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. 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. 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. Refining and Supply of Gasoline and Middle Distillates

A barrel of crude oil is a composite of hydrocarbons of varying densities. 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. 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. 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. 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. This could be true even in times when the price of diesel fuel is above the price of gasoline. 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. 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. 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. 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.
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.