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Old 08-08-2005, 03:10 PM
Join Date: Jan 2001
Location: Send me back to Atlanta
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Diesel Tax Break

Diesel Won't Solve Our Gasoline Woes

By Michael D. Tusiani

Monday, August 8, 2005; Page A15

Automakers are eager to sell you a diesel-powered vehicle. One of their responses to the rising price of gasoline has been to tell American motorists they can keep their large, powerful vehicles and at the same time save on fuel by buying a car or truck that burns diesel instead of gasoline. The new energy bill establishes a tax credit as large as $3,400 for diesels, matching the break allowed for hybrids.

Diesel-fueled vehicles do afford somewhat better mileage and may not require as much maintenance as gasoline-burners. But now and for years to come, the U.S. refining industry simply cannot produce enough diesel fuel to accommodate a significant increase in the number of vehicles that burn it.

At this year's auto show in New York, a DaimlerChrysler executive responsible for research and technology cited the success of diesel-engine automobiles in Europe while suggesting that these vehicles could gain a 5 to 10 percent share of the U.S. market. He made those comments at the introduction of a Mercedes-Benz station wagon scheduled to land in America in 2006. He did not mention, however, that because of the popularity of diesel-powered autos, diesel oil prices in Europe are soaring as demand pushes past the amount refiners can make.

European governments, working with automakers, have persuaded their citizens to replace gasoline-powered cars with diesel. They set tax rates to render diesel fuel cheaper than gasoline. But oil companies had no reason to invest in additional equipment for diesel production. Demand for diesel therefore bumps against the limit of supply. The marketplace will remedy such a situation, but it will be slow (because building new refining equipment takes time) and painful (because high-cost fuel hurts the financially weak the most).

Refineries can be equipped to make either a high yield of diesel or a high yield of gasoline, but not both. European refiners built their equipment before governments started manipulating the fuel market. To date, they have declined to scrap money-making gasoline production units worth many billions of dollars and replace them with even more expensive diesel hardware. But the market flirts with inducing such reinvestment. On a pretax basis, diesel has become much more expensive than gasoline in Europe. In five years European refineries may complete the construction of equipment to significantly increase diesel oil output. But in the meantime, Europe will have to import ever larger quantities of diesel -- that is, if it can find supply. Europe has raised its diesel quality standards to such a high level that very few refineries in other parts of the world can manufacture an acceptable product. Interestingly, the United States can. During a few months last winter, U.S. refiners quietly shipped diesel to Europe. Due to our own demand, that could not continue.

These exports undoubtedly raised U.S. prices while they lasted. In this country, we burn diesel mostly for commercial transportation. As our economy expands, we will need more fuel for trucks and locomotives to transport goods. In 2004 trucks and other diesel-burning vehicles required about 150,000 barrels per day more than in 2003 -- a one-year increase of almost 5 percent. If America continues to prosper, this commercial use of diesel will keep growing. Like their European counterparts, U.S. refiners have not seen any reason to invest in greater diesel production. In fact, they have a strong disincentive to build diesel-making equipment: Unless refiners can increase crude oil processing capacity, which seems unlikely, making more diesel will reduce gasoline production. Furthermore, they have gasoline production hardware that has only recently started to make solid profits for them as the price of gasoline rises.

For diesel-powered autos and light trucks to achieve a market share of 5 to 10 percent, American motorists must be compelled to buy 800,000 to 1.7 million of them per year. We do not have the spare diesel production capacity to cope with the additional demand that would produce, and we will not have it for quite some time.

Give U.S. refiners about 10 years and they might significantly increase diesel production capacity. It would take about that long to plan new projects and run the regulatory and litigation gantlet. Until then, a motorist buying one will have to compete for expensive diesel fuel in an increasingly tight market. In the meantime, diesels do not increase American motorists' practical choices. If the energy bill had given us new sources of diesel fuel, it might have done some good. As it is, that $3,400 tax credit could just tempt Americans to make a mistake.

The writer is chairman and chief executive of Poten & Partners Inc., which provides brokerage and consulting services to the oil, gas and maritime industries. He is a senior fellow at Columbia University's Center for Energy, Marine Transportation and Public Policy.

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