By Brian Mason and John Auers
In a blog last year, “Roll with the Changes” – Europe’s Changing Views on Diesel,” we discussed how European consumers have fallen out of love with diesel and are beginning to flirt with a previous flame – gasoline. Based on the recent release of the European Automobile Manufacturers Association’s (EAMA) third-quarter results on European car sales, it appears this fling is continuing and diesel vehicles are moving farther into the rear view mirrors of the continent’s drivers. This has happened for a variety of reasons, but the Volkswagen scandal and the realization that it is very difficult to meet stringent emission standards with diesel engines has certainly played a major role. Governments, which originally saw the mileage benefits of diesel as a big environmental benefit, are now rethinking policies which incentivized diesel usage and instead are moving towards regulations restricting consumption, especially in larger cities, due to smog concerns. In some ways this reversal in demand patterns could be coming at a good time as it should help mitigate the effects of a big bump in diesel demand from the IMO LS rules, which begin in 2020. In today’s blog, we will review the data from EAMA’s third-quarter report, discuss some of the dynamics which will impact product markets and postulate how refiners will “Roll with the Changes” coming over the next few years.
“So If You’re Tired of the Same Old Story” – A quick recap
In the 90’s and through the last decade, diesel vehicle sales steadily increased surpassing gasoline vehicle sales with more than 50% of the market. This was primarily due to the European Union’s push towards creating a diesel culture based on their findings at the time. They determined that diesel engines were more fuel efficient and that they were generally less harmful to the environment. To expedite the move toward “dieselization,” Europeans were incentivized to purchase diesel cars by placing less tax on diesel fuels making them cheaper to consumers. In Europe more than half of the fuel price paid at the pump is either excise or value added taxes. In general, excise taxes for gasoline are higher than diesel pushing consumers towards diesel vehicles. This tax decrease helped offset the higher price tag of earlier diesel car models that initially pushed consumers away. However, as diesel technology improved the differential between gas and diesel vehicles narrowed. Also with better fuel efficiency in earlier diesel engines compared to their gasoline counterparts, there were plenty of good reasons for the shift in vehicle demand. As car manufacturers began adding better injection systems and turbo systems to diesel vehicles for even better fuel efficiency the incentives only grew through the 90’s to own a diesel vehicle.
The only problem with the push towards dieselization for environment reasons is that it was based on a model that did not fully account for all the negative impacts. While diesel engines are more fuel efficient and do put off less CO2 emissions, they also produce excessive amounts of harmful particulate matter and nitrogen oxide.
“I Knew it had to Happen” – an update on the demand
For the last few years and even more drastically this year, diesel vehicle sales have begun to steadily decrease. It appears sales are over the “dieselization” hump and on a steep downward trend. As reported by EAMA, in the third quarter, diesel car sales accounted for only 34.7% of total sales. This is down from 43.1% just one year prior. In the same year, gasoline powered vehicle sales rose 7% to account for almost 58% of all sales. It was also reported that alternative-powered vehicle sales grew by 30%.
Dropping diesel auto demand can be attributed to environmental concerns and the uncertainty over future regulations or bans. As discussed last time, the “dieselgate” scandal helped reveal the truth about modern diesel vehicles on the road. In an attempt to keep up with the stringent European emission standards on diesel vehicles, many vehicle manufacturers were manipulating vehicle testing and allowing vehicles on the road with up to 15 times of permitted emissions. The UK government found that lab-based tests on diesel emissions were never reproducible in real world scenarios. On average vehicles sold between 2009 and 2015 produced more than 19 times more nitrogen oxides than permitted. Ongoing testing this year has shown that even newly produced diesel vehicles still do not meet current emission standards. This has led to many cities and countries calling for a complete ban or phase out of diesel vehicles. So far, only Hamburg, Germany, has implemented a full ban of all older diesel vehicles that do not meet Euro-6 emissions standards. This is still enough to worry consumers about future regulations and their ability to drive purchased diesel vehicles where they need to go.
“Oh Turn Some Pages” – What lies ahead
The sudden move back toward gasoline-powered vehicles in Europe may help balance fuel demand. Demand is currently dominated by distillates accounting for over 40% of all products. Europe is a large importer of middle distillates and exporter of surplus gasoline. If the current shift towards gasoline vehicles that we are seeing continues, the current imbalance could be lessened.
With new IMO regulations coming in 2020, a shift in demand toward gasoline vehicles may be a good thing. Many refiners who can’t currently produce compliant marine fuel will start blending down heavier noncompliant fuels with diesel to make saleable products. A shift toward gasoline vehicles will relieve products to be shifted toward blending. Overall, we anticipate European distillate demand to continue rising until peaking in 2020.
“Roll with the Changes” – Conclusion
It is clear we are continuing to see a shift towards gasoline vehicles in Europe as uncertainty over diesel vehicles acceptance grows. Consumers are worried about resale value and about being able to drive in major cities across Europe. Although we are seeing this shift toward gasoline vehicles, the demand for diesel may continue to rise as we move toward IMO 2020 as it is globally. As refiners move to make compliant marine fuels and try and reduce off spec resid products, diesel will be funneled toward blending. This will take large amounts of diesel and push diesel demand up, at least in the near future.
TM&C constantly monitors changes and projected changes in pricing and supply and demand across the globe for diesel and other petroleum products. Our projections take into account changing rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (C&RPO), and our various other studies. We are currently working on our 2019 C&RPO, which is scheduled to be issued in early February 2019 and the impacts on the diesel supply/demand balance from IMO, European consumer trends, and other dynamics will be a key topic of that report. More information on this and our other publications, along with the work we can do on a job specific basis can be obtained by contacting us, visiting our website at turnermason.com or calling Cindy Parker at 214-754-0898.