EPCA '15: Gasoline could be the real winner in VW emissions scandal

Author: Cuckoo James

2015/10/04

VW LogoBERLIN (ICIS)--Industry analysts predict the Volkswagen emissions scandal will impact Europe's diesel and gasoline landscape more than their US or Asian counterparts.

Gasoline could be the real winner if politicians pull the plug on diesel tax breaks, while the heavier fuel could turn bearish in the long term.

"In a world without diesel, average fuel use for new cars in the UK would be 11% higher," the Society of Motor Manufacturers and Traders (SMMT) said.

It will be good news for Europe’s refiners who are technically configured to produce more gasoline than the region needs, leaving it exposed to the whims of US consumers to balance the structural oversupply.

Volkswagen’s rigging of emissions tests in as many as 11m diesel vehicles to show up to 40 times less nitrogen oxide fumes could propel a move away from an intense period of growth for diesel in Europe.

Currently, demand for diesel is so high that Europe imports the transportation fuel from the US – where diesel cars are just 3% of passenger vehicle fleet versus Europe’s 2013 figure of 41%.

Diesel is also imported in cargo loads from Russia and from new refineries in the Middle East and India.

The automotive scandal has strengthened political campaigns against the energy-dense mid-distillate refined oil product.

“Every successive government since 1990 has incentivised the purchase of diesel vehicles in order to meet their obsession with reducing carbon dioxide emissions irrespective of the health impacts of other diesel exhaust emissions,” Simon Birkett, Founder and Director of Clean Air In London said.

“An investigation by Clean Air In London found that 90-95% of the most harmful particles and nitrogen dioxide from transport exhaust in London come from diesel vehicles,” Birkett said.

A shift away from diesel cars could be prompted by active lobbying from clean energy groups resulting in high-profile political initiatives such as those put forward by mayors of two of Europe's biggest cities last year.

In 2014, the mayor of Paris Anne Hidalgo announced radical plans to ban diesel cars from the capital by 2020.

The same year, London mayor Boris Johnson said he plans to raise the congestion charge for diesel cars by £10 in the capital.

Any shift in fuel demand will most likely be driven by political initiatives, said Ole Hansen, Saxo Bank’s head of commodity strategy in a note on the company's website.

Hard-hitting political moves would have to include higher taxation either of the fuel or the cars, Hansen noted.

“It could lead to a shift back towards petrol engines in Europe, where diesel engines now account for more than half of sales. A shift away from diesel would have a bigger impact on European manufacturers than on their US or Asian rivals,” Fitch Ratings said in a report published on 29 September.

Europe's love affair with diesel followed a drive to reduce carbon emissions after the Kyoto Protocol in 1997.

“Europe has witnessed a strong dieselisation movement over the past 20 years as cars were actively marketed for their lower fuel cost and higher fuel efficiency than petrol models," Natixis Economic Research said in a recently released report on the impact of the emissions scandal on diesel use.

While counterparts in the US and Japan invested in developing hybrid and electric cars, the European Commission was lobbied by German carmakers including Volkswagen to incentivise diesel.

The year after the Kyoto Protocol, European policymakers asked car markers to reduce carbon emissions by 25% over 10 years. Diesel became the choice of fuel for these car makers as it emits 15% less carbon than petrol.

Consumers also began to be taxed more on gasoline than on diesel.

Image courtesy of Fuels Europe

The trade off for such heavy reliance on diesel was public health as diesel emits four times more nitrogen oxide.

The World Health Organisation in 2012 re-classified diesel engine exhaust from “probably carcinogenic” to “carcinogenic”.

“An investigation by Clean Air In London found that 90-95% of the most harmful particles and nitrogen dioxide from transport exhaust in London come from diesel vehicles,” Birkett said.

A study by King’s College London – commissioned by Greater London Authority and Transport for London – attributed nearly 9,500 deaths per year in the capital due to long-term exposure to two key air pollutants, nitrogen oxide and fine particulates known as PM2.5s.

Increasing awareness of the toll on health has already begun to lead Europe's drivers away from diesel cars, but it remains to be seen if the VW scandal will accelerate the pace.

"The diesel penetration of new diesel cars has dropped to 53.1% in 2014, from highs of 55.7% in 2011. The share of gasoline cars sold in the Western Europe is once again rising as there are increasing concerns around diesel car emissions being far more hazardous to the environment compared to new and efficient gasoline cars," Natixis Economic Research said in its Oil Review 2015.

"A potential reduction in diesel consumption following the current VW scandal as some consumers switch to gasoline cars could put pressure on low sulphur diesel cracks," the firm said.

The annual EPCA meeting runs from 3-7 October.

Focus article by Cuckoo James

VW logo image above: Action Press/REX Shutterstock