June 02, 2017

Back in the early 1990’s, the CEO’s of big European Car Manufacturers told the CEO of an Oil Major, about all their investment in diesel engine technology and telling the oil man how diesel engines would soon match their petrol counter-parts in terms of performance, speed and power.

Unfortunately, some oil refineries had recently completed upgrade programmes designed to meet the projected increases in petrol demand that the oil company had been working on.  They didn’t bank on that this improvement in engine technology or that it would result in a huge increase in diesel car sales and a massive rise in the amount of diesel required to power them.

As things turned out, diesel consumption did indeed rocket and refineries lost millions of $, as they desperately tried to increase diesel production, whilst off-loading boatloads of gasoline at bargain prices. By 2010, nearly 60% of road fuel consumed in Europe was diesel. Global diesel consumption increased from 15m barrels per day (bpd) in 1990 to 25m bpd by 2010 and of course prices soared. For the first time, diesel prices leap-frogged petrol and by the mid 2000’s, diesel was regularly trading 5-6 pence per litre higher than petrol.

In Europe, older refineries were unable to cope and along with prices, imports of diesel also surged. Even today - after 25 years of refinery upgrades, 60% of diesel is still imported into Europe and of course, the extended supply-chain associated with these imports has kept both prices and volatility at high levels.

In recent times, we have seen more environmentally friendly vehicles on the market, like the new Euro VI diesel engines (manufactured from 2015 onwards) which produces 20 times less Nitrous Oxide than equivalent engines in the 1990’s and have a quarter of the CO2 emissions of equivalent engines in 2000. We’ve also seen “hot” new products such as hybrids, dual fuels, LNG and electric being launched, but where does that leave the oil companies if diesel engines are starting to be faded out?

Ironically, all of this suits the traditional oil companies rather well. If diesel demand starts tailing off, then this will remove massive operational problems that have plagued them since the 1990’s. Try as they might, some of the biggest oil companies were never able to meet diesel demand through their own refining facilities and this opened up market share to new, state supported “Super Refineries” in the Middle-East, India and China. The raison d’etre of these new market entrants was to produce enough diesel to meet exploding global demand and to do this, they spent billions of $ building diesel refineries on an unprecedented scale. But if the diesel days are over, then the owners of these diesel producing leviathans will find themselves in exactly the same position as the European Refiners over the last 20 years. It’s just the product that no-one wants will be diesel rather than petrol.

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