By Nicole Jao
NEW YORK, Sept 30 (Reuters) – The White House is considering regulatory relief that would expand sales of red-dyed diesel, a tax-exempt fuel typically used for farming, as prices surge following supply disruptions linked to the US conflict with Iran, Ukrainian strikes on Russian refineries and declining global inventories.
Analysts warn such relief would do little to combat the problem of shrinking supply that has driven prices to record levels. Here is more about the problems plaguing the diesel market, and what effect, if any, broader use of red-dye diesel may have:
WHAT IS THE WHITE HOUSE PROPOSING TO DO?
Diesel prices in the US reached a record $6.53 per gallon last week, according to Energy Information Administration data, due to a combination of a reduction in supply from the Middle East and interruptions to refining, in part because of Ukraine’s attacks on Russian energy facilities.
The spike has prompted the White House to consider allowing broader sales of red-dyed diesel, as President Donald Trump and his administration face pressure to ease fuel costs ahead of November’s midterm elections. It has also weighed a blanket diesel export ban, voluntary export limits by refiners, and has urged the European Union to release emergency diesel stocks to help ease prices.
WHAT IS RED-DYED DIESEL?
Red-dyed diesel is essentially diesel but exempt from highway fuel taxes.
It is generally sold for use in equipment and vehicles that are not usually operated on public roadways, but for places like farms and construction sites. Because it is intended for off-road use, it is exempt from taxes applied to diesel fuel sold for highway transportation.
The fuel is almost chemically identical to on-road diesel. The red dye serves as a tax-enforcement marker, indicating that highway taxes have not been paid. Using dyed diesel in vehicles operated on public roads is illegal and can result in significant fines because it constitutes tax evasion, not because the fuel differs from standard diesel.
Several states have relaxed restrictions on dyed diesel amid surging fuel costs.
HOW MUCH TAX DO DRIVERS PAY ON A GALLON OF DIESEL FUEL?
Highway diesel fuel in the United States is subject to both federal and state excise taxes.
Federal levies include a diesel tax of 24.3 cents per gallon and a 0.1-cent-per-gallon underground storage tank fee, together accounting for roughly 4% of a $6-a-gallon diesel.
State diesel taxes average about 35.5 cents per gallon, representing roughly 5% of current diesel prices.
HOW MUCH DIESEL DOES THE US CONSUME?
Off-road diesel accounts for about 30% of total US distillate consumption at roughly 18.2 billion gallons annually, according to Jim Mitchell, an analyst at consultancy Wood Mackenzie.
The U.S. transportation sector consumes nearly 123 million gallons of diesel daily, or about 45 billion gallons annually, according to federal data. That represents roughly 75% of total US distillate consumption of nearly 60 billion gallons per year.
WHAT DO ANALYSTS THINK THESE MEASURES WOULD DO?
“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.”
(Reporting by Nicole Jao in New York; Editing by Liz Hampton)
