What’s the Cost of Diesel Fuel?

The average retail price of diesel fuel continues to hover near $4.00/gallon. When you look at the total retail price of diesel fuel, it’s important to understand the components of the price to know where there may be opportunities to reduce the cost.

The largest portion of the retail price; just over 60%, is driven by the cost of the crude oil that is refined into fuel. Contracts for crude oil are traded on exchanges like NYMEX and many supply and demand factors continuously impact the trading price. If the price goes up or down, it has a direct impact on the price at the pump.

When you hear about crude trading around $100/barrel, keep in mind that a barrel is the equivalent of 42 gallons. Therefore, $100/barrel is almost $2.40/gallon. And, when looking at it from the retail price, 60% of $4.00/gallon also works out to $2.40/gallon. Extending this math means a $5 change in the price of a barrel translates to 12 cents/gallon at the pump, although there may be a lag in timing depending on inventory levels.

The next largest cost component of the retail price is attributable to refining the crude oil into diesel fuel. This represents approximately 15% of the total price, or 60 cents/gallon based on a $4.00/gallon total price. Based on the national average, Federal and state taxes also represent an additional 15% of the total price.

Regardless of the taxes paid at the pump, every state still collects their share based on the miles traveled in each state. The state tax allocation is accomplished by the quarterly IFTA reporting process that most companies with fleets must comply with. Therefore, a strategy to purchase fuel in a state with lower taxes won’t accomplish much except to defer payment of another state’s higher taxes as a balance due with the IFTA return. Limited exceptions for local taxes present small opportunities for savings, but thorough research is needed.

The various components mentioned above account for approximately 90% of the retail price of fuel and there isn’t much that can be done to reduce this part of the cost. The remaining 10%, or approximately 40 cents/gallon, represents downstream costs added by wholesale and retail distribution activities. Expenses for storage and transportation, facility maintenance and brand marketing along with many other line items must all be covered. Profit is in there too.

Some fuel merchants find ways to transport product at lower rates. Some structure their operations more efficiently which allows them to lower their costs. Others compete aggressively for volume and are willing to sacrifice margins. The point is that roughly 10% of the price of diesel fuel has some play in it. This is where opportunities exist to reduce your cost.

Sokolis Group Fuel Management has many years of experience working with different merchants and can identify when and where those opportunities exist. Even if you think you’re already getting the lowest price possible, let Sokolis Group Fuel Management do a no cost, no obligation audit of your fuel purchases to see if there are additional opportunities for your company to reduce the cost of diesel fuel.