Red Dyed Diesel Order: A 24 Cent Fix for a $2.50 Diesel Spike
Federal tax accounts for 24.4 cents of a $6.38 gallon. Diesel is $2.48 above its pre-war level and trades about $90 a barrel above crude. The order addresses the optics ahead of November 3, not the price.
Americans paid a record $6.53 a gallon for diesel two weeks ago, the highest in the EIA's weekly series, which starts in 1994. They were still paying $6.38 last week. Reuters reported on Monday, citing two sources, that Donald Trump was preparing an executive order to expand access to tax-exempt diesel, possibly to be unveiled that day. It could make more red-dyed diesel, used in agriculture and some off-road vehicles, available to buyers. A third source said it would likely direct the Transportation Department to coordinate with states on waiving taxes on road diesel. Politico reported that the actions would include a Treasury review of certain diesel taxes, a push for states to widen dyed-diesel availability and waive fuel taxes, and non-enforcement of dyed-diesel limits. The federal measure is a review, not a tax cut. The elections are on November 3.
The order will matter less at the pump than in the news cycle. The IRS instructions for Form 720 set the federal diesel fuel tax at 24.4 cents a gallon, while dyed diesel follows separate rules in IRS Publication 510. The tax is about 3.8% of a $6.38 gallon and 9.8% of the $2.48 rise since March. A policy aimed at the tax reaches only a small part of the problem.
Most of the price comes from elsewhere. The EIA's gasoline and diesel update broke a $5.60 diesel gallon in May into 42% crude, 25% refining, 23% distribution and marketing, and 11% taxes. Removing every federal and state tax would take about 11% off the price. Waiving the federal levy alone, or making more dyed fuel available to farms, affects only a fraction of the price and only for buyers who qualify.
The weekly prices show how quickly diesel rose. The EIA's retail series put No. 2 diesel at $3.897 a gallon in the week of March 2 and $4.859 a week later. It reached a record $6.529 in the week of September 21, above the previous high of $5.810 set on June 20, 2022. The latest reading, for September 28, is $6.382, or $2.485 above March and $1.92 above the $4.465 price of regular gasoline that week. The squeeze is concentrated in diesel, not petroleum generally.
With the tax unchanged, the increase reflects the gap between crude costs and refined diesel prices, known as the crack spread. The EIA's weekly spot prices put Brent at $117.08 a barrel and New York Harbor ultra-low-sulphur diesel at $4.955 a gallon for the week of September 25. At 42 gallons to a barrel, the diesel was worth about $208 a barrel, or $91 above crude. A week earlier, Brent was $124.15 and diesel was $5.223 a gallon, putting the premium at about $95 on roughly $219. Crude fell over those two weeks, but the premium narrowed by only about $4.
Trucks and farm machinery burn diesel, so buyers pay the market-clearing price for refined fuel regardless of what crude costs the refiner. When the premium over Brent reaches $90 a barrel, that extra revenue goes to the seller regardless of the tax code. The federal tax is about $10 a barrel, making the premium nine times larger. Cutting the $10 while the $90 remains would leave the spike in place, and buyers benefit from a waiver only if retailers pass it on in full.
The administration also blames refineries. In a Truth Social post reported on Monday, Trump wrote that "What's driving up Gasoline is no longer the Strait of Hormuz, because Record Numbers of Barrels are coming out now on an almost daily basis, but the word, 'Refineries,' where Russia's are being blown up by Ukraine, and where ours are being closed up, in Blue States, like California, by the Dumocrats." Refining is the bottleneck. The EIA puts California diesel at $8.18 a gallon and the West Coast at $7.36, well above the national $6.38. Regional prices do not explain a nationwide gap of this size; the crack spread does. A tax order will not narrow that spread.
Farms offer the clearest case for the order. During harvest, cheaper access to dyed diesel could help growers and off-road users. State waivers could add to a federal move, lowering some farms' fuel bills. The savings are small beside a $90 premium over crude, however, and road trucks still face the same 24.4-cent tax. The Group of Seven's pledge to release 100 million barrels of diesel is the only measure that adds product, though it is unclear how much would be new supply. More product would narrow the crack spread; the reported order adds none.
The pre war price of $3.90 a gallon is not coming back through a tax line. The EIA's Monday survey price for November 2, published on election day, will come in above $6 a gallon.