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What drives diesel fuel prices?

Author

Listed:
  • Jackson Thies
  • Stephen P. A. Brown

Abstract

Historically, gasoline has commanded a premium over diesel, but that changed in mid-to-late 2007, when diesel rose above gasoline. In 2007 and 2008, however, gasoline traded higher than diesel only 21.1 percent of the time. This deviation from historic norms raises an interesting question--what drives diesel prices? As with virtually all petroleum-derived products, the story begins with oil prices. Seasonal patterns also play a significant role. Demand for a range of oil-based products changes with the weather, and prices fluctuate as refiners adjust their output mix. Government regulations are another source of price variability. Earlier this decade, new standards aimed at reducing diesel fuel's sulfur content required further processing that increased refinery costs and prices for consumers. Finally, short-term changes in supply and demand--including imports--factor into pricing on a day-to-day basis. Our model suggests that spot diesel should rise 25 cents a gallon over the next six months and 41 cents a gallon over the next 18 months.

Suggested Citation

  • Jackson Thies & Stephen P. A. Brown, 2009. "What drives diesel fuel prices?," Economic Letter, Federal Reserve Bank of Dallas, vol. 4(nov).
  • Handle: RePEc:fip:feddel:y:2009:i:nov:n:v.4no.9
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    File URL: http://dallasfed.org/assets/documents/research/eclett/2009/el0909.pdf
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