Post 2020, the refining sector must grapple with the demand side regulatory changes that affect vehicle fuel efficiency, urban air quality and the broader moves towards decarbonisation.
Fuel efficiency and urban air quality
Ever more stringent passenger car fuel efficiency requirements are mandated for countries and regions that account for more than 75% of global gasoline demand.
There are also fuel efficiency standards for commercial trucking in both the United States and China, with the EU considering its own proposals. These standards decouple demand for refined products from economic activity.
However, this is mitigated by consumer preference, as they typically buy larger, more comfortable, less fuel efficient vehicles if they are affordable.
Urban air quality is an issue in many European and Asian cities, due to high levels of harmful nitrogen oxides. A key uncertainty here centres on local politics and whether enough city mayors ban diesel cars to improve local air quality. Such bans promote a switch to fuel-efficient hybrid gasoline engines or to all-electric vehicles (EVs). This would be detrimental to the global refining sector as the diesel passenger car currently accounts for one-third of European road diesel demand and European diesel imports are a key target market for export refiners located in the United States Gulf Coast, Russia and the Middle East.
Decarbonisation of the transport sector is key to achievement of the global COP 21 agreement. However, significant improvements in battery technology and electric vehicle manufacturing costs and capabilities are required for the average consumer to switch to an EV over a vehicle powered by a conventional internal combustion engine.
There is also the need for major developments in recharging infrastructure. In spite of all of these uncertainties, the political pathway is clear, as many governments are adopting policies to promote EV development and deployment. The consequences to oil demand of “transport as a service” fully deployed in urban centres using autonomous electric vehicles are clear
A silver lining?
Not all regulations are detrimental to the refining sector. The requirement by the International Maritime Organisation for the marine sector to reduce their airborne sulphur emissions whilst in international water from 1 January 2020 onwards is likely to be supportive to refiners. The marine sector has a number of options to comply with this regulation, but many ship owners are expected to comply by using lower sulphur fuels, which will increase the demand (and price) of these cleaner products, so improving refining margins. There are, however, many uncertainties associated with this legislative change, so it is worthy of a separate, future, blog.
The key question for the refining industry over the medium term is the pace of technology change in key demand sectors, as this will determine the time it takes to shift the pattern of demand from one of strong growth (and a bright outlook) to one of gloomy decline.