Whether or not Volkswagen's diesel deception proves to be "worse than Enron" as a Yale business school dean commented, it is more than just the business scandal du jour. Its repercussions could affect many other carmakers, especially those headquartered in Europe. And if it triggered a large-scale shift by consumers away from diesel passenger cars, that would have major consequences for the global oil refining industry, oil and gas producers, and sales of electric and other low-emission cars.
The scale of the problem ensures that it will not blow over quickly. Nearly 500,000 VW diesel cars in the US were equipped with software to circumvent federal and state emissions testing, and the company has indicated that 11 million vehicles are affected, worldwide. Even if Volkswagen's retrofit plan passes muster with regulators in the US, Europe and Asia, the resulting recall could take years to complete.
It's also still unclear whether VW's diesel models are unique in polluting significantly more under real-world conditions than in laboratory testing. Regulators in Europe appear to suspect the problem is more widespread. Other companies use essentially the same emission-control technologies--from the same vendors--to control the NOx and particulates from smaller cars equipped with diesel engines. The French government announced plans to subject 100 diesel cars chosen at random from consumers and rental fleets to more realistic testing.
So aside from the investigations and lawsuits that VW faces in multiple countries, the claims of every carmaker selling "clean diesels" and the reputation of a technology that European governments have long viewed as a crucial tool for reducing CO2 emissions and oil imports are likely to be under a cloud for at least the next few years. How consumers react to all this will determine the future, not only of diesel cars, but of the future global mix of transportation fuels and vehicle types.
Start with oil refining. As long ago as the early 1990s, when I traded petroleum products in London, the European shift to diesel was creating a regional surplus of motor gasoline and a growing deficit of diesel fuel, or "gasoil" as it is often called there. For a while trade was the solution: The US was importing increasing volumes of gasoline to meet growing demand and had diesel to spare. The fuel imbalances of the US and EU were well-matched, in the short-to-medium term.
As this shift continued, the wholesale prices of diesel and gasoline in the global market adjusted, affecting refinery margins on both sides of the Atlantic. Marginal facilities in Europe shut down, while others invested in the hardware to increase their yield of diesel and reduce gasoline production. US refiners also invested in diesel-making equipment.
The aftermath of the financial crisis and recession increased the pressure on Europe's refiners, as did the rapid growth of "light tight oil" production in the US. Europe's biggest export market for gasoline dried up as fuels demand slowed and US refineries reinvented themselves as major exporters of gasoline.
Diesel cars still make up less than 1% of US new car sales but have accounted for around 50% of European sales for some time. If governments and consumers were now to lose their confidence in diesels and shifted back toward gasoline, it would wrong-foot Europe's refineries and leave them with some big, underperforming investments in diesel hardware. A persistent slowdown in diesel demand could alter corporate plans and strategies even faster than refinery profits. In the meantime, US refineries would stand to benefit from a bigger outlet for their steadily rising gasoline output.
If consumers did retreat from diesel passenger cars--trucks are unlikely to be affected--the shift back to gasoline could be less than gallon-for-gallon, because competing technology hasn't stood still since 2007, when the US Congress enacted stricter fuel economy standards and the Environmental Protection Agency's tougher tailpipe NOx standard went into effect.
New gasoline cars are closing the efficiency gap with diesels, thanks to direct injection, hybridization and other strategies. At the same time, the number of new electric vehicle (EV) models is growing rapidly, their cost is coming down, and infrastructure for EV charging is sprouting all over.
EVs still accounted for less than 1% of the US car market last year, but the combined sales of the Chevrolet Volt, Nissan Leaf, Tesla Model S and over a dozen other plug-in hybrid and battery-electric models nearly matched those of the standard Prius hybrid "liftback". EVs are still not cheap, even after government incentives that mainly benefit high-income taxpayers. Most still come with a dose of "range anxiety", but they are greatly improved and getting better with each new model.
Even in Europe, where EVs haven't sold very well outside Norway, a big shift away from diesel would surely help EVs gain market share. If European consumers bought 9 gasoline cars and one EV for every 10 new diesels they avoided, European refiners would soon see not just a shift, but a net drop in fuel sales. Nor would refineries be the only part of the petroleum value chain to be affected. Global oil demand would grow more slowly as well, bringing "peak demand" that much closer.
For now, this scenario is hypothetical. VW may solve its technical problem, bringing the 11 million affected vehicles into compliance with pollution standards and performing more-or-less as advertised. Meanwhile, regulators could find that most other carmakers have been in compliance all along, particularly those selling cars that use the urea-based Selective Catalytic Reduction NOx technology; the rest might only need a few tweaks.
In that case, the scandal might eventually die down without putting small diesel cars into the grave, as a mock obituary in the Financial Times recently suggested. Carmakers would have a hard time increasing diesel's penetration of markets like the US, but loyal diesel customers around the world might still conclude that these cars provide them the best combination of value, convenience and drivability. Having driven a number of diesels as rentals and at auto shows, I wouldn't dismiss that possibility too easily. The jury is likely to be out for a while.