The Fuse

Trucking Fuel Economy Standards to Slice Diesel Demand, Undercut Alternative Fuels

by Matt Piotrowski | June 30, 2016

The contradiction of proposed increases in fuel efficiency standards for large trucks is that although they will reduce oil consumption, they will also discourage the adoption of alternative vehicles that run on natural gas and make them less competitive in the trucking sector. The latest long-term projections from the Energy Information Administration (EIA) show a reduction in diesel demand from implementation of more stringent fuel economy standards for medium- and heavy-duty vehicles, but also much lower penetration of vehicles that run on natural gas or propane. But as with all long-term outlooks from the U.S. government, they need to be taken with a healthy dose of skepticism, given that changes in price, economic growth, trucking industry dynamics, and public policy could change the outlook in the coming decades. The debate over fuel efficiency standards and whether they should contain provisions to drive adoption of alternative fuels will only continue to grow.

Long-term projections from the EIA show a reduction in diesel demand from implementation of more stringent fuel economy standards for medium- and heavy-duty vehicles, but also much lower penetration of vehicles that run on natural gas or propane.

According to the EIA, the implementation of Phase 2 fuel efficiency standards for the trucking industry would slice diesel consumption by 18 percent through 2040 versus expected levels without implementation (see graphic below). Such a reduction in demand would save some 2.5 billion barrels cumulatively over that timeframe, even when assuming an increase in vehicle miles traveled and freight similar to the agency’s reference case.

dieselhdregs

The proposed rules for Phase 2 were issued by the Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) last year, which build on the first phase that was implemented for medium- and heavy-duty vehicles starting for model year 2014. The second phase would begin for vehicles that are MY2021, and increase in stringency through MY2027. The proposed rules put forth last year are part of a directive by President Obama to move forward on national fuel economy regulations. The agencies are required to introduce a final rule in 2016. Currently, the medium- and heavy-duty trucks that would be impacted by the rule achieve a fleetwide average fuel economy of about six miles per gallon. Although these trucks represent only about five percent of vehicles on the road in the U.S., they currently account for more than 20 percent of refined product consumption in the country’s transportation sector. Heavy-duty vehicles are responsible for some 80 percent of that demand.

“The reduction in diesel consumption in the Phase 2 Standards case has significant implications for the mix, as well as the amount, of petroleum products consumed in the U.S.”

The EIA, in its reference case, puts diesel demand at 2.84 mbd by 2040, but lowers that to 2.32 mbd with implementation of Phase 2. Not only will diesel demand be lower than originally expected; it, in fact, contracts through 2033 as a result of improved efficiency, before rising again slightly. “The reduction in diesel consumption in the Phase 2 Standards case has significant implications for the mix, as well as the amount, of petroleum products consumed in the United States,” wrote David Stone and Melissa Lynes of the EIA in the Annual Energy Outlook.

Likewise, overall energy demand from large trucks—which includes gasoline and natural gas in addition to diesel—is expected to be sharply lower with Phase 2. The EIA expects trucking demand to average 3.35 million barrels of oil equivalent per day at the end of the forecast period in the reference scenario, but 730,000 boe/d of oil equivalent lower with the stricter fuel economy standards.

Fuel efficiency undermines NGVs?

Increased cost savings from improved fuel efficiency will undercut incentives to shift to alternative vehicles that run on CNG and LNG, the EIA says.

On the flip side, increased cost savings from improved fuel efficiency will undercut incentives to shift to alternative vehicles that run on CNG and LNG, the EIA says. “As the average fuel economy of conventional vehicles increases in the Phase 2 Standards case, there is less incentive to pay high capital costs for natural gas and propane vehicles despite their lower fuel costs, and there is a shift away from natural gas and propane toward conventional diesel and gasoline fuels,” wrote Stone and Lynes.

LNG&CNG

Under the EIA’s reference scenario, vehicles that run on natural gas or propane represent less than 5 percent of total trucking demand in 2040. That is already extremely low, but their share would drop even more dramatically with improved fuel efficiency for diesel- and gasoline-power trucks. Under the Phase 2 regimen, vehicles that run on natural gas or propane consume only 31,000 boe/d equivalent, or about 1 percent of total trucking demand. That would be up only slightly from current levels of six-tenths of 1 percent, or 17,000 boe/d.

The limitation of the EIA outlook, as is the case with all of the agency’s assumptions, is that it is based on current technologies, policies, and regulations. Furthermore, the data that the agency is using to make the projections is incomplete. “There are still limits on data about the technologies used to meet the Phase 1 compliance standards,” wrote Stone and Lynes. “Consequently, it is difficult to estimate the energy outcomes that could be expected as medium- and heavy-duty trucks begin to comply with the new Phase 2 standards. Without better data, it is difficult to analyze the composition of the truck market at the level of diversity included in the proposed standards, or the efficiency and fuel economy metrics associated with each classification in the standards.”

Uncertainties in oil prices and economic growth cloud the EIA’s projections for both diesel and natural gas consumption in the trucking sector, but acceleration of new technological adoption or policy changes will likely play major roles too.

Besides limited data, there are a number of caveats to the outlook. Obviously, uncertainties in oil prices and economic growth cloud the EIA’s projections for both diesel and natural gas consumption in the trucking sector, but acceleration of new technological adoption or policy changes will likely play major roles too. Since they aren’t taken into consideration in either the reference case or the outlook that looks at the implementation of Phase 2, there could end up being a large disconnect from the EIA’s assumptions with what actually occurs, particularly if there is a large push for electrification and natural gas fueling infrastructure, or other government actions emerge that incentivize alternative vehicles.

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