Tag: refining capacity

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Why have diesel prices risen more than petrol prices?



From the start of the American and Israeli war with Iran on 28 February 2026 to 30 September – a period of just seven months – the retail price of petrol in the UK has risen by approximately 43p, from around 132p to 175p per litre – a rise of 33%. In contrast, the price of diesel has risen by approximately 59p, from around 142p to 201p per litre – a rise of 42%.

In several other countries the percentage difference is greater still, particularly in countries where fuel taxes are lower and thus the wholesale cost of the fuel is a larger percentage of the pump price. In the USA, for example, petrol (gasoline) prices have risen by around 38%, whereas diesel prices have risen by around 73%.

But why have diesel prices risen by more than petrol prices? The answer has to do with supply and demand.

Supply

Greater effect of the Iran war on diesel supplies.  The closing of the Strait of Hormuz has drastically cut the supply of oil from the Gulf states. This is being compounded by the Houthi attacks on Saudi shipping in the Red Sea. This has forced Saudi oil that is transported by pipeline to the Red Sea and destined for countries east of Saudi Arabia to be transported north via the Suez canal rather than south through the Bab al-Mandab Strait. This has been made worse by attacks launched from Iraq on the Saudi oil pipeline.

Middle Eastern crude oil’s composition is the most efficient for refining high-quality diesel. The restriction on exports, both of crude oil and of diesel from Gulf refineries, has thus affected diesel supplies more than petrol supplies.

Effect of Ukraine war.  Ukraine has been launching drone attacks on Russian refineries, mainly producing diesel. The resulting shortage of diesel within Russia has led it to impose a ban on diesel exports, extended at least to the end of 2026, to limit the effects on supplies for the military and for domestic users. Russia has historically been the world’s second-largest diesel exporter and the ban has reduced the world’s supply of seaborne diesel by around 12%.

Low diesel stocks.  Stocks of diesel have been run down and this has meant that there is little flexibility to draw them down further.

Refinery constraints.  Refineries cannot instantly alter their output to produce more diesel. Furthermore, diesel has become more expensive to produce in recent years due to the transition to ultra-low sulphur diesel to meet stricter environmental standards. This makes the supply of diesel relatively price inelastic, exaggerating the effect on price.

UK refineries produce more petrol than the domestic market requires, making the UK a net exporter of petrol. This higher self-sufficiency partially shields domestic petrol prices from global shocks. However, the UK does not refine enough diesel to meet domestic demand. It relies heavily on foreign imports to cover the shortfall. Thus diesel prices in the UK are more subject to global price increases.

Demand

Seasonal demand spikes.  The demand for diesel tends to rise in late summer due to extra agricultural demand for autumn crop harvests.

Low price elasticity of demand.  Unlike petrol, which is primarily consumed by individuals who can choose to drive less when prices rise, diesel is essential to industrial economies. It powers lorries, ships, buses, trains, agricultural machinery, mining equipment and many industrial machines. Because businesses must keep moving goods, farming crops and running machines, global demand for diesel is little affected by rising prices. This low price elasticity of demand results in a bigger price rise for every reduction in supply than is the case for petrol.

What is more, the transition to EVs has been greater for cars than for lorries, although many buses and vans are now electric. The electrification of the railways, however, is too long-term a project to affect short-term diesel prices and electric lorries are still in their infancy. But with rapid development of electric alternatives underway in the haulage and industrial machinery sectors, they may become less reliant on diesel in the relatively near future.

Articles

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Questions

  1. Draw a demand and supply diagram for diesel and petrol to illustrate the effects discussed in this blog.
  2. Is the demand for diesel likely to be more elastic over the longer term? Explain.
  3. Compare the effects on diesel prices in the UK with one other country of your choice. How similar are the factors affecting the relative price increases in diesel and petrol in the two countries?
  4. Would cutting taxes on diesel solve the problem of higher prices for diesel users?
  5. How has the cost of heating oil and aircraft fuel changed compared to that of petrol and diesel? Explain.
  6. What would be the effects on diesel prices in the UK and the USA if Donald Trump carried out his potential plan to ban US exports of diesel?
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Oil prices – the ups and the downs

Oil prices are determined by demand and supply. Changes in oil prices are the result of shifts in demand and/or supply, with the size of the price change depending on the size of the shift and the price elasticity of demand and supply.

Some of the shifts are long term, with the price of oil varying from year to year or even moving in a particular direction for longer periods of time. Thus the opening up of new supplies, such as from fracking wells, can lead to a long-term fall in oil prices, while agreements by, say, OPEC to curb output can lead to a long-term rise in prices (see the blogs The oil see-saw, OPEC deal pushes up oil prices and An oil glut).

Medium and long-term price movements can also reflect medium and long-term changes in demand, such as a recession – oil prices fell dramatically as the world economy slid into recession in 2008/9 and then recovered as the global economy recovered.

Another long-term factor is the development of substitutes, such as renewable energy, which can reduce the demand for oil; another is developments that economise on power, such as more fuel-efficient vehicles and machines.

But oil prices do not just reflect these long-term movements in demand and supply. They also reflect daily and weekly movements as demand and supply respond to global and national events.

Two such events occurred at the end of August/beginning of September this year. The first was Hurricane Harvey. Even though it was downgraded to a tropical storm as it made landfall across the coast of the Gulf of Mexico, it dumped massive amounts of rain on southern Texas and Louisiana. This disrupted oil drilling and refining, shutting down a quarter of the entire US refining capacity. The initial effect was a surge in US oil prices in late August as oil production in much of Texas shut down and a rise in petrol prices as supplies from refineries fell.

Then prices fell back again in early September as production and refining resumed and as it became apparent that there had been less damage to oil infrastructure than initially feared. Also the USA tapped into some of its strategic oil reserves to make up for the shortfall in supply.

Then in early September, the North Koreans tested a hydrogen bomb – much larger than the previous atom bombs it had tested. This prompted fears of US retaliation and heightened tensions in the region. As the Reuters article states:

That put downward pressure on crude as traders moved money out of oil – seen as high-risk markets – into gold futures, traditionally viewed as a safe haven for investors. Spot gold prices rose for a third day, gaining 0.9 per cent on Monday

Quite large daily movements in oil prices are not uncommon as traders respond to such events. A major determinant of short-term demand is expectations, and nervousness about events can put substantial downward pressure on oil prices if it is felt that there could be a downward effect on the global economy – or substantial upward pressure if it is felt that supplies might be disrupted. Often markets over-correct, with prices moving back again as the situation becomes clearer and as nervousness subsides.

Articles

U.S. crude edges higher, gasoline tumbles after Harvey Reuters, Libby George (4/9/17)
Global oil prices fall after North Korea nuclear weapon test Independent, Henning Gloystein (4/9/17)
Brent crude oil falls after North Korea nuclear test The Indian Express (4/9/17)
Oil prices remain volatile AzerNews, Sara Israfilbayova (4/7/17)

Questions

  1. What are the determinants of the price elasticity of demand for oil?
  2. Search news articles to find some other examples of short-term movements in oil prices as markets responded to some political or natural event.
  3. Why do markets often over-correct?
  4. Explain the long-term oil price movements over the past 10 years.
  5. Why is gold seen as a ‘safe haven’?
  6. If refineries buy oil from oil producers, what would determine the net effect on oil prices of a decline in oil production and a decline in demand for oil by the refineries?
  7. What role does speculation play in determining oil prices? Explain how such speculation could (a) reduce price volatility; (b) increase price volatility. Under what circumstances is (b) more likely than (a)?