. At a refinery, 100 barrels of crude can be turned into 50 barrels of gasoline, but only about 30 for diesel. The rest is for jet fuel and other low-grade products.

The low inventory stocks of diesel in the U.S. are exacerbating the situation. That has led to the increased premium on diesel at a time of historically low supply.

So what’s up with crude oil prices, the main component of diesel’s cost? That is just anyone’s guess.

At press time, Brent crude futures for next year range between $83-$86 a barrel. But analysts at Goldman Sachs, Bank of America, JPMorgan, Morgan Stanley, UBS and others are forecasting Brent to be as high as $105 a barrel next year. The Organization of Petroleum Exporting Countries (OPEC) appears to hold all the cards at the moment.

Trying to make sense of the world oil market at any time can be baffling. But in an era when oil futures are sinking but forecasts of future prices are rising, that is especially so—even for the pros who make their living at this stuff.

“There are so many geopolitical issues around oil that the head spins at times,” Hari Hariharan, chief investment officer at NWI Management, a hedge fund, recently told the Wall Street Journal.