This project involves the development of an improved facility for economic analysis of the issues discussed below, which involve changing feedstock quality, fuel demand, and processing and related technologies. The main vehicle for the research is a set of enhanced versions of the MIT Economic Projection and Policy Analysis (EPPA) model. It is being applied to studies of the implications for fuel markets under evolving regulatory regimes.

Background: Several forces of change in energy markets appear in conflict with the need to mitigate emissions of CO2 and conventional pollutants. In fuels markets, demand for transportation worldwide has biased growth in fuels heavily toward gasoline, diesel, and jet fuel, potentially leaving excess supply of both heavier and lighter fractions in conventional refineries. At the same time, the increasing use of heavy oils, bitumens and, looking forward, possibly shale oil and coal-derived liquids is contributing to a heavier fuel slate that requires more processing to produce mid-weight fuels, and consequently more emissions of CO2 and other pollutants from refinery processes. In addition, increasing liquefied natural gas facilities in the Middle East and elsewhere are leading to increasing production of natural gas liquids and similar products. On the environmental front, mitigating CO2 from automobiles is widely seen as one of the most difficult technical challenges, exacerbated by potentially increasing emissions from refinery processes that produce the fuels. Concern about conventional pollutants including ozone, carbon monoxide, sulfur, and fine particulates are also putting strong pressures on fuels markets requiring specially formulated fuels as well as advances in automobile and engine design. The scale of demand growth globally appears likely to overwhelm incremental improvements toward cleaner and more efficient vehicles and further improvements in fuels.

Resolution of this conflict will be a complex result of energy and CO2 policies, resource availability and price, the development of supply technologies, and the evolution of use devices, particularly in personal transport. The implications are very great for fuels markets — particularly for investments in the refinery sector broadly defined, electric power generation and vehicle design. Moreover, the fuels and electricity sectors, and the associated industrial firms, are likely to become more interdependent than has historically been the case. This will occur because large-scale chemical processing (i.e., coal gasification) is likely to take an important role in the electric sector, and electric power may take a growing role in personal transport through the development of plug-in hybrid vehicles. Moreover, these changes portend significant shifts in international trade and modification of issues of energy security. Analysis of these developments, and their implications for various technologies under development, requires an analytical facility that can represent, in an international context, these fossil resources, steps in the chain of supply and conversion, and use demand — and that can study the development of these markets under alternative assumptions about energy and climate policies that may be implemented by different nations.