The Future of Diesel in the US: Analysis

This post comes to you from Popular Mechanics. Written By Larry Webster.

In the U.S., gasoline and diesel are dirt cheap compared to their cost in Europe. In late August, the average U.S. price for a gallon of gas was $2.60, and a gallon of diesel cost $2.65. Both diesel and gasoline come from the same barrel of oil—since diesel is a heavier, less refined product, it has historically cost less than gasoline. However, the relative price difference in the U.S. is determined by market forces, refinery constraints and taxes. Typically, demand for gasoline is higher, and U.S. fuel taxes favor gasoline, making gas less expensive here. Federally, we tax diesel at a higher rate than we do gas—24.4 cents per gallon of diesel versus 18.4 for gas. Some states tax gas a higher rate, but on average, the diesel tax is higher (With state taxes added in, the average diesel tax is 51.4 cents per gallon, gas is 47.0). According to the Energy Information Administration, since 2004, diesel has generally cost more than gasoline in the U.S., year-round.

While determining the drivers of fuel and oil prices is an undertaking worthy of a business-school dissertation, we can simply say that European drivers pay more than double our prices—seven bucks for a gallon of gas and six for diesel (here’s an illustrative graph). Why the big difference? Fuel taxes in Europe are not only historically much higher, the tax on diesel is less than gas. And it’s been that way for over a decade. Over time, the high European taxes caused a marked difference in customer demand.

Americans haven’t been clamoring for diesels because our fuel is so comparatively inexpensive—and diesel engines cost so much more to manufacture. Diesel engines cost more because they require added equipment such as a turbocharger to make power levels close to a gas engine. They also need heavier-duty internal components to stand up to higher compression ratios. The time it takes to “pay back” the $1500 to $3000 cost premium of a diesel engine with fill-ups at the pump, is very long at current U.S. fuel prices. Consider a hypothetical $20,000 gas car that gets 30 mpg (3.33 gallons per 100 miles). Check the diesel engine option for $1500 and you’d see a 30 percent efficiency improvement (39 mpg or 2.56 g/100m). Over a 15,000-mile year, the diesel will save about 115 gallons. With our fuel prices, it would take more than four years to make back that $1500 investment. At six bucks a gallon for Euro diesel versus seven for gas, the payback is less than two years.

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