Higher diesel prices add to inflation

Energy costs have been on the rise in recent days, with not only soaring gasoline prices, but even higher diesel prices, with the national average more than $1 per gallon higher. As diesel prices rise, so will the prices of various products transported by related power vehicles, which could further exacerbate the inflation problem.

According to data from the American Automobile Association (AAA), the average price of gasoline in the United States on July 31 was about $4.22, while the average price of diesel was as high as $5.291. Diesel is not only a source of fuel for trucks, but also plays an important role in international transportation, as cargo aircraft and ships rely on diesel and its related oils for power.

Diesel prices have long been higher than gasoline prices for three main reasons. First, increasingly stringent environmental regulations are driving up the cost of producing cleaner diesel. Second, the federal and state governments levy higher taxes on diesel fuel. Finally, the demand for diesel is far greater than the supply.

In 2006, the U.S. Environmental Protection Agency (EPA) began developing rules to drastically limit the sulfur content of diesel fuel. Since 2014, the EPA has mandated that all diesel produced and sold in the United States must be “Ultra Low Sulfur Diesel” (ULSD). These rules help protect the environment but raise refining costs, putting upward pressure on diesel prices.

In order to reduce fuel prices, US President Biden recently called on Congress to suspend fuel taxes on gasoline and diesel. The system has not changed since it was implemented in 1993, and the federal fuel tax for gasoline and diesel is 18.3 cents and 24.3 cents per gallon, respectively. Fuel taxes are primarily used to fund and maintain infrastructure such as the U.S. highways and mass transit systems.

In addition to federal fuel taxes, states have their own surcharges on both fuels, with diesel averaging 7.55 cents higher. The reason is that large vehicles such as trucks and buses that use diesel are more likely to worsen road conditions than ordinary vehicles.

Diesel prices soar, the most fundamental reason is the shortage of supply. On the supply side, diesel is produced at a much slower rate than gasoline. A barrel of crude oil in the United States can produce 19 to 20 gallons of gasoline, but only 11 to 12 gallons of diesel.

On the demand side, diesel is more versatile. It is the fuel for all types of vehicles and equipment, including trains, factory equipment and generators. Analysts say gasoline powers people’s vehicles and diesel is the backbone of the U.S. economy.

Business Times｜Zheng Shengde

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