Jane Van Ryan
Posted June 1, 2009
When economists are asked why the price of fuel fluctuates, they often explain that price changes are due to the "market"--the interaction of all of the people around the world who buy and sell crude oil and fuels in the global marketplace. These buyers and sellers decide how much oil and oil products they are willing to buy or sell at a given price. Their decisions can be affected by several factors including weather, refinery operations, and geopolitical and economic conditions. The price of other commodities, such as wheat and corn, are determined in much the same way. I touched on these points a bit in last Friday's post.
Recently, the market pushed the price of crude oil to about $66 a barrel (May 29), which equates to an increase of 49 cents a gallon since April 20, 2009. But the price of fuel has not risen quite as rapidly. As of this morning (June 1), the price of gasoline had risen 45 cents a gallon, and the price of diesel fuel had climbed only 11 cents a gallon. Ask an economist why the price of diesel has been slower to rise, and he or she would say: "the market." To the average consumer who doesn't study economics for a living, that can be a puzzling response.
So, let's look at the facts. First, the price of diesel fuel has remained low due to a huge decline in demand. In April 2009, U.S distillate deliveries--which include deliveries of diesel fuel to the marketplace--were 13 percent lower than during the same month a year earlier. Why? The demand for freight transportation has fallen sharply during the economic downturn because fewer goods and services are being sold. Also, the supplies of distillate fuel oil have skyrocketed to the highest level since 1980. In April, inventories were 37 percent higher than at the end of April a year ago.
As we all learned in our high school economics class, low demand and high supplies tend to push prices down. As a result, the national average price of diesel fuel fell below the average price of gasoline in mid-May for the first time since July 2007, according to the U.S. Department of Energy.
Read more about diesel prices and how they've fluctuated during the past few years.
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