The Future of Diesel in the US: Analysis

Concerns over fuel economy and carbon-dioxide emissions have left many wondering why more cars with diesel engines aren't available in America. After all, diesel-engined cars are 20 to 40 percent more efficient, and they're cleaner than ever. Diesels are wildly popular in Europe, accounting for roughly 50 percent of the car market there. So why don't automakers simply bring the European cars here? It comes down to intrinsic differences between U.S. and European governmental policies, consumer demand and fuel prices. Here is a primer on the future of diesel in the United States.

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An Audi Q7 TDI clean diesel at the Point Honors Event in New York City. (Photograph by Jason Kempin/WireImage/Getty Images)
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In the U.S., gasoline and diesel are dirt cheap compared to their cost in Europe. In late August, the average U.S. price for a gallon of gas was $2.60, and a gallon of diesel cost $2.65. Both diesel and gasoline come from the same barrel of oil--since diesel is a heavier, less refined product, it has historically cost less than gasoline. However, the relative price difference in the U.S. is determined by market forces, refinery constraints and taxes. Typically, demand for gasoline is higher, and U.S. fuel taxes favor gasoline, making gas less expensive here. Federally, we tax diesel at a higher rate than we do gas--24.4 cents per gallon of diesel versus 18.4 for gas. Some states tax gas a higher rate, but on average, the diesel tax is higher (With state taxes added in, the average diesel tax is 51.4 cents per gallon, gas is 47.0). According to the Energy Information Administration, since 2004, diesel has generally cost more than gasoline in the U.S., year-round.

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While determining the drivers of fuel and oil prices is an undertaking worthy of a business-school dissertation, we can simply say that European drivers pay more than double our prices--seven bucks for a gallon of gas and six for diesel (here's an illustrative graph). Why the big difference? Fuel taxes in Europe are not only historically much higher, the tax on diesel is less than gas. And it's been that way for over a decade. Over time, the high European taxes caused a marked difference in customer demand.

Americans haven't been clamoring for diesels because our fuel is so comparatively inexpensive--and diesel engines cost so much more to manufacture. Diesel engines cost more because they require added equipment such as a turbocharger to make power levels close to a gas engine. They also need heavier-duty internal components to stand up to higher compression ratios. The time it takes to "pay back" the $1500 to $3000 cost premium of a diesel engine with fill-ups at the pump, is very long at current U.S. fuel prices. Consider a hypothetical $20,000 gas car that gets 30 mpg (3.33 gallons per 100 miles). Check the diesel engine option for $1500 and you'd see a 30 percent efficiency improvement (39 mpg or 2.56 g/100m). Over a 15,000-mile year, the diesel will save about 115 gallons. With our fuel prices, it would take more than four years to make back that $1500 investment. At six bucks a gallon for Euro diesel versus seven for gas, the payback is less than two years.

Gas-electric hybrid systems add cost penalties to new cars similar to diesel engines', yet these types of vehicles are gaining in popularity. "In 2007, 56 percent of consumers said they would consider a hybrid," says Mike Omotoso, senior manager of powertrain forecasting for JD Power and Associates. "In 2008, that number went up to 62 percent," he says. The specific cost penalty of both hybrids and diesels depends on which car manufacturer you ask. Jim Lentz, the head of Toyota's U.S. operations told us that a hybrid system like the one in the Prius is less expensive for them to develop than a 50-state diesel. But Wolfgang Hatz, Audi's powertrain chief, says that a hybrid system is double the cost of a modern diesel. So who's right? The answer is contingent upon where a company's competency lies. European manufacturers traditionally know how to manufacturer and develop diesels at a lower cost because they've been serving their home markets for years. The Japanese, on the other hand, have concentrated on hybrids.

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Unlike hybrids, which have a green reputation in this country, modern diesels must still overcome the reputation here of those soot-belching, unreliable oil-burners of the past. Additionally, since diesel doesn't evaporate like gasoline, the pumps are dirtier--no matter how clean those diesel engines are. And then there's another challenge for diesels--stricter U.S. emission regulations. The 50-state light-duty vehicle limit for emissions of nitrogen oxides is 0.07 grams per mile. In Western Europe, the limit is 0.29. Reducing NOx to nitrogen and oxygen is much harder with a diesel engine because the exhaust is typically cooler and contains less oxygen compared to a gas engine. To meet U.S. regulations, diesel engines are required to use complicated--and expensive--high-pressure fuel injection and after-treatment systems that in some cases inject an aqueous urea solution to handle the NOx. The added expense of course means an even longer payback period for the consumer.

So where does that leave the U.S companies? Ford and GM--and now Chrysler--have access to perfectly competent diesel cars produced by their European arms. When asked about the possibility of bringing diesel cars to the U.S., GM's product chief, Tom Stephens, said that GM has a wide portfolio of diesel engines and continually investigates bringing them stateside. But right now he thinks that diesels are better suited to heavy-duty trucks. A diesel engine under load offers a greater efficiency bump than what could typically be expected in a light-duty diesel car. "It's also a question of priorities," he says. "One of the things we look at is that we have a 96 percent dependence on conventional petroleum. The electrification of the automobile tends to take you away from that dependence; we think that's a worthwhile strategy." Of course, he's talking about the Chevy Volt.

Even though Honda and Toyota recently shelved plans to bring a diesel car to the U.S., there's still a steady, slow increase of diesels--mostly from the German manufacturers. Mercedes, VW and Audi all offer at least two diesel models. Ford recently announced an all-new truck diesel.

BMW is also increasingly bringing diesels stateside. In addition to the BMW X5 diesel, the company now offers a diesel in the 3 Series sports sedan, the BMW 335d. "We believe diesels have a future in the U.S," Jim O'Donnell, president of BMW North America recently told the media, "By 2014, between 10 and 20 percent of our mix will be diesels." BMW isn't relying solely on diesels, however. O'Donnell said, "We're putting our money in all the technologies." Soon BMW will offer X6 and 7 Series hybrids. Every automaker has some type of hybrid either currently for sale or on the drawing board as well.

Except for the VW Jetta TDI and, to a lesser extent, the new Audi A3 TDI, the diesels we can get in the U.S. are expensive premium cars and SUVs. So even if more diesels are coming, when will we see the small, 50-mpg-and-better economy diesels that populate Europe? Don't hold your breath. Except for VW, the manufacturers we spoke with said that at current fuel prices, American small-car buyers aren't willing to pay extra for diesels. What we'll have in the future instead is a mix of powertrains. Gas engines will, for the foreseeable future, dominate our cars. According to JD Power's Omotoso, hybrids are projected to become 9.5 percent of the passenger-car market by 2015 (up from 3 percent this year), yet diesels will grow to become just 3.5 percent of the car market here by 2015, up from less than 1 percent this year. However if the U.S. fuel prices take off more abruptly than analysts predict, we could see a deeper penetration of both diesel and hybrid vehicles.

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