The Disparity Between Retail Gasoline and Diesel Fuel Prices

The Disparity Between
Retail Gasoline and Diesel Fuel Prices
March 31, 2008
Robert L. Bamberger
Specialist in Energy Policy
Resources, Science, and Industry Division
Robert Pirog
Specialist in Energy Economics
Resources, Science, and Industry Division

The Disparity Between Retail Gasoline and
Diesel Fuel Prices
Over time, gasoline has typically been more expensive than diesel fuel.
However, their relative prices have now reversed. In mid-March of 2008, gasoline
prices exceeded $3.39/gallon (gal) while diesel fuel prices were above $3.97/gal, a
differential of almost $0.60/gal. This has prompted questions of why the historic gap
between gasoline and on-highway diesel prices has widened so greatly and over such
a relatively brief period of time.
Crude oil, when refined, produces a mix of products. Diesel fuel and home
heating oil are derived from the portion of the barrel that produces what are termed
“middle distillates.” Another part of the barrel furnishes the feedstock for gasoline.
Refiners process barrels of crude oil of differing quality, depending on the relative
prices for oil of different qualities, and their available technology. Within
technology-defined limits refiners can vary the proportions of middle distillate and
gasoline production. Because the entire range of petroleum products derive from the
same barrel, it is difficult to attribute general refining costs to any single product,
making it also difficult to ascertain the relative cost proportions. The exception to
this would be when the investment costs of changing product specifications to meet
seasonal or environmental requirements can be measured.
A number of specific factors may be identified that have contributed to the
shifting relative prices of gasoline and diesel fuel. It is important to recognize that
the U.S. market for these fuels is part of a broader world market. World demand
patterns are shifting as diesel fuel becomes a primary consumer transportation fuel
in Europe and other parts of the world. World price differentials are transmitted to
the U.S. market.
Other factors affecting diesel prices include refinery investment costs, as well
as investment costs in the product distribution system to accommodate new
specifications for diesel fuel that require lower allowable sulfur content; the
seasonality of home heating oil demand, a similar product, which transmits the price
effects of cold weather from the heating market to the on-highway diesel fuel market;
world market effects that might affect the pricing and output mix decisions of
refiners; and circumstances affecting the local market at point of purchase.
One other factor should be noted. The primary demand sectors for gasoline and
diesel fuel are different in the United States. Gasoline is a mass consumer good and
home heating oil an important regional and seasonal residential product, while diesel
fuel is used in a wide variety of commercial and industrial applications. Diesel fuel
is often part of the cost of delivering goods and providing services. As a
consequence, demand for diesel fuel may be less elastic, and therefore, likelier to be
passed on to consumers.

Refining and Supply of Gasoline and Middle Distillates...................2
Diesel and Gasoline Prices...........................................5
Factors Influencing Gasoline-Diesel Fuel Price Differential.................8
World Market Balance..........................................8
Refinery Output...........................................9
Sulfur Content................................................9
Heating Oil/Seasonality........................................10
Pricing Practices..............................................10
Conclusion ......................................................10
List of Figures
Figure 1. Components of Retail Gasoline Price: January 2007-January 2008...6
Figure 2. Components of Retail Diesel Price: January 2007-January 2008.....7
List of Tables
Table 1. Petroleum Products Produced from One Barrel of Oil Input to
U.S. Refineries, 2006...........................................3
Table 2. Sales of Distillate Fuel Oil by End Use in the United States:
2002-2006 ...................................................4
Table 3. Components of Retail Gasoline Price: January 2007-January 2008....5
Table 4. Components of Retail Diesel Price: January 2007-January 2008......6

The Disparity Between Retail Gasoline and
Diesel Fuel Prices
By mid-March of 2008, gasoline prices exceeded $3.39/gallon (gal) while diesel
fuel prices were $3.97/gal, a differential of almost $0.60/gal. In mid-March of 2007,
the relationship between the two fuels was the reverse: gasoline prices were higher
than diesel prices.1 At that time, diesel prices were roughly $2.68/gal, while the
average price of gasoline for all grades was $2.76 — more than $0.08 higher than the
average price of on-highway diesel. Additionally, where gasoline prices in mid-
March 2008 are roughly $0.63/gal higher than year-ago averages, diesel fuel prices
have risen over $1.29/gal over the same period.2 Over $0.60/gal of this increase has
occurred since the beginning of 2008.3 This has prompted questions of why the
historic gap between gasoline and on-highway diesel prices has widened so greatly
and over such a relatively brief period of time. Because diesel fuel costs affect the
cost of shipping by truck, price increases affect the delivered cost of most consumer
goods purchased in the United States, contributing to the over-all level of price
This report provides background and identifies some of the likely factors and
forces in world markets that may have contributed to the evolution of the relative
prices of gasoline and diesel fuel over the past several years. Among these are strong
international demand for diesel fuel; product mix decisions by refiners, and refinery
investment to meet more stringent limits on the sulfur content of diesel fuel; the
similarities between diesel fuel and home heating oil; and the effect on retail prices
from local market conditions.

1 Gasoline prices exceeded diesel fuel prices for every year between 1995 and 2004. For
2005 through 2007 diesel prices were, on average, above gasoline prices. However, the
quarterly results were mixed; gasoline prices exceeded diesel prices in some quarters. See
the Energy Information Administration, Annual Energy Review 2006, Table 5.24, and
comparative gasoline and diesel price data at [].
2 The most recent weekly prices for gasoline and diesel fuel at the pump are reported by the
Energy Information Administration, Department of Energy, at these sites:
[ h t t p : / / www.ei oi l _ga s/ pet r ol eum/ dat a_publications/wrgp/moga s_home_page .html ,
and] [].
3 See [].

Refining and Supply of Gasoline and Middle
A barrel of crude oil is a composite of hydrocarbons of varying densities. The
initial step in refining crude oil is to separate its heavier and lighter “fractions” by
heating it. The lighter products are recovered at, or near the top of a distillation
column where the temperature is lowest. The heavier fractions are recovered from the
bottom where the heat is greatest. Gasoline is among the lighter components. Diesel
fuel and home heating oil come from the portion of the barrel that is termed “middle
distillates” because the feedstock for these fuels settle out roughly in the middle of
the distillation tower.
Crude oil itself is of varying densities, as well as sulfur content, generally
distinguished as “light” or “heavy,” or high and low quality oil. Light crude will
furnish a higher percentage of lighter products than heavy crude; additional
processing can increase the yield of lighter products from the heavier end of the
barrel, but will add to product costs.
Once distilled, gasoline and middle distillates are further processed
“downstream,” where the addition of blending components and other steps create the
finished petroleum products that are released to markets. The typical yields from a
barrel of crude oil of gasoline and middle distillates range, respectively, around 45-
47% and 25-27% depending on the time of year (see Table 1). Typically, refiners
take some of their facilities offline for brief periods to perform maintenance and
make seasonal adjustments to slightly favor the yield of gasoline or middle distillates.
During the spring, refiners seek to build inventories of gasoline for the summer
driving season. Conversely, production of home heating oil for the heating season is
maximized beginning during the summer.
Gasoline consumption has been averaging 9.0 million barrels daily (mbd), while
all distillate consumption is roughly 4.5 mbd. In 2007, U.S. imports of middle4
distillates averaged 348,000 b/d in 2007. As is discussed later in this report, world
demand for middle distillates has grown and added to the pressure on prices for
middle distillate imports.
The typical product yield from a barrel of crude oil is shown in Table 1.

4 See U.S. Department of Energy. Petroleum Supply Monthly, Table 36. Year-To-Date
Imports of Crude Oil and Petroleum Products by PAD District, January-December 2007.
[ h t t p: / / www.ei pub/ oi l _ga s/ pet r ol eum/ dat a _publ i cat i ons/ pet r o l e u m_ s upply_mo
nthly/ current/pdf/table36.pdf].

Table 1. Petroleum Products Produced from One Barrel of Oil
Input to U.S. Refineries, 2006
Finished Motor Gasoline19.30
Distillate Fuel Oil10.70
Kero-Type Jet Fuel3.92
Petroleum Coke2.24
Still Gas1.87
Residual Fuel Oil1.68
Liquefied Refinery/Petroleum Gas1.58
Asphalt and Road Oil1.33
Other Oils for Feedstocks0.53
Naptha for Feedstocks0.51
Other Products and Processing Gain3.31
Source: Energy Information Administration, Department of Energy.
As is also noted later in this report, some of the sharp runup in on-highway
diesel fuel prices in recent months likely stems from the close similarity between
diesel fuel and residential home heating oil. Both, as has been noted, are middle
distillates and, to some extent, in competition with one another. Home heating oil
and transportation diesel are chemically identical, but in the refinery they are
processed in slightly different ways for their respective purposes. In addition to
having specified regulations and taxes, transportation diesel has a low sulfur
standard, meaning that it must contain 0.05% sulfur or less. Home heating oil is
required by law to contain not more than 0.5% sulfur content, but due to
unintentional mixing of transportation diesel and home heating oil at the refinery, the
sulfur content of home heating oil usually hovers around 0.2%.
Table 2 shows recent demand for products that fall within the parameters of
distillate fuels. In 2006, diesel fuel represented nearly 63% of distillate sales while
residential home heating oil was 8% of sales. This is compared with 58% and 10.8%,
respectively, in the year 2002.

Table 2. Sales of Distillate Fuel Oil by End Use
in the United States: 2002-2006
(thousand gallons)
Distillate Fuel Oil
Energy Use
2002 2003 2004 2005 2006
U.S. Total59,342,63363,854,77662,257,93463,164,56962,192,027
Residential 6,376,653 6,927,070 6,644,939 6,154,461 4,984,826
Comme rcial 3,293,387 3,686,537 3,383,061 3,224,216 2,808,786
Industrial 2,384,383 2,394,445 2,326,604 2,459,711 2,463,676
Oil Company770,682513,511472,920472,922636,788
Farm 3,418,452 3,200,809 3,189,014 3,215,819 3,261,345
Electric Power750,5571,147,727823,380906,976656,355
Railroad 3,245,482 3,656,657 3,047,491 3,447,630 3,552,430
Vessel Bunkering2,078,9212,216,9212,139,6432,005,5641,903,138
On-Highway Diesel34,308,88537,103,56337,125,23938,053,12939,118,301
Military 357,359 415,702 358,682 268,553 327,827
Off-Highway 2,357,872 2,591,833 2,746,960 2,955,589 2,478,554
Source: Department of Energy, Energy Information Administration.
Table 2 also suggests that the distillate fuel market in the United States is not
a growth market. The total demand for distillates was no higher in 2006 than in
2003, and less than 2% higher than the weak demand year of 2002. On-highway
diesel was the only sector that showed continuous growth over the period. Other
sectors, like residential and commercial, suggest seasonality related to the weather.
Some sectors, like vessel bunkering, electric power, and military showed declining
Differing sectoral demand patterns within the same product group makes it
likely that, in pricing terms, those sectors with the relatively strongest demand
patterns might be charged prices which help to offset the lower returns that might be
earned in sectors with weaker demand. For example, since all of the distillates are
joint products of the refining process, all must find a market. However, if one
segment of the market, say use in electric power generation, is relatively weak and
declining, and another, on-highway use is increasing, it is likely that electric power
distillates may be sold at a discount, while on-highway distillates may be sold at a

5 Economists identify joint products in production as products which must be produced
together. The nature of the technology, or the raw materials, are such that if one product is
produced, each of the products in the joint product group must be produced, even though the

Diesel and Gasoline Prices
The retail prices of gasoline and diesel fuel have four major components: the
price of the crude feedstock; federal and state taxes; the cost of refining, reflected
in what is referenced as the “refiner margin”; and the costs of distribution
(transportation) and marketing. As the price of crude rises or fluctuates, along with
any demand pressures, the relative percentage share of these components of retail
price will shift. The observed drop in the share represented by state and federal taxes
— values that are constants over the period shown below — is a reflection of the
significant change in the retail sales price for gasoline and diesel fuel. These
percentages for the last year for both gasoline and diesel fuel are set out in Tables 3
and 4, and depicted as graphs in Figures 1 and 2.
Table 3. Components of Retail Gasoline Price:
January 2007-January 2008
Retail PriceRefiningDistributionTaxesCrude Oil
Mo/Year (Cents per(percentage) and Marketing(percentage) (percentage)
gallon) (percentage)
Jan-07 224.0 10.6 15.2 20.3 53.9
Feb-07 227.8 18.0 5.8 20.0 56.3
Mar-07 256.3 23.6 8.5 15.5 52.3
Apr-07 284.5 28.1 7.6 14.0 50.3
May-07 314.6 27.9 13.3 12.7 46.1
June-07 305.6 22.7 13.7 13.0 50.5
Jul-07 296.5 18.4 11.4 13.4 56.8
Aug-07 278.6 13.5 11.8 14.3 60.4
Sep-07 280.3 12.8 8.6 14.2 64.3
Oct-07 280.3 10.1 8.1 14.2 67.6
Nov-07 308.0 10.0 8.7 13.0 68.3
Dec-07 301.8 8.1 10.5 13.2 68.1
Jan-08 304.3 7.8 11.1 13.1 67.9
Source: Energy Information Administration, Department of Energy. [
info /gd u/gasp ump .html]

5 (...continued)
demand conditions for each product may be very different.

Figure 1. Components of Retail Gasoline Price:
January 2007-January 2008

80% $3. 50
70% $3. 00 n)
60% $2. 50 allo
50%age$2.00er g
40%t (p
20%$1.00tail P
10% $0. 50 Re
0% $0. 00
-0 7 b -07 a r- 0 7 r- 07 y -0 7 n-0 7 Jul-07 g- 07 p- 07 c t- 0 7 v-07 c-0 7 n-0 8
Jan Fe M Ap Ma Ju Au Se O No De Ja
Refining %Distribution & Marketing %
Taxes %Crude Oil %
Retail Price
Source: Energy Information Administration, Department of Energy. [
info/gdu/gaspump.html] Adapted by CRS.
Table 4. Components of Retail Diesel Price:
January 2007-January 2008
Retail PriceRefiningDistributionTaxesCrude Oil
Mo/Year (Cents per(percentage) and Marketing(percentage) (percentage)
gallon) (percentage)
Feb-07 248.8 21.5 5.8 21.1 51.5
Mar-07 266.7 23.6 8.7 17.4 50.3
Apr-07 283.4 23.4 9.7 16.4 50.5
May-07 279.6 22.0 9.6 16.6 51.9
June-07 280.8 21.0 7.5 16.5 54.9
Jul-07 286.8 18.3 6.8 16.2 58.7
Aug-07 286.9 16.0 9.2 16.1 58.7
Sep-07 295.3 17.4 5.9 15.7 61.0
Oct-07 307.5 16.7 6.6 15.1 61.6
Nov-07 339.6 17.1 7.3 13.7 61.9
Dec-07 334.1 15.4 9.1 13.9 61.6
Jan-08 330.8 14.6 8.9 14.0 62.5
Source: Energy Information Administration, Department of Energy. [
gd u/ d i e s e l p ump . ht ml ]

Figure 2. Components of Retail Diesel Price:
January 2007-January 2008

70% $4. 00
60% $3. 50 n )
50%e $3. 00 a llo
40%tag $2. 50 p e r
$2.00e (
30%ercen $1. 50 r ic
20%P$1.00ail P
10% $0. 50 R e
0% $0. 00
07 r- 07 r- 07 -07 n-0 7 l-07 g- 07 0 7 t- 07 -0 7 c- 07 n-0 8
F e b- M a Ap May J u Ju A u S ep- Oc Nov De J a
Refining %Distribution & Marketing %
Taxes %Crude Oil %
Retail Price
Source: Energy Information Administration, Department of Energy. [
info/gdu/dieselpump.html] Adapted by CRS.
Tables 3 and 4 suggest that the reason for the shift in the relative prices of
gasoline and diesel fuel cannot be easily be identified through cost growth at any
particular stage of the production process. However, part of the explanation may be
in the behavior of refining as a percentage of price. The decline in refining cost in
gasoline has been greater than the decline in refining cost in diesel. This pattern
suggests that the ability of refiners to pass through cost increases to the consumer is
stronger in diesel than in gasoline, and that there are significant recoverable costs that
have been added in diesel refining. Both may play a role. As is discussed later in this
report, mandated refinery investments have been required in diesel fuel refining to
meet new product specifications.
On the demand side, the second half of 2007 and early 2008 have been
characterized by record-setting crude oil prices. Gasoline prices lagged the increase
in crude oil prices, leading to shrinking refiner margins and profitability. Possibly,
because diesel fuel is an intermediary product in commercial use, and as such can be
expected to be passed through to final consumers, refining costs as a percentage of
cost remained stronger.
It is expressly because refiners often absorb the initial increases in crude prices
that some are predicting that, if crude prices remain roughly in their current range or
go higher, further price increases in all highway fuels are likely. How steep these
increases may prove to be will depend very critically on the demand response to the

price of motor fuels. Gasoline demand is recently observed to be relatively flat, and
stocks of gasoline are unseasonably high. However, with the start of the summer
driving season still some weeks off, any prediction about the price, supply, and
demand for gasoline (and diesel fuel) during the summer of 2008 would be
conjecture at best.
Factors Influencing Gasoline-Diesel Fuel Price
A variety of factors, some cyclical, and some structural, have likely contributed
to the break-down of the traditional pattern of relative prices between gasoline and
diesel fuel. These are identified and described in turn.
World Market Balance
Growing petroleum product demand, including demand for diesel fuel, in China,
Europe, and the United States has put pressure on the ability of refineries to meet
production requirements. Demand growth in China is primarily tied to the level of
economic growth, expanding both industrial and consumer demand. While the over-
all growth in petroleum demand in Europe has not been high, demand for diesel fuel
over gasoline has increased. The European automobile and light truck fleet has
moved in the direction of diesel fuel. In the United States, the demand for gasoline
has continued to increase. Even though crude oil prices have risen since 2004,
demand for gasoline in the United States over the same period continued to increase.
In a world market where the major producers sell their products in virtually
every geographic and product segment, price effects will have a tendency to move
from one part of the market to another. If strong demand for diesel fuel exists in
Europe and places upward pressure on prices, the effect is also likely to be felt in the
U.S. market. Even if it were possible to wall off the U.S. market from higher prices,
it is unlikely that it would be helpful. If a price spread between gasoline and diesel,
greater than the cost of shipping, develops between Europe and the United States, a
major oil company might be inclined to draw diesel fuel from the U.S. market and
sell it in Europe to earn a greater profit. The potential for transactions of this type
transmit price increases from one geographic market to others, even if the trade flow
does not occur.6
U.S. imports of diesel fuel have been in the 200 to 400 thousand barrels per day
range since 2004. If the import price of diesel fuel exceeds the domestic price of the
same fuel, and given that in the market all product is sold at the same price, all prices
will rise to the level of the higher cost imported fuel. In terms of the example cited
above, tight demand and supply conditions in the European diesel fuel market are
transmitted to the U.S. markets as prices tend to equalize.

6 Economists relate this kind of analysis to opportunity costs. Opportunity costs are the
value of a good or service in its next best alternative use. Prices are generally at, or above,
their opportunity values, but it is unlikely they will trade below that value.

Refinery Output
U.S. refinery utilization rates in recent years have been high, generally at or near
90%, reflecting strong domestic demand for most petroleum products. The product
mix has generally been optimized to produce a maximum amount of gasoline. This
could be true even in times when the price of diesel fuel is above the price of
gasoline. Record profit levels in the oil industry have increased public scrutiny of oil
company operations. Although prices of all petroleum products have been high, and
market conditions tight, physical shortages of transportation fuels have not been
generally observed. If the general motoring public had to confront high gasoline
prices at the same time that physical shortages were developing, the pressure to tax
or regulate oil company profits and product prices might grow. As a result, it may
be that a major priority of the oil companies supplying the U.S. market is to avoid
shortages. To avoid shortages, the U.S. imports gasoline and gasoline blending
components. These imports now generally exceed 1 million barrels per day,
augmenting domestic gasoline production, and avoiding the likelihood of physical
shortages of gasoline.
A possible result of maximizing gasoline output at the refinery may be to make
the supply of diesel fuel relatively less available when compared to any particular
level of demand, resulting in stronger upward pressures on diesel fuel prices
compared to gasoline prices. In this way, even though all petroleum product prices
are rising due to the increasing price of crude oil, the relative prices of diesel fuel and
gasoline could shift because of an emphasis on gasoline production.
Sulfur Content
The Environmental Protection Agency (EPA) in 2001 promulgated new rules
concerning the sulfur content of diesel fuel that began to go into effect in 2006. Ultra
low sulfur diesel (ULSD) contains 15 parts per million of sulfur, compared to 500
parts per million or more in uncontrolled diesel fuel. Refineries were to begin
producing 80% of their output of diesel fuel as ULSD in June 2006, with availability
at fuel outlets for on-highway use by October 2006. Because the sulfur content is
measured at the pump according to EPA regulation, special transportation and
distribution systems were also needed to avoid fuel contamination. Use of reduced
sulfur diesel for off-highway purposes began in 2007, with full implementation of
ULSD by 2010.
The American Petroleum Institute estimated that over $8 billion have been spent
by refiners to acquire and implement refinery processes for sulfur removal. In
addition, hundreds of millions of dollars have been spent to upgrade transportation
and distribution systems. These investment costs to meet federal regulation are likely
to be passed on to consumers in the form of higher diesel fuel prices.7 These
investment costs increase the refinery cost component of diesel fuel, and if the
refiners allocate costs specifically to the cost-generating product, diesel prices should
rise relative to gasoline prices.

7 American Petroleum Institute, Diesel Fuels, at [].

Heating Oil/Seasonality
Home heating oil and diesel fuel are essentially the same product from the
refining point of view, and as such, their prices are related in the market. As a result,
peaking demand for home heating oil in cold months can have an effect on the price
of diesel fuel.
For parts of the United States, the winter of 2007-2008 was colder than usual.8
Heating oil prices reached a record price of $3.55 per gallon for the week ending
March 3, 2008. This record price represented an increase of almost 9 cents from the
previous week. These prices represented higher than a year-ago prices for the 22nd
consecutive week this heating season. Heating oil demand and high prices have
likely contributed to the increases observed in diesel fuel prices.
In addition, the linkages between the domestic diesel fuel market and
international markets suggest that cold weather which increases heating oil demand
anywhere in the world is likely to contribute to higher heating oil and diesel fuel
prices in the United States.
Pricing Practices
In a market economy, sellers of a commodity may set prices at whatever level
they think the market will bear. Consumers respond by adjusting their level of
purchases. If the consumer’s demand is inelastic, or insensitive to price, then sellers
have an incentive to charge higher prices. Transportation demand, and hence the
demand for fuels including gasoline and diesel fuel, is thought to be relatively price
insensitive in the short term. In addition, since diesel fuel is used for mostly business
purposes in the United States, it may be treated as an intermediate good; one that is
a cost component of a production process leading to some final consumer good or
service. As such, any increases in diesel fuel costs are likely to be passed on to the
ultimate consumers. If costs can be passed on through a pricing process, there is little
need for those who use the product to make adjustments as a result of higher costs.
Although gasoline and diesel fuels are joint products of the refining process,
refining companies have the right to apportion the costs of production to segments
of the product mix in whatever blend they choose. Refiners may choose to change
relative prices within the product mix to take advantage of demand conditions, to
alter the composition of demand to match available supply, or simply as a strategy
to increase shareholder value.
On the basis of the market dynamics described in this report, the future price
path of highway fuels and the relative disparity between the price of gasoline and

8 See map of accumulated heating degree days for the United States, November 2007
through March 11, 2008 at [

diesel fuel cannot be predicted with any confidence. At this time, the price support
for diesel fuel is primarily demand-driven, with the United States competing for
world supply to supplement domestic production of middle distillates with product
It could be anticipated that, at some point, the price of a fuel could reach a level
where there is some demand response. It is unclear what these price points may be.
However, owing to the primary use of diesel fuel in the commercial sector for the
delivery of goods and some services, demand for diesel is likely to be less elastic
because, as has been noted, those costs will be passed on to consumers. Demand
outside the United States may also prove to be less elastic. A supply response could
ameliorate prices somewhat, but any supply response is bounded by the nature of
crude oil and refinery investment.