Blame EPA, Global Demand for Higher Diesel Prices

lower diesel supply, tighter air pollution laws driving the price up, and an increased thirst for diesel, and we easily can see a receipe for higher prices.

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Patrick DeHaan is a senior analyst at gasbuddy.com.

Diesel prices have remained above gasoline prices for much of the past few years, with many motorists asking: How this could be? What happened to the old days when diesel was always cheaper than gasoline? How is diesel more expensive when it is a byproduct?

A lot has changed in the last decade. The Environmental Protection Agency and the U.S. government have been mandating cleaner fuels as time goes on—not only gasoline, but diesel fuel as well. In the old days, diesel was very dirty (I'm sure you can remember it easily). You could see the black clouds left behind by semi-trucks each time they accelerated. Pollution standards used to be lax, and refineries didn't have as good of technology to manipulate their facilities to produce less heavy diesel/distillate and more gasoline, so supply of the dirty diesel was plentiful and cheap.

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Since the good ole days, diesel has undergone changes. First, it contains much less sulfur, and removing the sulfur from diesel is expensive and has added to the cost of the fuel. In past years, there were categories for how much sulfur content was in the diesel fuel: less than 15 parts per million (ppm), 15-500ppm, and over 500ppm. Most of the on-road diesel was of the 15-500ppm level, while construction equipment used diesel with over 500ppm of sulfur. Back in the mid-2000s, diesel requirements changed—a new product, Ultra Low Sulfur Diesel,  was required to take the place of higher sulfur diesel. This caused refineries to install additional sulfur recovery units to remove more sulfur out of the diesel fuel. 

Similar to how cleaner-burning summer gasoline costs more, so does cleaner-burning diesel fuel. In addition to the sulfur reductions versus the late '90s and early '00s, refineries also started tweaking their plants to produce more gasoline out of a barrel of oil, but netting less distillate fuel. Since the North American market is primarily gasoline driven, refiners were seeking every drop of gasoline at the expense of other types of petroleum—distillates, heavy oil, etc. This caused prices of distillate and diesel to rise as supply fell.

[Read the U.S. News debate: Is Obama to Blame for High Gas Prices?]

Add lower supply in and the stricter pollution laws in place for diesel, and prices have remained high. Also adding to the equation is rising global demand for diesel because of its efficiency over gasoline. Even in the United States, new clean diesel vehicles are hitting the market. This holds true globally: More diesel vehicles are coming to market, driving up demand for diesel fuel. In addition, the booming Chinese economy has been consuming more diesel fuel for construction equipment. When the economy is in recovery, diesel demand rises as construction equipment demands it. More orange barrels? More diesel demand. Booming diesel demand for oil equipment in North Dakota is also having an impact. Big pickup trucks' and construction equipments' thirst for diesel has led to some shortages in the upper Midwest.

The result of all of this is lower diesel supply, tighter air pollution laws driving the price up, and an increased thirst for diesel, and we easily can see a recipe for higher prices. So next time you're filling up with diesel, know that there's really no part of each barrel of crude that's unwanted. We use just about every drop. This isn't the 1800s when part of each barrel of crude produces unwanted or unnecessary products that are burned off. This is the 2000s, where we want every drop we can get.

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