An article in the Monday, November 17th edition of the Wall Street Journal outlines some of the reasons diesel fuel is likely to remain much more expensive than gasoline.
In addition to the tax difference (diesel has higher taxes on it in the US – a point the WSJ did not mention), there are world-forces pushing the cost of diesel. Key factors include:
- Buyers of new European cars are now specifying diesel engines more than 50% of the time. In France and Belgium, 70% of all new cars are diesel because consumers recognize diesel as being more efficient, better environmentally, and in Europe, there are lower taxes on diesel.
- Refinery capacity for diesel is going beyond tight. Europe buys a big portion of its diesel from elsewhere. Russia, one of the biggest suppliers of the 700,000 bbl/day of diesel imported to Europe, has old refiners and may have difficulty meeting standards for the ultra-low sulfur (cleaner) diesel. At the same time, European refineries have not invested in diesel cracking equipment – which is more expensive than gasoline production facilities. An interesting bye product of this is that Europe exports a lot of gasoline to the USA. The only new refinery capacity is coming on line in India – which will generate 580,000 bbl/day of diesel.
- China is using diesel to make electricity. The recent downturn in electricity demand in that country (4%) may have freed up a lot of diesel – as China has a huge “base” generation capacity in coal fired plants. As China’s economy and infrastructure projects pick up steam, this will put a lot of pressure on fuel-oil supplies.
This can all be summarized by a quote from Pands Cavoulacos – President of the European Petroleum Industry Association – “I don’t see how we can add sufficient capacity over the next decade to handle the increasing demand for diesel in Europe.” ...and since it is a world market, expect what hurts Europe and Asian supplies will impact us here in the US.
While Europe will change taxation of fuel cost to favor diesel, this will not overcome the added power and efficiency of diesel and its position as the preferred fuel for cars. And, if current model introductions in the US are any indication, more diesel cars and SUV’s will be using more fuel here in the US.
The bottom line: More demand, fixed production capabilities, and global transfers means that diesel will continue to be a premium cost fuel for the next 10-15 years.
