Does diesel have a future in America?

It's understandable that the revelation about Volkswagen (VLKAY) cheating on emissions tests with its diesel engines has torpedoed sales of diesel sedans in the U.S., but many buyers of pickups and big SUVs continue to choose diesel power plants.

Only about 6,500 diesel sedans sold in the U.S. this February vs. about 22,000 a year ago before the VW scandal broke. That's according to Allen Schaeffer, executive director of the Diesel Technology Forum, a trade group, in a speech this week before auto writers at the International Motor Press Association in New York City.

Despite these numbers, he predicted a recovery for diesel sedans within a few years. "This scandal will have more impact for Volkswagen as a company than for diesel as a technology," Schaeffer said. The sharp reduction in sales resulted in part from Volkswagen suspending U.S. sales for all diesel versions of its Volkswagen and Audi sedans.

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However, some independent analysts believe that while car buyers will continue to shy away from diesel sedans, diesel pickups and SUVs will continue to sell strongly. "It's possible diesel may remain popular in Europe," said senior analyst Karl Brauer of Kelley Blue Book. "But in the U.S. it may fade away completely outside of truck, SUV and industrial applications."

Auto analyst Alan Baum of Baum and Associates, who also spoke to auto writers, made some additional points about the current and future state of the diesel engine market in the U.S.

  • Businesses that buy work trucks love diesel. Some 70 percent of Ford's (F) big F-250 Super Duty are sold with diesel -- especially good for hauling and towing. Even Chrysler's (FCAU) smaller RAM 1500 pickup, often bought for personal use, sells 15 percent of its production as diesels. General Motors (GM) is now offering diesel options on its compact pickups Chevrolet Colorado and GMC Canyon. By 2018, expect the iconic Jeep Wrangler SUV to offer a diesel.
  • To regain any momentum with diesel beyond pickups and SUVs, automakers need to reduce the premium price for diesel versions of sedans -- now ranging from $2,000 to $4,000. In addition, when gasoline prices are high, the premium for diesel fuel (about $1 a gallon earlier this year) will remain a hindrance. With oil prices down so low now, diesel has retreated to near-parity with gas.
  • To meet tightening government fuel economy standards, automakers will need all possible options, including diesel. With the market for hybrid and electric vehicles only so large, diesel can help get carmakers reach their economy targets.

Baum noted that Cummins (CMI) is now developing a 2.8-liter diesel that gets 40 MPG on the highway but with emissions that meet so-called Tier 3 standards -- equal to the emissions from a Toyota (TM) Prius hybrid. "For people who drive a lot of highway miles," said Baum, "diesel can still make economic sense."