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The White House is weighing regulatory changes that would broaden the sale of red-dyed diesel, a tax-exempt fuel commonly used in agricultural equipment, as prices climb because of supply disruptions tied to the U.S. conflict with Iran, Ukrainian attacks on Russian refineries and declining global inventories.
Analysts say the proposal would do little to address the shrinking supply that has pushed diesel prices to record levels. Here is a look at the problems affecting the diesel market and the potential impact of expanding red-dyed diesel sales.
What the White House is proposing
Dig deeper:
U.S. diesel prices reached a record $6.53 per gallon last week, according to Energy Information Administration data. The increase was fueled by reduced supplies from the Middle East and refining disruptions, including those linked to Ukraine’s attacks on Russian energy facilities.
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The price surge has prompted the White House to consider expanding access to red-dyed diesel as President Donald Trump and his administration face pressure to reduce fuel costs ahead of November’s midterm elections.
The administration has also considered a blanket ban on diesel exports by refiners and urged the European Union to release emergency diesel reserves to help lower prices.
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What red-dyed diesel is
Why you should care:
Red-dyed diesel is essentially the same fuel as standard diesel, but it is exempt from highway fuel taxes.
The fuel is generally used in equipment and vehicles that do not operate on public roads, including machinery used on farms and construction sites. Because it is intended for off-road use, it is not subject to the taxes imposed on diesel sold for highway transportation.
Red-dyed diesel is almost chemically identical to on-road diesel. The red dye serves as a tax-enforcement marker showing that highway fuel taxes have not been paid.
Using dyed diesel in vehicles driven on public roads is illegal and can result in significant fines because it is considered tax evasion — not because the fuel is materially different from regular diesel.
Several states have eased restrictions on dyed diesel as fuel costs continue to rise.
How much tax drivers pay on a gallon of diesel
By the numbers:
Diesel sold for highway use in the United States is subject to federal and state excise taxes.
The federal government imposes a diesel tax of 24.3 cents per gallon, along with a 0.1-cent-per-gallon fee for underground storage tanks. Together, those charges account for roughly 4% of a $6 gallon of diesel.
State diesel taxes average about 35.5 cents per gallon, or roughly 5% of current diesel prices.
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How much diesel the US consumes
Off-road diesel accounts for about 30% of total U.S. distillate consumption, representing roughly 18.2 billion gallons annually, according to Jim Mitchell, an analyst at consulting firm Wood Mackenzie.
The U.S. transportation sector consumes nearly 123 million gallons of diesel each day, or about 45 billion gallons annually, according to federal data. That represents approximately 75% of total U.S. distillate consumption, which is nearly 60 billion gallons per year.
What analysts say the measures would do
Big picture view:
"One doesn't have to pay federal and state excise taxes on dyed diesel, but it really doesn't shift the amount of overall diesel manufactured for domestic purposes," said Tom Kloza, chief energy adviser at Gulf Oil.
"It would help less than it sounds like, and the version the administration can do without Congress wouldn't lower pump prices at all," said Gregg Ibendahl, an agricultural economics professor at Kansas State University. "It's a much safer idea than the export ban — mostly because it does less."
"While expanding access to the tax-exempt diesel could provide some relief to eligible end-users, it would not change the underlying wholesale diesel price," said Preben Sørli, analyst at Rystad Energy. "Refiners would still receive market price for their fuels, and the main effect would be lowering federal tax revenues. It would do little to change supply or market fundamentals."
The Source: The story is based primarily on Reuters reporting, with fuel price data from the U.S. Energy Information Administration. This story was reported from Los Angeles.