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Pricing Dilemma: Why Is Diesel More Expensive Than Gasoline?

In: Business and Management

Submitted By alexusleo
Words 1856
Pages 8
Pricing Dilemma: Why is diesel more expensive than gasoline?

Problem Definition
In this research we will be looking to find out why is diesel fuel more expensive than gasoline despite historically being cheaper to produce. This paradox did not exist prior to 2004 but after that year diesel retail prices became consistently higher than those of gasoline,.

As we look at different aspects of this situation we will uncover that there are several main reasons for that: 1. Transition to cleaner diesel fuels made the production more expensive. 2. Global demand for diesel fuel is very high and the refining capacity is tight. 3. There is a difference in terms of on-highway fuel tax between diesel and gasoline. 4. Variability in terms of raw material prices.

Another important part of this paper will be the analysis of the competitive landscape in this industry. We will discuss how the competition might be affecting the prices of both types of fuels.

The role of costs (supply)
Upstream
Petroleum industry can be divided in two major segments: upstream and downstream. The value chain for petroleum products consists of the following stages: 1. Prospecting and Extraction 2. Downstream
Refining or Importing of Road Fuel 3. Wholesale Transportation and Bulk sales of refined products 4. Retailing
The main determinants for prices are cost of crude oil, refining, taxation and profit margin. While different sources report different percentage contributions from each of the above factors, we can still determine the similarities and analyse their effect on the price (Anderson and Kahya, 2014; Policy Roundtables: Competition in Road Fuel, 2013):

In the upstream sector, the main factor affecting the price of diesel and petrol is the price of crude oil. The figures above demonstrate that the contribution into the price by crude oil is uneven…...

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