Industry Trend Analysis - Scrappage Scheme To Further Erode Fuels Demand - JUNE 2017

BMI View: Government plans for a new diesel car scrappage scheme will pose further downside risk to distillate fuel demand in the UK. Over the long term, the UK will experience structural declines in total fuel consumption as improved efficiencies and environmental regulations continue to erode demand.

The UK Government is due to announce details of a strategy to target air pollution in the country, in which officials are thought to be considering a scheme that pays drivers between GBP1,000- 2000 to scrap older diesel vehicles and replace them with new, cleaner and more efficient cars. If implemented, the scheme poses further downside risk to the overall consumption of distillate fuel in the UK, combining with rising fuel price inflation to drag on diesel demand in the country. The roll out of this type of scheme is in line with our long-term view that increasingly burdensome regulation on vehicle emissions in Western Europe will result in structural declines to fuels consumption over our forecast period (see ' Regional Outlook: North America & Western Europe: Upstream Growth Returns, Downstream Declines Persist, March 31).

The scheme is likely to be restricted to certain drivers to minimise costs, specifically, to vehicle owners living in the areas suffering the worst air pollution associated with burning diesel fuel, or those on low incomes. However, the prominence and number of similar schemes targeting the most polluting vehicles will grow across Western Europe as the politicisation of air pollution standards continues.

Diesel Demand Bouncing Back On Cheaper Prices
UK Diesel Consumption, 000b/d
Source: JODI, BMI

Diesel is the most consumed transport fuel within the UK, representing 40% of total petroleum consumption. Over recent years, the fall in crude prices has fed through to fuel prices and acted to stem the declines in fuel demand in Western Europe over the short term. However, with oil prices forecast to rise over the coming years (see ' Bullish Brent On Demand, Cautious WTI On Supply ' , April 4), the impetus behind fuels growth will run out of steam and the UK fuels market will return to its structural decline, as improved efficiencies and environmental regulations limit any room for further growth. (see ' Rising Prices Will Temper Further Consumption Growth ' , October 13 2016)

Long Term Declines In Gasoline & Diesel
UK Refined Fuel Consumption
e/f = BMI estimate/forecast. Source: National Sources/BMI