Demand for Diesel

Diesel a Cleaner Alternative?

In the United States today, concerns about the environment, political conditions overseas, as well as dependence on foreign oil are very prevalent, prompting the need to seek for alternatives to gasoline and gasoline powered engines in running its vehicles and equipment. Lately concepts like the hybrid car have become a popular and widely available alternative to traditional “gas only” automobiles. Although hybrid technology is the current trend, diesel power, by no means a new technology, has garnered revived life and attention as another possible “cleaner” alternative to traditional gasoline engines and another option for those who wish to go in a different, more environmentally friendly direction in its fuel consumption.

Clean Diesel Audi Crossover SUV

Source

Demand for Diesel in the U.S. and Elsewhere

Demand for diesel engines in the United States have been dismal since the early 1980’s due to their reputations for being loud, dirty, smelly, and expensive to fuel compared to gasoline powered internal combustion engines (Job, 2004). ” With publicized concerns cropping up over the years about diesel emissions possibly being deleterious to health, it's not surprising that the demand for diesels in this country fell” (Job, 2004). The diesel engine industry, particularly in the United States, seemed to be dead. In reality it never really went away, especially in European countries. In Western Europe, 35 to 40% of new vehicles sold are diesel (Job, 2004). The main drivers of demand in this region of the world are lower fuel prices, greater fuel efficiency, torque strength, as well as greater durability In comparison to gasoline powered engines (Job, 2004). Some say that if you want to save money, conserve energy, and do what’s best for the environment, diesel is the way to go (Why Diesel is the Way to Go, 2006.).

2012 VW Toureg TDI Clean Diesel

Efficient Diesel?

Specifically focusing on a common modern concern, diesel engines are considered among the most fuel efficient on the market today (Why Diesel is the Way to Go, 2006.). In the United States, where diesel fuel is commonly still more expensive than gasoline, consumers may be intrigued by the fact that diesel engines burn 30% less fuel than their internal combustion counterparts, thus increasing gas mileage (Why Diesel is the Way to Go, 2006.). This fact should be appealing to the cost conscious and environmental consumers alike. For those who feel hybrid technology doesn’t provide enough “punch”, diesel engines also provide more power at lower engine speeds, allowing drivers to maneuver easier in traffic situations that require bursts of speed and quick responsiveness (Why Diesel is the Way to Go, 2006.). Diesel engines also produce 25% less carbon dioxide emissions, making them a much more environmentally friendly alternative to the gasoline powered engine (Why Diesel is the Way to Go, 2006.). In all, the demand for diesel engines and fuel will be driven by its ability to appeal to consumers need for power, fuel efficiency, environmental friendliness, and economic concerns as an alternative to hybrid technology and some of its current short comings in these areas.

Why Doesn't Diesel Catch on In the United States?

As we learn about our old new friend, the diesel engine, we may wonder if its clear benefits have lead to an increase demand in recent years. As mentioned earlier, 35% to 40% of all new cars purchased in Western Europe are diesel (Job, 2004). In France, a whopping 60% of new car purchases are of the diesel engine variety (Job, 2004). In Austria, it is an even larger 70% or more (Job, 2004)! Diesel, however, has not faired quite as well in the United States. “In the United States, development of the market has lagged because of government concerns over what the fuel does to air quality; diesel vehicles make up just 3.2 percent of the market”(Freeman, 2006. ). Some may see this as surprising given how popular diesel automobiles are in other countries. For purposes of full disclosure, gas prices in the United States, although expensive, do not compare to the $7.00 plus a gallon that those native to Amsterdam pay (Ford, 2005. ). With such relatively low gas prices, it is no wonder that Americans have been reluctant to make a change to diesel despite its many advantages.

Diesel, Price Elasticity of Demand, and the U.S. Market

Price elasticity of demand is defined as “the percentage change in quantity demanded from a 1 percent change in price” (Allen, Neil, Weigelt & Mansfield, 2005, pg. 92). In short, price elasticity of demand measures the change how much of a particular item is purchased based on how much the price changes. The closer the price elasticity of demand is to zero, the more “inelastic” or non-volatile the demand of the item is based on its price. In the case of diesel engines, does price play a big factor in its demand? Using diesel fuel’s short run price elasticity of demand of -.07 as an indication, price does not play a big factor in the demand for diesel and the engines that consume it (Meier & Munasingghe). Another indication could be seen in the non-road diesel engine price elasticity of demand. According to the Office of Advocacy; US Small Business Administration, a 5.2% cost increase of diesel equipment would decrease demand by only .014%, making the price elasticity of demand nearly completely inelastic (U.S. Small Business Administration, 2005). If these trends hold true for diesel automobiles as well, it would mean that those that own diesel cars must virtually buy diesel fuel regardless of price. It would also suggest that those who wish to buy diesel fuel cars are not highly affected in their decision making based on the price of the car in the short term.

Diesel Reconsidered

In general, this example of diesel fuel, equipment, and automobiles, shows that non unlike the gasoline market, consumer demand is generally not affected, at least in the United States, by the price because of the intense need for the resources. It also shows that there is great potential in the coming years for diesel to be re-considered and embraced in the United States as an alternative to traditional internal combustion engines and the more recently popular Hybrid automobiles. How soon this will occur will depend on how long it will take car manufacturers that are interested in selling diesel cars to convince the American people that the new diesel is light years beyond the dirty relics from years past.

Sources

Allen, W.B., Doherty, N., Weigelt, Keith, & DrugMansfield, Edmund. (1995). Managerial Economics: Theory Applicaations, and Cases (6th ed.). New York: W&W Norton Company, Inc.

Ford, Peter. “Gas Prices Too High? Try Europe.” 26 Aug. 2005. The Christian Science Monitor Online. Online. Internet. 7 Oct 2007. http://www.csmonitor.com/2005/0826/p01s03-woeu.html.

Freeman, Sholnn. “Has Diesel Grown on the United States?” 19 Oct. 2006. WashingtonPost.com. Online. Internet, 7 Oct 2007. http://www.washingtonpost.com/wp-dyn/content/article/2006/10/18/AR2006101801834.html

Job, Ann. “Diesels in Demand?”. 2004. MSN Autos. Online. Internet. 7 Oct. 2007.
http://autos.msn.com/advice/article.aspx?contentid=4022218


Meier, Peter, and Mohan Munasingghe. Energy in Developing Countries: Policy Analysis and Case Studies. Monroe County Public Library Online. Preview. Online. Internet. 7 Oct. 2007.


U.S. Small Business Administration: Office of Advocacy. “Re: Control of Emissions of Air Pollution From Nonroad Diesel Engines and Fuel;
Proposed Rule (68 Fed. Reg. 28328).” 20 Aug. 2003. U.S. Small Business Administration. Online. Internet. 7 Oct. 2007.. http://www.sba.gov/advo/laws/comments/epa03_0820.pdf

“Why Diesel is the Way to Go” 24 Apr. 2006. Carjunky.com., Online, Internet. 7 Oct. 2007. http://news.carjunky.com/why_diesel_is_the_way_to_go_c125.shtml

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