Report#: SR/OIAF/98-02

Executive Summary

This study was undertaken at the request of the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Office of Transportation Technologies (OTT). OTT requested that EIA examine the impacts on supply and prices of assumed increased penetration of diesel fuel in the U.S. transportation sector. Specifically, OTT requested that EIA examine cases in which diesel technology penetrated new U.S. light duty vehicle (LDV) sales at rates of 10, 20, and 30 percent by 2010. In addition, it was requested that EIA analyze a 30-percent penetration case in which the diesel fuel required would have a sulfur content of 50 parts per million (ppm) compared to the current specification of 500 ppm, in order to examine some of the impacts of requiring a much lower-sulfur diesel fuel. In each of these cases, OTT requested that EIA assume that the diesel technology to be used is 50 percent more efficient than that of conventional gasoline-powered internal combustion engines, based on the best currently available technology. The primary reason for the request was to assist in the measurement of costs and benefits of OTT's programs, as required by the Government and Performance Results Act of 1993, the National Performance Review's Performance Agreements with the President, and Executive Order 12862 on setting Customer Service Standards.

Results

The primary results for each of the four cases are compared with the reference case in Table ES1. The reference case for this study is that appearing in the Annual Energy Outlook 1998.

Diesel consumption in the transportation sector is as high as 4.54 million barrels per day (mmbd) in 2020 with 30 percent sales of diesel-fueled LDVs, compared to 2.99 mmbd in the reference case. Conversely, motor gasoline consumption is lower in the 30-percent case (8.02 mmbd compared to 10.24 mmbd in the reference case), as consumers switch from gasoline to diesel fuel as a result of the increased penetration of diesel-fueled LDVs. Alternative-fuel vehicles (AFV) also are slightly higher than in the reference case, reaching about 0.47 million barrels per day oil equivalent (mmbdoe) in each of the three diesel penetration cases by 2020, about 0.06 mmbdoe above the reference case level. This is primarily due to further inroads of AFVs (especially those fueled by ethanol, methanol, and electricity) in the light-duty truck fleet, as the share of gasoline-powered trucks is reduced by assumption. In the low-sulfur diesel case, motor gasoline use is slightly higher, and diesel fuel consumption slightly lower, than in the 30-percent case in 2020. Because the price of diesel fuel with the more stringent sulfur specification is higher, there is less incentive for consumers to switch away from gasoline in this case. AFVs are also slightly lower than in the 30-percent case, since there is a smaller non-gasoline market in which to compete.

Because total demand is lower for the diesel penetration cases, net imports of crude oil and petroleum products are also lower. The United States would continue to be dependent upon imports for more than half of its petroleum supply under these cases, but the dependence would be less than in the reference case. In the 30-percent case by 2020, total net imports are 0.70 mmbd lower than in the reference case, a savings of more than 4 percent. Because a larger share of imports is expected to come from finished products by 2020, most of the reduction in imports (0.59 mmbd) is due to lower product imports, primarily motor gasoline. Crude imports in the 30-percent case are only 0.11 mmbd below the reference case. In the low-sulfur diesel case, because prices for diesel fuel are higher, there is correspondingly less incentive to shift out of motor gasoline. As a result, net imports of product are higher (0.08 mmbd) than in the 30-percent penetration case, only partially offset by slightly lower (0.04 mmbd) net crude imports. In this case, domestic refineries would be expected to supply most of the low-sulfur diesel fuel, requiring continuing imports of crude oil.

Prices for motor gasoline, diesel fuel, and crude oil are all lower in 2020 in each of the diesel penetration cases as compared with the reference case, with the exception of diesel prices in the low-sulfur diesel case. For motor gasoline, both the cost of the feedstock (crude oil) as well as the incremental processing costs associated with motor gasoline production, would be lower as a result of the lower percentage of motor gasoline produced by refineries. Diesel fuel prices also respond to the lower crude oil prices, but the difference from the reference case is not as great because the cost of processing rises as more diesel fuel must be produced. Motor gasoline prices in the 30-percent case are about 10 cents per gallon (in real 1996 terms) below the reference case by 2020, while diesel fuel prices are only about 1.5 cents per gallon lower. Crude oil prices, assumed to be set in world oil markets, are about 87 cents per barrel, or about 2 cents per gallon, lower in the 30-percent case compared to the base case. Thus, while the refiner margin for motor gasoline would be as much as 8 cents per gallon lower in the 30-percent case than in the reference case, diesel fuel margins are expected to remain relatively flat compared to the reference case, reflecting the lower cost of converting refineries to produce more distillate fuel compared to the cost of upgrading equipment to produce a higher yield of motor gasoline.

Both economic output and carbon emissions are expected to show small changes as a result of higher diesel penetration. Gross domestic product (GDP) shows a slightly higher level in each of the diesel penetration cases in 2020 compared with the reference case. This reflects the benefit to the economy of lower energy prices, particularly those for gasoline. It should be noted, however, that this study does not take into account all of the effects that might arise from a higher level of diesel demand, such as the impacts on suppliers of equipment to refineries, the feedback effects due to trade, or the tax revenue consequences of lower petroleum prices. It is not clear whether the ultimate impact would be negative or positive for the economy; however, the first-order impacts of lower petroleum prices would be beneficial. Carbon emissions are lower in the diesel penetration cases by as much as 20 million metric tons in 2020 compared with the reference case, as the higher assumed efficiency of diesel-fueled LDVs reduces overall petroleum demand.

Profitability of the refining industry could be affected by increased diesel penetration. Because the margins for motor gasoline are lower than those in the reference case, and the margins for diesel fuel are about the same, revenues are lower in these cases than they are in the reference case. However, because the processing of distillate products is less expensive than that of motor gasoline, there is less need to make costly investments than there would be in the more gasoline-intensive reference case. In all cases, refinery profits are higher by 2020 than in recent history, primarily because it is assumed that refiners would need approximately a 15-percent return on their investment to invest in expensive new upgrades for refineries, compared to a recent return of less than 10 percent. While there is a likelihood that refinery profits would suffer somewhat with a large reduction in motor gasoline production, the impact would probably not be severe in the 10- and 20-percent cases. Under the 30-percent case, it is possible that revenues would be reduced enough to cause some pressure to raise prices or reduce other costs in order to maintain the same level of viability as in the reference case. Under those circumstances, the prices shown in this analysis for the high-penetration case could be somewhat understated for diesel fuel.