Motorists in Europe have this year witnessed at the pumps the end of the era when diesel was seen as a cheaper fuel than petrol.

But the debate on this issue frequently overlooks a simple economic reality: that prices are to a large degree determined by the balance between supply and demand and it is the consumers who, through their choices and collective behaviour, hold the keys to the future.

On the one hand, we have a massive increase in demand.

The liberalisation of global markets has led to a huge increase in the number of lorries on the roads of Europe, whether transporting goods between European Union countries or the Europe-wide distribution of merchandise brought into European ports in millions of containers on ships arriving from Asia and the rest of the world.

Diesel engines, which run on diesel oil, have also attracted owners of light vehicles, drawn by the economy of consumption and the lower prices at the pump, at least for the past few years.

In addition, the global growth of airline traffic has pushed up the price of kerosene, extracted in the refineries from the same constituent parts of crude oil and domestic heating oil.

All the major European countries now ‘run’ mostly on diesel. In those countries with the least proportion of diesel vehicles, Britain and Germany, diesel still accounts for 53% and 54% of capacity respectively. At the other end of the scale, in France, Spain, Belgium and Luxembourg diesel accounts for 76%, 78%, 80% and above.

Governments have helped accelerate the growth in the trend with favourable policies of fuel tax on diesel oil with the logical consequence that European motorists have been switching to diesel. The upshot is that, since 1990, the year when the petrol and diesel curves on the graph crossed, the demand for diesel oil has doubled while demand for petrol has dropped by half. In France, in 2007, nearly 80% of all new vehicles on the road were fitted with diesel engines.
 

On the other hand, we have a shortage of supply.

European oil refineries are having trouble keeping up with demand. Traditionally, they produce 1/3 petrol, 1/3 kerosene and diesel and 1/3 heavy fuels. Overall, Europe today has an excess of production from its refineries, which prevents the construction of new plants, which some feel is still necessary.

Some refineries have been able to increase their production of diesel by ‘cracking’ heavy fuels or by desulphurisation of domestic fuel oil, but in order to do so they have had to invest heavily. These new processes are heavy on energy and hydrogen consumption leading to an increase in refining costs. But in spite of that, the imbalance persists and Europe continues to import diesel oil and export quantities of petrol which have become superfluous to requirements, chiefly to the United States. The cost of diesel quoted on the markets has gone up and the price of diesel oil at the pump is almost on a par with ‘super’ petrol, despite the tax advantages.

Demand is on the increase for specific products, but supply is struggling to keep up. Speaking to French National Assembly commissions, Total's Chief Executive Officer Christophe de Margerie, explained: “for the last five years we have been trying in vain to explain that following an all-diesel policy without increasing the supply of diesel oil, is like driving straight into a brick wall.”
 

What do the years to come hold in store?

In a classic market economy, the balance would be restored automatically: the rise in price should, in theory, lead to a slowing-down of demand. But in fact, the factors involved are much more complicated.

Road transport, which is responsible for two-thirds of diesel consumption, shows no sign of cutting back in the near future.

As for diesel car owners, who pay more for their vehicles, are sure to question the sense of their initial outlay. However, the tax advantages still looking tempting and running on diesel also insures an economy of fuel consumption in the order of at least 15% over a classic petrol-operated car, which is an attractive saving, particularly for anyone who drives frequently and runs a high-powered car.

Among the smaller models, petrol engines have improved greatly, along with premium petrol itself. The result is, according to one recent study, that it is only after 150,000 kilometres, that is to say very late in the day, that the owner of a diesel car will begin to reap the benefit of his extra initial expenditure in cheaper fuel costs. It is perhaps the speeding up of the process of making small petrol engines more efficient that might, in the end, resolve the diesel-petrol imbalance.

There remains also the effect, decisive but difficult to predict, of technological innovation. Hybrid cars (running on petrol and electricity), ‘all-electric’ vehicles, gas-powered cars and hydrogen motors all have their part to play in the race to find a balance between supply and demand both for diesel oil and for petrol ( Read Benoît Luc interview).