Europe's Shift to Diesel Fuel

As we ponder how to improve our fuel economy in light of $3.00 gasoline, the first thing that comes to mind for many is the hybrid, with a powertrain combining electrical and gasoline-driven components. I'm a big fan of this technology, even though I don't own a hybrid car myself. But I think it's worth thinking about the very different choice that Europeans have made, going back more than a decade, and how that decision is changing the global supply and distribution of petroleum products. The technology in question is the diesel engine, running on either petroleum diesel, biodiesel, or increasingly a blend of the two.

The US experimented with diesels during the oil crisis of the 1970s, and by most accounts the result was a failure. Not only were the diesel cars of that era noisy, smelly and balky, but they were also unreliable. Since then, and unbeknownst to most of us on this side of the Atlantic, terrific diesel cars began arriving in Europe, equipped with smooth and responsive turbocharging and other innovations, and almost indistinguishable from gasoline cars in their driving performance. I've driven a couple, and I loved them. These vehicles get much better fuel economy than their gasoline cousins, up to 35% better in models such as the Ford Mondeo or GM's Opel Vectra.

Europe's shift toward diesel began more than a decade ago, helped along by government policies that taxed diesel fuel at a lower rate than gasoline. That provided a double benefit for consumers, on a cost/kilometer basis. Diesels were also helped indirectly by the taxes on engine capacity that took effect in the UK and elsewhere. Today, this transition is in full swing, with diesels accounting for more than half of all new car sales in the EU.

The less well-publicized aspect of this change is its impact on the refining industry and international trade. As early as the late 1980s/early 90s, when I traded gasoline, diesel and jet fuel out of Texaco's London office, the reduction in the growth of European gasoline demand was starting to hurt refining margins. That's because the choice between making gasoline or diesel fuel is built into the design of a refinery's very expensive hardware.

All refineries do essentially two things. First, they separate crude oil into its component fractions of propane, butane, gasoline, kerosene, diesel, various "gasoils", and heavy fuel oil or asphalt. Then, after separation, some of these fractions are processed further to convert them into other products or improve their quality. The workhorse for much of this in most refineries, particularly in the US, Europe and Japan, is the fluid catalytic cracking unit, or "cat cracker", an expensive piece of hardware using updated versions of a 60-year old technology to turn diesel and gasoil into gasoline. These devices make a lot of high-octane gasoline, but their flexibility to shift operations between gasoline and diesel is somewhat limited.

The competing "conversion" technology is hydrocracking. It's more expensive--both in capital and operating costs--and requires a reliable supply of hydrogen, but it provides a lot more flexibility between gasoline and diesel output. Unfortunately, all but the largest refineries had to choose between one technology or the other. In the market of the 1960s and 70s, when many of these facilities were built or expanded, and with demand for gasoline going through the roof, cat cracking was the obvious way to go.

Today, many of Europe's refineries sit there with big cat crackers in a market that's increasingly demanding more diesel, of a higher quality, than this process can easily produce. They can't all build hydrocrackers at once, though some are suggesting they will have to do this eventually. One of the things they can do is run a bit more crude oil, of types that makes more diesel out of the front-end separation process, and sell their excess gasoline into another market that needs it. Where might such a market be found? Right here on the other side of the Atlantic, where environmental and permitting restrictions have limited the ability of refiners to expand to meet US demand.

The problem for both sides of the pond is that this game can't go on this way forever. At some point, if the trend towards diesel in the EU continues, European refineries will need to reconfigure to make a lot more of it and a lot less gasoline from the same quantity of crude oil. That looks likely, because "dieselization" is one of the EU's main strategies for meeting its greenhouse gas targets under the Kyoto treaty. Diesel's greater fuel economy translates directly into lower CO2 emissons. Changing the manufacturing base is going to be expensive and largely irreversible, and it will have a ripple effect in the US, as a reliable source of gasoline imports becomes less reliable over time. That might be another justification for building more refineries here.

What would happen, though, if the US followed the same path as Europe? It hasn't happened so far, because most European diesel cars couldn't meet the US regulations on car exhaust, especially for particulate matter. But technology will likely close that gap, and consumers will then have a non-hybrid option for getting 40 miles per gallon in a mid-size car. It wouldn't even bother US refiners for a long time, because we have all those gasoline imports to back out before they'd have to change their operations very much.

This might be a pretty good thing for US carmakers, too. While they may lag Toyota on hybrid technology, their European branches sell loads of nifty diesel cars. In fact, they may be betting on this technology as a way of getting the profitable SUV segment up to a respectable fuel economy standard before it is forced out of existence.