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Why does diesel fuel cost so much?

Consumer Reports News: March 16, 2009 07:41 AM

Part two of a two-part series. Also read “Can diesels save money and oil?

There are three main reasons diesel fuel costs so much, according to the petroleum experts we interviewed:

Diesel prices track the economy – only with a sizeable lag, says Sal Gilbertie, senior vice president of energy and renewable fuels at NewEdge LLC in New York. Almost all truck, train, and barge transit relies on diesel fuel (and related heavy petroleum distillates). So as the economy grows, and more goods are shipped, demand for diesel fuel grows, too. That drives up prices. Since companies plan in advance for this shipping, the demand (and thus prices) for diesel lag behind the overall economy. That’s why once the recession started, diesel prices dropped quickly, says Mr. Gilbertie. This long-term trend fluctuates.

An immediate, but lasting, supply squeeze jolted diesel prices up last summer. As oil supplies tightened after years of rising demand, European countries, which used to export diesel fuel to the U.S., no longer had excess supplies to export. European governments have long favored diesel fuel with lower taxes to encourage fuel savings. The effect has become so pronounced that in countries such as Britain and Italy, that more than 50 percent of all new cars sold there are diesel-powered. Thus demand for diesel fuel is rising faster in Europe than demand for gasoline. So European oil refineries, which used to have excess capacity, no longer did. Since the U.S. has no excess refining capacity of its own, this caused a sharp spike in diesel prices, added on top of an already-rising trend.

Taxes. Unlike Europe, the U.S. government charges a higher tax on diesel fuel than on gasoline: 24 cents per gallon, vs. 18 cents. Since trucks use lots of diesel fuel, and wear out roads faster than cars, this may increase revenue for road construction. But it begs the question: If we want consumers to save oil and produce less CO2, why not swap the extra tax to gasoline, to improve diesels’ payoff equation for consumers and encourage them to burn less gas?

Our tests have shown the latest diesels to easily match the comfort, convenience, and performance of gasoline-powered cars. We think it would be easy for consumers to make the switch if it were cost effective although finding gas stations with a diesel pump can be difficult if you don’t live near an interstate highway. Fiddling with fuel taxes usually runs the risk of disrupting highway funding in the United Sates. But a Federal Highway Administration spokesman Douglas Hecox says he doesn’t expect that switching the extra six cents in tax from diesel to gasoline would have any effect on the highway fund’s shortfall. 

Now that a new crop of diesels is coming on the market from Acura, BMW, Mercedes-Benz, Nissan, and others, the question of how to make saving fuel be cost effective for consumers is taking on increasing urgency. We hope the Obama administration will keep this in mind as it wrestles with saving the U.S. auto industry and finding new money for the highway fund.

Eric Evarts

Learn more about driving green in the Consumer Reports special fuel economy section

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