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March 02, 2020   |   Diesel Technology Forum

Policy Insider

There’s More to Falling Diesel Fuel Prices Than a Potential Pandemic

The stock market has taken a hit of late due to fears over the spread of COVID-19 and a fall-off in the demand for goods from China and other economies. Meanwhile diesel fuel prices are also trending down. Is it related to fears of a spreading epidemic? Well, it’s complicated and we’ll explain.


The stock market has taken a hit of late due to fears over the spread of COVID-19 and a fall-off in the demand for goods from China and other economies. Meanwhile diesel fuel prices are also trending down. Is it related to fears of a spreading epidemic? Well, it’s complicated and we’ll explain.

Global air travel to and from China has slowed to a trickle while fears over expensive supply chain disruptions between the world’s second largest economy, owing to the spread of COVID-19, have largely explained investor fears over a global economic slowdown. Meanwhile, U.S. gasoline and diesel fuel prices are falling. Diesel prices are now $0.17 cents less than this time last year. Are fears over a global pandemic leading to a fall-off in domestic fuel prices? Well, somewhat but not entirely.  

Supply and Demand Explain Diesel Fuel Prices

Like most other commodities, supply and demand explain fuel prices including diesel fuel. Most of us are intimately aware of gasoline prices as most of us drive a gasoline-powered car or see motor fuel prices displayed at convenience stores and gas stations. On the supply side, gasoline and diesel are subject to the same type of costs. Both are derived from crude oil, there are costs related to refining and distributing the fuels and both are subject to federal, state and sometimes even local motor fuel taxes. 

 Diesel Fuel Prices

While gasoline and diesel fuel are subject to roughly the same type costs, they differ widely on demand. Gasoline is used exclusively for our passenger car fleet and some larger delivery vans and powers little else. Unlike gasoline, diesel is the fuel of work. Diesel powers 75 percent of our commercial vehicles along with school and transit buses and 98 percent of the larger Class 8 trucks. Diesel is also the predominant fuel that powers agricultural, construction, mining and forestry equipment, freight locomotives and marine vessels including ferries, tugs and fishing boats and much of the fleet of ocean going vessels that move global commerce.

There are other sectors that are also using diesel fuel in less obvious ways. Aviation fuel, or kerosene, is considered a type of diesel fuel as it is derived from crude oil and refined in much the same manner as traditional diesel fuel. Home heating oil that is used predominantly in the Northeast is also a type of diesel fuel.  The demand for these fuels can explain some price volatility in U.S. diesel fuel prices as we will soon see.

Bringing it All Together
On the supply side, U.S. refiners have access to growing sources of crude oil, the major input to diesel fuel. Much of our crude oil is sourced domestically and the U.S. is now a net exporter of crude. Domestic sources of crude are expected to expand. Some refinery operations still rely on certain imports of crude oil to produce specific products and these imports are increasing as well. According to the laws of supply and demand, growing access to the primary input to diesel fuel – crude oil – should contribute to moderate price pressures.

Crude Oil Production

On the demand side, we have seen the domestic demand for diesel fuel remain flat. While we do not have full year data for 2019, the most recent sector-specific data published by the U.S. Department of Commerce shows stagnant growth in diesel fuel demand among those industry sectors largely dependent on diesel powered vehicles and equipment. In the third quarter of 2019, as the chart below indicates, the diesel dependent economic sectors showed a modest easing in demand by less than one percent. 

Sector

2019 Q2 ($B)

2019 Q3 ($B)

Agriculture, Forestry & Fishing

166

173

Mining

332

310

Construction

884

890

Transportation & Logistics

682

683

Total

2,064

2,056

 

Worldwide, the U.S. Energy Information Administration estimates that the fall-off in demand for air travel and goods movement from China owing to COVID-19 will see a reduction in demand for fuel by 109,000 barrels a day. This sounds like quite a lot, but it represents less than one percent of the 101.7 million barrels a day of liquid fuel demanded across the globe.

Although it may be hard to determine, the 2020 winter season has temperatures much above average in the U.S. and abroad. The U.S. Energy Information Administration estimates that the global drop off in demand for fuel owes as much to a warmer winter than to COVID-19. Here in the U.S., home heating oil prices are $0.36 per gallon less than this time last year.  

What does the future hold?

Predicting fuel prices with any accuracy is nearly impossible. No single variable on its own can explain diesel fuel price changes. By understanding the variables that comprise supply and demand for diesel fuel, we may understand the pressures that move diesel prices up or down.  Understanding how COVID-19 will impact the global demand for goods and services could play a large role in explaining changes in domestic diesel fuel prices.  



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Key Contact

Ezra Finkin
Director, Policy
efinkin@dieselforum.org
301-668-7230

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