OREANDA-NEWS. October 08, 2015. In this week’s Oilgram News column, Petrodollars, Robert Perkins looks at what the future of diesel for automobiles in Europe and beyond could be in the wake of a scandal that caused many to question whether gasoline has an opening to grab more fuel market share.

Volkswagen’s emissions test debacle in the US has kicked into the open a debate over the future of diesel that has been festering in oil industry circles for years.

In Europe, where three-quarters of the world’s diesel cars are sold, concerns over rising air pollution from diesel motor tailpipes have fueled calls for a radical rebalancing of the region’s road fuel mix for some time.

VW’s woes have sparked a new round of crystal ball gazing to predict the future of diesel demand and, by all accounts, the prognosis is not good.

If European governments wind down tax breaks supporting the structural dieselization of the passenger fleet, the region’s diesel demand from passenger cars would be almost 29% lower by 2035, according to energy research group Wood Mackenzie. Over the same period, gasoline demand for passenger cars would be over 40% higher, it reckons. Petromatrix has estimated that the fallout from VW’s test scandal could see a rebound of European gasoline demand as early as 2016/2017.

That would go so some way to appease European refiners who have been urging EU members to equalize fuel duties on gasoline and diesel. The incentives have transformed the fuel demand landscape in Europe, creating a major imbalance between demand and refining capacity, which is geared to making more gasoline. Outright demand for diesel in Europe surpassed gasoline in 1999 and diesel consumption is now more than double than of gasoline at around 200 million mt, Wood Mac estimates.

Under its base case scenario, Wood Mac projects that Europe will see a deficit some 1.7 million b/d of diesel/gasoil and surplus 0.7 million b/d of gasoline by 2020.

But forecasts of diesel’s imminent demise and seismic structural shift back to gasoline as the main road fuel may be overdone and too simplistic.

First off, it requires a major policy reversal on fuel duty incentives for diesel across the region, something that haulers and truckers are likely to oppose.

In Europe, on-road diesel consumption is mostly attributable to commercial vehicles, including freight trucks, light trucks and buses, which make up almost 60% of diesel demand.

Many market watchers expect to see the biggest shift in demand for diesel cars come in the passenger car segment, where the additional costs of building diesel power trains — and cleaning up the exhaust fumes — will be felt more acutely. But the large transport segment, managed by fleets, may be more tough to win over.

Shifting patterns of diesel demand will also hinge on the pace of transport alternatives such as hybrids and full electric vehicles. If the cost of the new technologies and their power sources can be tamed in the short term, a switch away from diesel could be faster than expected.

The broader picture is that diesel’s foothold had been slipping in Europe for some time. The International Energy has noted a slow-down in passenger car dieselization in the Europe for a number of years. In March, the oil market watchdog forecast that global dieselization would only increase “gently” over the next five years due mainly to escalating health concerns over particulates. Even then it noted that pressure on European countries to equalize their fiscal treatment of gasoline and diesel would only build, hitting diesel demand.

How this feeds through to refiners’ margins is even more difficult to predict, with regional imbalances in fuel demand spreading across the globe. Both China and India are expected to see growth rates for diesel demand fall in the coming years, at a time when global refinery capacity has been rising with new refineries maximizing distillates yields.

As a result, a potential acceleration in the slowdown of diesel’s appeal as drivers switch to alternative fuels puts pressure on low sulfur diesel cracks.

Some Middle Eastern countries that have invested billions of dollars on new export refineries targeting middle distillate demand growth may be concerned but European refiners are likely not too bothered.

CitiGroup, for one, is not convinced by doom and gloom forecasts of diesel’s imminent demise. The bank predicts that the fallout will mostly prompt a change in emissions regulations rather a wholesale jump from away from the fuel at the pumps.

Indeed, policy makers in Brussels are now widely expected to bring forward muted plans for real-world emissions testing of vehicles. In the short term, the implications for diesel car makers, and indirectly car buyers, means higher costs to produce cleaner cars that comply with more rigorous Euro 6 emission tests.

Longer-term, however, some are even upbeat that the resulting fillip to diesel powertrain technology could be actually see the fuel’s prospects emerge stronger rather than weaker from the current crisis. — Robert Perkins