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Volkswagen emissions scandal dims outlook for diesel

(Reuters) – The scandal over Volkswagen’s falsification of car emissions in the United States further dims the outlook for what was once seen as the fuel of the future.

Unforeseen changes in fuel consumption in the world’s fastest growing economies such as China, combined with a global economic slowdown and the rapid evolution of gasoline engines, have left the world with an excess of diesel just as huge state-of-the-art refineries switch on.

The crisis at VW has turned the spotlight on concerns that have gathered momentum in recent years — particularly in Europe where diesel is the more common car fuel — about air pollutants it produces and its credibility as a cleaner alternative to gasoline that cloud prospects for diesel carmakers.

"The focus was on low carbon emissions," said Chris Main, a commodities analyst with Citi in London. "One thing that wasn’t seen was that you’d get other pollutants – such as nitrogen. People are starting to become more wary of diesel."

The impact of the VW scandal could, however, go far beyond the auto industry.

Refiners as well as many analysts have been caught off guard over the past year by the modest growth in diesel consumption compared with an insatiable thirst for gasoline from China to the United States, where the halving of oil prices since last June triggered a rapid growth in oil demand.

A slowdown in emerging economies that were expected to fuel the demand for diesel through rapid industrial growth, housing and infrastructure construction, further weakened diesel.

"It was a natural resort from the diesel shortage that we had seen in the past in the developing worlds. We did not realize that the growth pattern would be changing so much in China with less focus on industry and more focus on middle-class growth which is focused on gasoline vehicles," Olivier Abadie, Senior Oil Market Analyst for Refining at the International Energy Agency, told Reuters.

For example, Brazil’s diesel imports plunged 95 percent in August as its commodities sectors contracted during a slowdown in nearly all global industrial sectors.

"The picture for diesel imports is not good," said Jose de Sa, head of oil and gas in Latin America for Bain & Company. "It’s really the macroeconomic situation … unfortunately, it’s going to be like this for a while."






The U.S. Environmental Protection Agency (EPA) said on Friday VW could face penalties of up to $18 billion for cheating emissions tests on some of its diesel cars. Since then, VW has admitted cheating and the value of its shares has sunk.

Analysts say the saga could have far-reaching implications for the auto industry, resulting in more stringent regulation and deadlines, and higher investment costs to meet them.

Costs for carmakers to comply with emissions requirements could rise and drivers could be turned off diesel cars, accelerating an expected fall in the share of diesel cars in Europe’s market, they say.

Some predict more consolidation in the industry as companies try to share the prohibitive cost of developing greener and hybrid cars.

The tide of opinion had already started to turn in Europe before the VW crisis broke.

Europe’s car fleet shifted from gasoline to diesel engines over the last two decades as governments favored diesel’s lower emissions of harmful carbon dioxide gases and its high efficiency compared to gasoline. By 2014, diesel cars made up more than half of passenger fleet sales in Europe.

But research suggesting a link between pollution from diesel cars and respiratory problems has raised questions over how clean they are and concerns have grown in particular over diesel’s higher sulfur emissions.

The mayor of Paris has announced plans to ban diesel engines in the French capital by 2020 as part of a plan to fight pollution, and other European countries are beginning a rethink of incentives such as tax breaks offered for diesel cars.

Diesel-powered cars are more expensive to produce than those powered by petrol, or gasoline, and, with profit margins now fragile, the incentives and savings make a big difference to the producers’ cash flow.

Meanwhile, gasoline engines have over the years become smaller, more powerful and with lower emissions.

"Now, you strap an electric engine onto a gasoline car, and you’ve got both power and efficiency. Gasoline and electric engines are more complementary," Main said.

In sign of what might lie ahead in Europe, the European Parliament’s Environment Committee voted on Wednesday to speed up rules to tighten compliance with pollution limits on cars.

Some in the industry say tougher emissions rules could add up to 600 euros ($670)to the costs of a vehicle. Any decline in sales of diesel cars could also have a big impact on producers of catalytic converter emissions control devices as they are heavily dependent on production for diesel cars.

What happens in Europe is vital as Europe accounts for about three-quarters of sales of diesel cars worldwide.

The percentage of sales in the United States has remained in the single digits and Japan, a big auto market, began phasing out diesel cars in the 1990s.


If diesel car production stalls, the global refining industry will also feel the impact, having invested billions over the past decade to build huge plants heavily geared towards diesel production in Asia and the Middle East while others upgraded in Europe and the United States.

McKinsey & Company management consultancy firm has said the global refining industry is set to rise from around 93 million barrels per day in 2012 to around 103 million bpd in 2020.

Saudi Aramco’s behemoth Yasref and Jubail refineries are configured to produce at least 60 percent distillates, while Kuwait Petroleum’s clean fuels expansion, due online in 2018, is intended to target Europe. [ID: nL5N11O2L7] [ID: nL5N0YD3KF]

"It has really been driven in the wrong direction from the point of view of a refiner and the point of view of the environment," Lars Thorstholm, asset optimization manager with Norway’s Statoil, told a recent European refining conference.

Global supplies of middle distillates, which include diesel, jet fuel and gasoil, are expected to exceed demand by up to 776,000 bpd next year, according to consultancy Energy Aspects, hitting the rates of return on new diesel-oriented projects. (LONDON, Sept 23/2015)

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