Transport energy markets
Transport energy markets encompass the various systems and fuels utilized to power transportation, which have evolved significantly since the late 19th century. Initially dominated by horse-drawn carriages, steamboats, and railways, the market transitioned to automobiles in the early 20th century, facilitated by the assembly line production method. Today, petroleum-based fuels like gasoline and diesel remain the primary sources of energy for most transport modes, accounting for over 95% of global consumption. However, increasing geopolitical, economic, and environmental concerns have sparked interest in alternative fuels, including biofuels, natural gas, hydrogen, and electricity.
Despite their potential, alternative fuels face challenges such as cost competitiveness and infrastructure development, although some regions, like Brazil, have made significant strides in biofuel use. The demand for innovative technologies is influenced by various factors, including economic growth, consumer behavior, and government policies aimed at reducing oil dependence and environmental impact. Governments can influence transport energy markets through taxation, fuel economy standards, and regulatory measures, promoting the transition towards cleaner energy sources. As the market continues to evolve, the interplay of traditional and alternative fuels remains crucial in shaping the future of transport energy.
Transport energy markets
Summary: The transport market expanded and changed radically over the 20th century and is still undergoing transformation. Transport services have facilitated global economic growth but have also given rise to geopolitical and environmental concerns related to consumption.
In the late 19th century, modes of transport in much of North America and Europe were largely characterized by the horse and buggy, steamboats, and railways, powered respectively by horsefeed and coal. The automobile industry began to take shape in Europe by the beginning of the 20th century, giving rise to the modern transport era. The modern era has been defined by widespread personal vehicle ownership in North America and Europe and growing market penetration in emerging economies, made possible largely by the assembly line, as developed by the Ford Motor Company in 1908. This gave way to mass production of vehicles and declining prices for personal transport modes. While rail transport decreased significantly in the United States after the rise of the automobile, freight transport, via truck, ship, and airplane, expanded as greater numbers of economic sectors formed regional and global markets. Petroleum-based fuels such as gasoline and diesel have dominated the modern transport fuel market. Today, however, alternative fuels are diversifying the transport sector and may become the means of addressing economic, environmental, and geopolitical concerns over traditional transport fuels.
Important characteristics of the modern transport market include increased speed of travel, reliability of transport modes and routes, variety of destinations, and flexibility of itineraries. Demand for transport continues to increase as consumers around the world are able to devote income to travel and various transport modes become more affordable through increases in efficiency and technological advances. This increase in demand for various modes of travel, particularly personal travel, has vastly increased the global consumption of transport fuels, thereby increasing the predominance of fuel producers in the global economy in terms of revenue earned.
Gasoline and Diesel
Two liquid petroleum-based fuels, gasoline and diesel, constitute more than 95 percent of the transport fuel consumed globally. These fuels are produced by refineries from crude oil, which sell these fuels at a “wholesale price” to distributors and ultimately to fueling stations. At the fueling station, consumers pay the wholesale price plus a markup attributable to state and federal taxes, distribution and marketing costs, and costs of the fueling station’s operations.
The wholesale prices of gasoline and diesel are dependent on several key factors: global demand for oil products, global supply for oil products, and refinery capacity. Increases in seasonal and longer-term demand, even if matched by crude oil supply, can raise prices of gasoline and diesel if refinery capacity does not increase to match demand.
The heavy dependence of the world’s transport sector on gasoline and diesel, which have increased substantially in cost and for which many countries are dependent on imports, has generated interest in developing alternative transport fuels. These alternatives have not yet achieved significant market penetration, but their promotion has resulted in significant government involvement in transport markets.
Alternative Fuels
Biofuels can substitute partially for gasoline and diesel in many transport applications with very little modification to the conventional internal combustion engine and fuel tank, making biofuels a technologically simple option for displacing fossil fuel use. However, current biofuel technology is generally not economically competitive with technology designed for fossil fuels, resulting in low levels of supply (about 3 percent of global transport fuel consumption in 2017), in spite of heavy government funding and political support in many parts of the world. An important exception is Brazil. Using domestic sugarcane to produce biofuel, Brazil requires that all gasoline be blended with at least 22 percent ethanol and requires all vehicles to be flex-fuel capable. Flex-fuel vehicles, which are capable of running on both gasoline and ethanol, are not yet widely popular elsewhere, because of factors such as the generally lower cost and higher efficiency of gasoline and diesel vehicles. Some researchers have indicated that biofuels could constitute up to 27 percent of transport fuels used globally by 2050.
Natural gas as a transport fuel is generally less expensive than gasoline or diesel, yet the incremental costs of compressed natural gas storage on the vehicle, the spark-ignition internal combustion engine (ICE), and the small number of natural gas fueling stations have prevented large-scale market expansion of this fuel option. Natural gas is closer to being economically and logistically viable for heavy-duty vehicles such as city buses, refuse trucks, and forklifts, which benefit more from the fuel cost savings than do light-duty vehicles and can utilize centrally located fueling stations.
Hydrogen has been used in the ICEs of cars, trains, and ships, as well as for other applications, since before the 1930s. To date, most methods of hydrogen production are prohibitively costly compared to those used to produce fossil fuels, as is the vehicle technology.
Electricity has also been used for transport since the early 1900s. Once primarily used to power passenger rail, it has become an increasing popular alternative to fossil fuels in the consumer car market. In 2022, electric vehicle sales surpassed 10 million for the first time in history, with electric vehicles accounting for about 14 percent of all new car sales. The cost of electricity as a transport fuel is highly attractive compared to that of fossil fuel, particularly because electric vehicles are approximately two to three times as efficient as conventional vehicles. However, all-electric vehicles are generally much higher in price than conventional vehicles, largely because of the high cost and weight of batteries, which are required for onboard electricity storage.
Government support to bring both hydrogen and electric vehicles to market has been observed in countries around the world, particularly the United States, Spain, China, the United Kingdom, and Germany. Researchers estimate that these technologies could comprise between 11 and 64 percent of US light-duty fleets by 2030, with these numbers dependent on policy landscapes, oil prices, technology advancements, and many other factors.
In general, demand for alternative-fuel vehicles and more efficient vehicle technologies increases as gasoline prices increase or become more volatile. Spikes in oil prices in the 1970s and in more recent decades have spurred consumer demand for these alternatives.
Influencing
Multiple factors influence the level of demand for the amount and type of transport services in any given economy, particularly the country’s level of economic development and economic growth. Increased availability of quality transport services can, in turn, facilitate increased economic activity by decreasing costs of production, opening opportunities for new and bigger markets, and providing jobs. Economic growth and transport are thereby mutually reinforcing.
As demand for transport continues to increase in many countries, resulting in congestion, infrastructure degradation, and poor air quality, governments are seeking to address these negative impacts while reducing transport costs, particularly in order to stimulate economic activity. Other incentives for influencing travel modes and demand include reducing dependence on oil and reducing the environmental impacts associated with transport.
Decision makers can influence transport supply and demand through a multitude of policy strategies, including tax policy, mandates, fuel economy standards, research and development, public education, and regulation of environmental externalities.
Tax Policy
Increasing or decreasing the tax rate on specific transport fuels and vehicles can influence consumers’ choices and thereby affect the amount of transport demanded in the short term and potentially modes of transport over the long term. For example, many parts of Europe have nearly 10 times the tax burden on gasoline and diesel as that of the United States, which has resulted in Europe’s comparatively lower demand for personal vehicles, particularly smaller, more efficient vehicles.
Over time, this has also resulted in a more extensive supply of public transportation, better bicycle infrastructure, and pedestrian-friendly urban centers and suburbs. Many governments use tax credits or tax breaks to stimulate demand for certain fuels (such as biofuels and natural gas) or vehicle technologies (such as electric vehicles) that are commercially available but that might otherwise be uneconomical. Similarly, governments use subsidies to decrease the cost to consumers of certain modes of transport, such as bus or rail or road construction.
Fuel Economy Standards
Fuel economy standards are government regulations for both light- and heavy-duty vehicles that require vehicle manufacturers to increase average fuel efficiency over time. In many instances, the standards are specified by vehicle weight class or footprint, and vehicle manufacturers can purchase or sell credits in order to comply. Thereby, the standard acts as a tax to vehicles with efficiencies lower than the standard and as a subsidy to vehicles with higher efficiencies, encouraging production of higher-efficiency vehicles.
Research and Development
Technological challenges are significant barriers to market penetration of alternative fuels and vehicles, particularly for hydrogen and electricity. Governments can devote funds and create targets for a particular technology goal, such as reducing the cost of a hydrogen fuel cell by 50 percent over a 10-year period. Such government intervention can also foster private-sector confidence in similar or related sectors, thereby leveraging additional funds.
Regulation
Fossil fuel combustion results in the emission of air pollutants such as particulate matter, sulfur oxides, nitrogen oxides, heavy metals, and carbon dioxide (CO2), a greenhouse gas (GHG). Governments can regulate the pollution from transport by setting fuel quality standards (such as limiting sulfur content or requiring pollution control technology) or by using economic approaches such as cap-and-trade or taxes.
In 2020, transport was responsible for approximately one-fifth of CO2 emissions globally so it became a targeted sector for regulation. Greenhouse gas regulation can take many forms, but ultimately such regulation is intended to increase the costs associated with high-carbon activities relative to low-carbon alternatives. Therefore, any greenhouse gas regulation, including that affecting the transport sector, increases the competitiveness of lower-carbon fuels (such as natural gas, electricity, and hydrogen produced from renewable energy) and decreases the competitiveness of high-carbon fuels (such as gasoline and diesel and electricity produced from coal).
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