Diesel use to hold unless tax hike, refiners to benefit long-term – IEA

LONDON (ICIS)–The International Energy Agency (IEA) said on Friday the “ongoing story” about the diesel emissions tests affecting German car manufacturer Volkswagen (VW) is unlikely to affect consumer behaviour in the short term unless significant fiscal changes taxing that type of fuel are implemented in Europe.

The IEA said diesel used in passenger transport represents approximately 40% of the 4.7m bbls/day of European countries members of the Organisation for Economic Co-operation and Development (OECD), with the remaining 60% being used for freight transport.

“Even if there were a step change in buying patterns, the slow turnover of the European fleet means it will take time for a significant change. For instance, if the share of diesel in new car registrations dropped from the current 54% to 40% from 2016 onwards, there would be 17m less diesel cars in Europe by 2025 – for a current 250m passenger vehicle fleet,” said the IEA.

The Paris-based organisation went on to say that potential reduction would represent a decrease in diesel demand of approximately 300,000 bbls/day, “leaving Europe still net short” adding the potential reduction would correspond to a year-on-year decrease of 0.8% in diesel demand which “would mostly offset” the growth registered between 2007 and 2014 of 1.1%.

On the back of the heavy taxation fuels are subject to, the IEA said a significant change would come only from a fiscal shift, and pointed to France’s move to equal gasoline and diesel taxes in the next five years as a step towards a potential behavioural change in consumers’ preferences.

“The decision to buy a diesel car will most probably still rest on the perceived saving for diesel, so it would take a substantial shift in fiscal policies to massively discourage diesel car purchases,” said the IEA.

“Two measures could accelerate the transition: a ban on diesel cars in city centres, and the implementation of real-world conditions for tests, which could force manufacturers to add expensive equipment to be compliant. Currently, according to the sustainable transport group Transport & Environment, only one out of 10 cars complies when tested in normal driving conditions,” concluded the IEA.

Moreover, the IEA added refiners might experience short-term losses on the back of the emissions scandal as the diesel yield doubles that of gasoline, “a unique regional feature” in a “purely” European story as only in this region diesel cars represent a significant share of the fleet, around 40%.

Nevertheless, given that European refiners still produce more gasoline than the region needs, obliged therefore to export the oversupply with lower netbacks, a rebalancing between gasoline and diesel in the long term should be positive for refiners.

“In the short term, however, any decrease in diesel demand could translate into a lower diesel margin – or crack – implying a lower overall European refining margin,” the IEA concluded.

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