Market Snapshot


With U.S. regulators looking to revise fuel-economy standards amid concerns for energy security and greenhouse gas (GHG) emissions, the combined annual diesel and hybrid gasoline vehicle sales in the United States will be $2.7 million by 2012, according to a recent press release by Ricardo, a strategic consulting firm for the automotive industry.

At present, hybrid gasoline technology appears to be the preferred route in the United States, partially due to its attraction as a visible badge of green awareness amongst higher income purchasers, says Ricardo. Many OEMs plan to launch hybrid products in the next few years, but the company notes that this technology faces substantial manufacturing-cost penalties, which are unlikely to be eroded, even in mass production. Ricardo further comments that diesel has a clear cost advantage over hybrid, even when fitted with the type of complex exhaust after-treatment technologies necessary to meet future, more stringent emissions regulations.

Diesel already dominates in Europe, Ricardo reports, and the conditions may now be right for a big acceleration in diesel sales in the North American market. Ricardo forecasts that combined diesel and hybrid gasoline will represent 15% of the U.S. light-vehicle market by 2012, with sales of diesels outstripping gasoline hybrids by 1.5 million units versus 1.2 million. 

According to American Automobile Association (AAA) data, there are now 4.8 million diesel cars on U.S. roads, and J.D. Power and Associates predicts diesel vehicles will reach 10% of U.S. sales by 2015, triple that of 2005 levels. The gap between diesel and gasoline prices has not been as wide in a decade.

The national average reached $3.21 for a gallon of gas as of May 25-up nearly 33% from the same time last year, according to U.S. Energy Information Administration (EIA). Ultra-low sulfur diesel (ULSD) stands at $2.80 a gallon, according to the EIA. ULSD, which contains 15 sulfur parts per million or less, has only been available nationwide since October so there is no direct comparative. However, average prices for all highway diesels are down almost 9% versus last year.

The ongoing pattern for diesel prices is exactly the converse of gasoline. Typically attuned to the winter supply and demand of the home-heating oil market, diesel prices usually taper as summer approaches and increase during the fall. Meanwhile, gasoline continues to surge as vacation season begins, and oil companies say their refinery infrastructure is still hobbled from the hurricane destruction of nearly two years ago.

The Washington, D.C.-based Diesel Technology Forum (DTF) took the opportunity to issue a press release noting the 40%-plus pricing disparity. Coupled with the 20%-40% fuel-economy efficiencies inherent with diesel powertrains over gasoline, the state of diesel prices is all the more reason for consumers to switch to oil burners, the advocacy group contends.

"We're basically back to where we were a decade ago," said Allen Schaeffer, executive director of the diesel advocacy group told Diesel Forecast. But as surging worldwide demand for all petroleum remains a constant in the equation of fuel prices, Schaeffer does not expect the diesel-favored trend to last. "I would not be surprised to see this dynamic go back the other way...that's just been the typical patterns for the last few years," he said.

ULSD prices have grown in 2007, but at a modest 13% since the start of the year. According to the EIA, the average per-gallon price for ULSD was $2.51 in February, rising to $2.68 in March and $2.85 in April.

"The influx of diesels in North America is not going to be tomorrow," said Paul Lacy, powertrain analyst with Global Insight. "So there's some pressure on how much of that the refiners are going to have to absorb. The problem is from (the oil companies' perspective) is you can't go backwards in the refinery process. You can go from diesel to gasoline but you can't go from gasoline to diesel."

Some oil giants are responding, including Marathon Oil Corp., which announced in April it would construct a $3.2-billion addition to its largest refinery in Garyville, Louisiana. That facility currently processes twice as much gas as diesel. However, when the edition is complete in late 2009, Marathon said it expects to produce equal amounts of diesel and gas. 

Fred Rozell, a retail gasoline/diesel analyst for the Oil Price Information Service-a petroleum industry pricing news and information firm that supplies data to AAA, said the seesaw effect of gas versus diesel prices will even out as production does. "I think eventually the majority of the U.S. (auto) fleet is going to be running on diesel," said Rozell, who is even more bullish on diesel's market penetration than JD Power and Associates. "The transition where half the vehicles are running on diesel and half on gasoline is going to be difficult."

And when will that transition hit? "It's going to be a long period, over the next 10 years," Rozell said.  One more federal requirement may play a role in spiking diesel prices later this year. June 1 is the deadline for refineries to begin shipping low-sulfur diesel for off-road vehicles, such as construction and farm vehicles and machinery. That grade of diesel will reduce sulfur levels from 2,500-3,500 parts per million sulfur to 500 parts per million. The Environmental Protection Agency (EPA) requires off-road fuel to be available for sale by October.

"You've got that clamp coming down on the off-road group as well, and I think that's going to be a driver in bringing diesel prices back up," DTF's Schaeffer said. All of the pricing pressures could weigh on diesel-intending consumers, who usually pay $1,000 premium for diesel powertrain light-duty vehicles over their gasoline counterparts. "How fast you re-accrue that investment is directly dependent on fuel prices," Schaeffer said. "The circumstance you worry about is a $.50 gap (favoring gasoline)."

Sources: Ricardo (May 24, 2007). "Diesels Set to Out-Strip Hybrids in Accelerating U.S. Growth." Ricardo press release courtesy of PR Newswire; Scott Anderson. (May 2007). Diesel, "Gas Price Gap Widens." Retrieved May 31, 2007 from