Understanding How Diesel Fuel is Priced in Canada, the USA, and the World

Fuel prices are a hot topic lately, not just at the pump. It’s all over the news, so I decided to dive deeper and get into the nitty gritty on gas pricing.

Recently, Ram announced that it is dropping its 3L EcoDiesel from the lineup. This follows Ford quietly dropping its 3L small diesel last year. So, GM is last with its inline – 6-cylinder diesel available in half-tons and some SUVS. Why did they drop them when they reportedly sold well? There were mechanical and programming issues with Ford and Ram, which didn’t help the business case. The future looks bleak for producers as looming federal regulations will cost oil refineries billions of dollars in forced upgrades.

On paper, diesel fuel is cheaper to produce than gasoline, yet it costs more. All these costs are passed on to the consumer. But why is the fuel more expensive? In two words: tax and supply.

Let’s look at fuel taxes in Canada

Gasoline averages taxes in Canada

• Federal charges 10 cents / L. Provinces add 10.81 cents / L.
• The Federal and Provincial Carbon Tax adds another 10.25 cents / L.
• Now add on an average of 9.2% HST/GST. You now have a minimum tax of 36.78 cents on a litre of gasoline.

Diesel averages in Canada.

• Federal charges 4 cents / L. Provinces add 11.34 cents / L.
• The Federal and Provincial Carbon Tax adds another12.33 cents / L.
• Now add the average 9.2% HST/GST = which brings in a minimum tax of 31.82 cents on a litre of diesel.

Tax on diesel in Canada is lower than gasoline, so why the higher price? Here is where it gets interesting. There are only three refineries in Canada that produce diesel fuel. Transport costs are higher in regional markets.
That’s reason number one. A second is that these refineries are the same ones that supply us with winter home heating fuel (it’s the same stuff as diesel). This demand, affected by weather, also pushes up prices through the summer/winter cycle.

The result?

Diesel costs more, and there is no advantage, and manufacturers know this. What happens in the United States often dictates what happens economically in Canada. As in diesel production and offerings from the manufacturers. Frankly, if it’s not working for them in the United States, we will lose out. They don’t keep anything in production for the Canadian market only.

Diesel taxes in the United States

Looking at taxes on diesel fuel in the United States, you’ll see they are much higher for a different reason. Heavy truck transport takes a toll on highways, and OTR transport is almost 100% diesel-powered. The federal and individual states try to recoup road maintenance expenses through taxes on diesel fuel. If you drive a diesel VW Golf, you pay the same taxes as an 18-wheeler which is another blow to small diesel ownership in the United States. Let’s have a look at the tax costs on fuel down south.

Average fuel taxes in the United States

• Federal charge 18.4 cents on a gallon of gasoline.
• Federal charge 24.40 cents on a gallon of diesel fuel.
• The States add an average of 31.67 cents (gal) on gasoline.
• On diesel, though, the States add 33.45 cents on a gallon.

This tax picture is clear – but there is more. There are 130 refineries in the United States. Most refineries generally produce 50% unleaded gasoline, 30% diesel, 10% jet fuel and 10% other fuels, including propane and general aviation gasoline. However, over the last few years, at least 13 U.S. refineries shut down, significantly cutting production. An industry source (TMC) points out that the loss of the 13 refineries accounts for more than 1.4 million barrels of oil per day, or more than 7% of the country’s total gasoline, diesel and jet fuel capacity. The report said this is not just in the U.S., as worldwide refining production has declined by an additional 2.13 million barrels per day. A lack of supply pushes up prices. This is another nail in the coffin of small diesel.

This upward price trend has been going on for a long time now. A U.S. study of on-highway diesel fuel prices shows they have been higher than regular-grade gasoline prices, on a dollar-per-gallon basis, almost continuously since September 2004. This trend is a break from the previous historical pattern of diesel fuel prices usually being lower than gasoline prices except in cold winters when demand for heating oil pushed diesel fuel prices higher.

What’s happening in Europe?

Further complicating the supply chain for diesel fuel in North America is the export of more than 1 million gallons of diesel per day to Latin American nations and Europe to help that continent as it abruptly separates from buying energy from Russia because Moscow invaded Ukraine. The gasoline/diesel picture in the rest of the world is quite different. In many other countries, diesel fuel is still much cheaper than gasoline. This is partly because significantly more diesel-powered passenger vehicles are on the roadways. Europe has always reversed the gas/diesel fuel taxation model. European countries have traditionally kept the cost of diesel down – to aid the transport industry and business in general. They prefer the gasoline consumers to bear the brunt of the tax burden.

The average gasoline tax is €0.55 per litre ($2.47 per gallon) in Europe and €0.44 per litre ($1.98 per gallon) on diesel.

Final Thoughts

If more drivers in the United States and Canada were willing or able to switch to diesel-powered vehicles, the price per gallon/litre of diesel fuel might fall below that of gasoline. However, with the current supply issues at refineries and the tax structure, particularly in the United States, it is doubtful that we’ll see a slight diesel engine market recovery. And that has contributed to the cancellation of small diesel offerings by Detroit.