Petroleum Fuel Optimization Technologies

Report Highlights

• The global market for fuel optimization technologies was $35.3 billion in 2005. This figure is expected to rise to $38.6 billion in 2006 and $66.1 billion by 2011, an AAGR of over 11% between 2006 and 2011.
• The transport sector is by far the largest covered in this report. It was $27.8 billion in 2005 and will cross $31 billion by 2006. At an AAGR of 13.4% it will reach $52 billion by 2011.
• A significant share of this market is supplied by captive producers, and is therefore not immediately available to independent suppliers. BCC estimates the non-captive share of the market for fuel optimization technologies at about 63%, a percentage that is expected to remain almost stable through 2011.

INTRODUCTION

The U.S. and other governments have a strong interest in promoting technologies that reduce their economies' dependence on imported petroleum and optimize the use of oil and gas. As a result, they support the development and commercialization of fuel optimization technologies through government-funded R&D, tax incentives, and other policy initiatives. Development of petroleum fuel optimization technologies is especially relevant in the current environment of high oil prices and national security-related concerns about reliance on foreign oil.

In April 2006 NYMEX crude oil futures reached $75 per bbl, as the impact of a global shortage of spare crude production was exacerbated by supply disruptions in Nigeria and the harsh political rhetoric coming out of Iran. Overall, world oil prices have approximately doubled in the last 2 years.

Prices have weakened to around $70 per bbl in June 2006, as this report is being written. Projected growth in global oil demand growth for 2006 has been revised down from 1.47 mb/d to 1.25 mb/d, due to mild first quarter temperatures and the impact of high oil prices. At the same time, world oil supplies have been rising (e.g., by 485 kb/d in April 2006) due to production increases by OPEC countries, the former Soviet Union, Africa and North America that more than offset seasonal North Sea outages.

Although price pressures may abate somewhat in the near term, e.g., as offshore production facilities damaged by Hurricane Katrina come back on line, the medium-term oil supply-demand balance looks very tight, and prices are expected to remain near current levels. The high oil prices have not yet had a major impact on the global economy, but if they persist, they could

• Weaken demand for trade goods by countries highly dependent on imported oil, such as the U.S., the EU, and Japan.
• Intensify inflationary pressures as producers of goods and services pass on higher costs to purchasers.
• Have a mixed impact on financial markets, e.g., by depressing shares of firms producing energy-intensive outputs, while boosting bond prices.

Unlike the world oil market, the world market for natural gas is fragmented into a number of regional markets, so it is not possible to speak of a world price for natural gas. The degree of market regulation varies among individual countries, so prices may or may not respond directly to market conditions and differ among countries.

However, in the United States, where the natural gas market is deregulated and prices respond freely to changing market conditions, the price of natural gas spiked sharply in late 2005 because of damage to production facilities due to Hurricane Katrina. In 2005, the average U.S. spot price of natural gas shot up to $8.79 per thousand cubit feet (mcf), up 50% from the 2004 average of $5.85. The U.S. Department of Energy expects the average price to decline to $7.74 per mcf in 2006, before moving back up to $8.81 in 2007.

While there is thus reason for concern about the impact of continued high oil and gas prices on the U.S. and world economies, the International Energy Agency in an oil price study published in 2004 concluded that "there are likely minimum repercussions from a sustained period of high oil prices." As of mid-2006, this prediction has proven true. High oil prices remain an important macroeconomic variable, but are not the only determinant of economic performance. Sound fiscal balances, external reserves, trade accounts and strong macroeconomic management are other key variables.

In addition to the potential macroeconomic impacts of high oil and gas prices, there are the national security issues inherent in a high degree of dependence on foreign source of energy, especially petroleum. In addition to the worst-case scenario of an oil supply disruption due to political or military conflict, there are issues of the degree to which the United States and other oil-using nations are willing to allow their foreign policies to be influenced by their need for good relations with oil-producing countries. There is also a strong environmental case to be made for reducing consumption of petroleum and other fossil fuels.

The impacts of the recent surge in oil and gas prices may be manageable on a macroeconomic level, but there is plenty of evidence that individual consumers and other users of petroleum products are feeling the pinch. For example, a 2006 survey of American drivers by Consumer Reports magazine found that more than one-third of the respondents were considering replacing their current vehicle with something more fuel-efficient. The U.S. Department of Energy estimates that the average heating bill for a household that heats with natural gas was 35% higher in the 2005 to 2006 heating season than the year before.

Consumers are not the only ones feeling the pinch from high oil prices. A 2006 report prepared by for leaders of the international airline industry by the Institute for the Analysis of Global Security raises questions about the economic viability of many airlines if fuel prices remain at or near their current levels.

More than 300 major freight shippers, trucking companies, railroads, and logistics companies have joined in the SmartWay Transport Partnership. SmartWay, which was launched in 2004 with U.S. Environmental Protection Agency sponsorship, pursues initiatives designed to increase energy efficiency while significantly reducing greenhouse gases and air pollution. The nation's major freight railroads are joining with the U.S. Environmental Protection Agency (EPA) in a partnership aimed at reducing locomotive fuel consumption and emissions.

The President of the (U.S.) National Association of Manufacturers, addressing a NAM Energy Efficiency Forum in 2005, put fuel optimization in a broader context when he spoke about a "revolution in the way energy is used…retooling plants, rewriting processes, and inventing whole new technology-based industries to squeeze more output from every unit of energy invested in the manufacturing of goods…By getting more energy-efficient we can improve financial results and compete to win in the fierce global marketplace and at the same time do better for the environment."

SCOPE OF STUDY

This report:

• Identifies the opportunities for developers and manufacturers of petroleum fuel optimization technologies
• Quantifies the R&D funds flowing into the commercialization of these technologies and analyzes the resulting business opportunities for suppliers of these technologies
• Estimates the potential global demand for these technologies, detailing market data and trends with global forecasts through 2011
• Profiles the companies in the market and a patent analysis.

METHODOLOGY

The methodologies and assumptions used to develop the market projections in this report are discussed at length in the section on Global Market for Fuel Optimization Technologies, 2006 through 2011/Detailed Market Estimates and Projections. In general, BCC used the following approach:

• Identify commercial as well as promising developmental fuel optimization technologies and their target markets through a literature review and interviews with industry experts.
• Estimate baseline (2005) market penetration ratio for each technology/target market.
• Develop forecasts of growth trends in each target market.
• Analyze technical, economic and other factors that will influence the ability of different fuel optimization technologies to compete for a share of their respective market(s) and estimate future consumption of each technology on this basis.
• Analyze industry structure to determine potential for third-party suppliers of technology, hardware, and materials.

The report estimates the market for each technology in unit as well as cost terms. The cost factors used are based on the incremental cost of the respective fuel-optimizing technology. For example, the cost factor for a variable-displacement gasoline engine reflects only the estimated cost of the variable-displacement technology, not the cost of the entire engine.

The report carefully documents data sources and assumptions. This way, readers can see how the market estimates were developed and if they so desire, test the impact of changing assumptions such as price on the final numbers

ANALYST'S CREDENTIALS

Andrew McWilliams, the author of this report, is a partner in the Boston-based international technology and marketing consulting firm, 43rd Parallel, LLC. He is the author of numerous other BCC Research business opportunity analyses, including Catalysts for Environmental and Energy Applications. The Department of Energy and several foreign governments have engaged Mr. McWilliams to help them in assessing the commercial potential of various alternative energy and energy optimization technologies.