AM Online

Heady days of diesel demand may be short-lived

The residual values of diesel-engined vehicles have recently enjoyed a revival, with premiums over petrol vehicles increasing. This has been due to both demand and supply factors, but it should not be regarded as a permanent and irreversible shift.

Demand for diesels has been boosted by increased public concern over high fuel prices and further reinforced by media coverage of the issue. Oil prices have risen from the artificially low levels of 1998 and this has also contributed to higher road fuel prices.

The supply side has also contributed significantly to increased residuals. The number of diesels in the new car market has fallen sharply in recent years, from more than 400,000 units in 1994 to 300,000 in 1999. Therefore, the number of diesels on the used market has declined and will fall further during the next couple of years.

In the medium term, the trend towards more fuel-efficient vehicles is expected to persist but some of the factors that have supported recent growth in diesel residuals will not continue.

For example, road fuel prices have already fallen in recent months. However the differential between petrol and diesel fuel prices has increased, which has reduced the running cost savings of diesels.

Factors on the supply side which support diesel residuals will also deteriorate over the medium term. The market share taken by diesel is forecast to increase from 2001 due to the factors outlined above and also the impact of the new business in kind (BIK) taxation system.

The changes in BIK taxation will result in an increased diesel uptake from high mileage drivers seeking a more tax-efficient company car (although note that this is not the case for perk drivers).

The risk is that a situation will develop similar to that of the mid-1990s – a rapid uptake of diesels in the corporate sector causing oversupply in the used market, with residuals falling as a result. Another risk to be considered is that of further tax penalties in the UK for diesels, with recent tax treatment less favourable than that of petrol-engined vehicles.

Diesels will be increasingly accepted in particular market sectors. As has already occurred in the 4x4 sector, they are likely to become the norm for seven-seat MPVs. Diesels will also be accepted in the executive sector, where large petrol engines are becoming a problem as demand declines in the used market.

However, for the typical used car buyer, petrol will remain the firm favourite. Typical annual mileages of private buyers are much lower than those of company car drivers and this reduces the benefits of buying diesel. This is particularly the case in the popular supermini sector, where petrol engines already offer fuel consumption that is acceptable to the used car buyer.

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