As fuel prices continue to rise, many consumers are concerned about the reasons for such a large fluctuation in price. While diesel fuel prices vary by region in the United States, there is a general trend upwards in diesel fuel prices that isn’t for the faint of heart. While there’s not much that any layperson can do to combat the rising fuel prices, we can collectively make an effort to educate ourselves on how the retail price for diesel fuel is determined, so that we can recognize the factors at play when we see diesel fuel prices fluctuate. In this blog, we are taking you through the four components that go into a diesel fuel price, as well as other factors that can cause it to increase or decrease.
What is Diesel Fuel and Who Uses it?
Diesel fuel is used to power diesel engines, just as gasoline is used to power gas engines. Even though there are some major differences between diesel fuel and gasoline, both substances originate from crude oil, and the differences between them begin to emerge as they go through the refining process. Diesel fuel is much thicker than gasoline, meaning that it evaporates more slowly, lending itself to greater efficiency and fuel economy. For this reason, diesel fuel is generally used by semi-trucks, as their diesel engines can have greater power and hauling capabilities than other, less efficient gas-powered engines.
What Goes into a Diesel Fuel Price?
While many factors are at play in any economic market, the basis of a diesel fuel price is determined by four different components. A fluctuation in each of these components can result in a ripple effect occurring throughout the diesel fuel process, which can trickle all the way down to the retail price that a consumer pays. These four components which we will discuss are the cost of crude oil, refining costs and profits, distribution, marketing, and retail station costs and profits, and taxes.
Cost of Crude Oil
Both diesel fuel and gasoline are made by refining a substance called crude oil. Crude oil is extracted by drilling deep into the ground in an area where the natural resource is abundant. Once it is extracted, the crude oil is bought by refineries to be made into other products, such as gasoline or diesel fuel. The price of the crude oil that is the base ingredient in diesel fuel is responsible for the bulk of the retail price that a consumer will pay at the pump. In fact, crude oil accounts for about 50% of the final diesel fuel price.
Crude oil prices are themselves driven by other outside factors, such as those within the physical market and on the trading and financial sides. To learn more about the factors that drive crude oil prices, check out What Drives Crude Oil Prices?
Refining Costs and Profits
To turn crude oil into diesel fuel, it must go through a refinement process. The cost of running a petroleum refinery is not cheap, and between the human labor and equipment costs, it comes out to be a hefty chunk of cash. While it may not be as hefty a chunk as the cost of crude oil, the cost of refining the crude oil into diesel fuel adds on a considerable amount of expenses that much be rectified by increasing the price tag on the final product.
Distribution, Marketing, and Retail Station Costs and Profits
Just like any other product, it takes time and money to get diesel fuel to market. Costs for things such as transportation and distribution that allow the fuel to get into consumers’ vehicles play a big role in determining the final price of diesel fuel.
Taxes (Federal, State, County, and Local)
While it may not be the first thing that comes to mind, tax is also a component in determining the final price of diesel fuel. Taxes are just like any other cost incurred in the process of getting a product to market, but they can be levied by different entities and at different levels. Although taxes vary across the nation, they can be levied at the federal, state, county, and local levels.
What Other Factors Affect the Price of Diesel Fuel?
Without any other factors interfering, these four components determine the final price that the consumer pays at the pump. However, there are many other factors that can interact with each of these four components and cause the price of fuel to increase or decrease.
Supply and Demand Imbalances in the U.S.
The United States economy is heavily dependent on transportation that is powered by fuel made from crude oil. If there were to suddenly be a shortage of crude oil, the retail price of diesel fuel would rise. Likewise, if there was suddenly a great surplus of crude oil, there would be a decrease in the retail price of diesel fuel, as the supply is greater than the quantity demanded.
Changes in demand can also affect the price of diesel fuel along with changes in supply. For example, a mass change in consumer preferences that favored electric vehicles could decrease the demand so much so that the price of diesel fuel would drop. Fluctuations in price, such as these, are due to the supply and demand imbalances in the United States and the market’s desire to self-correct.
More transportation costs are incurred when the destination is further away from the petroleum refineries. For those locations that are further from these sites, prices can fluctuate based on the costs associated with transporting the product further.
Regional Operating Costs and Local Competition
Based on the location of the retailer, there are some serious fluctuations in the price of doing business. For example, based on the higher standard of living in some places, higher salaries must be paid out than in other areas where the standard of living is much lower. For local retailers, these can cause fluctuations in the retail price of diesel fuel.
Certified Diesel Solutions in Knoxville, TN
We can’t do much about the rising price of diesel fuel, but we can take care of all your diesel engine needs! At Certified Diesel Solutions, we offer the best automotive and diesel repairs in East Tennessee. From regular maintenance to full-on repairs, CDS can do it all. With our expertly trained mechanics and our outstanding customer service, you’ll never believe that you ever went anywhere else. So, bring on all your diesel engine needs. We’ve got you covered.