An inside source at a fuel company tells me that American refineries that reach their end of life are now being replaced (upgraded?) from gasoline to new non-sulphur diesel production using hydrocracking. They tend not to build new ones (last construction was 1979). So a big shift in US diesel production is expected — from around 30% to over 50% of refinement over the next ten years — as their refineries age.

The move away from gasoline is good news for America. Today’s diesel engines blow away gasoline designs in power and efficiency at the consumer level. They provide same or better performance as gasoline-hybrid vehicles without any of the issues caused by batteries. Diesel-hybrid vehicles, meanwhile, can improve efficiency far more dramatically than gasoline and some models already suggest 200 mpg. The future of the auto engine is unquestionably diesel, especially in high-growth consumer markets.

I bought my first diesel in 2004; a VW Passat Wagon. It offered 40 mpg yet the towing capacity equivalent of a Ford F-150. I would have happily bought my diesel from Ford, Cadillac, Honda, Subaru, Nissan…but in 2004 my options were limited to just one car manufacturer.

Many people know what I mean when I say it has been extremely frustrating to see American and Japanese car manufactures play dumb and take a wait-see approach on this issue.

My VW has exceeded my expectations. It has delivered the most power and performance possible for the least fuel. I can drive from San Francisco to Las Vegas on one tank of gas. That not only saves me fuel-costs, but I save hours every week, days every month. It also offered the option of fuel from domestic and even local sources of waste.

When I worked at Yahoo! I ran the car on waste oil that I recycled from campus cafeteria that was run by Bon Apetit. It took some convincing but they eventually told me I had to take it away and use it. (I offered to redirect their 50 gallons a week back into their transportation fleet but was told that was too little and too risky. I suggested that they at least switch to a commercial source of biodiesel, which became the foundation for their “Green Guzzler” marketing campaign.)

As you can see in the above picture diesel engines are not just the smart future of personal vehicles, they are the backbone of markets that need efficient heavy and public transportation technology. China, India, Brazil…growth in construction, agriculture, etc. will drive demand for diesel.

Back to the point of this post, and fortunately for America, German car companies have continued to offer diesel models. Audi reported 70% of American A3 sales were diesel, as I have written before. The FT report on March 2011 data for VW is quite simply amazing.

Volkswagen boosted sales of diesel models 46.2 per cent last month compared with a year earlier, more than double the increase in its overall US sales, the German carmaker told the Financial Times.

Demand for some VW diesel models now outstrips supply. “The challenge for us is getting them from the factory,” said a VW spokesman

And FT says they are bringing back the VW Passat diesel option.

VW is sufficiently confident that the tide is moving in its favour that its new plant in Tennessee, opening later this year, will build a diesel version of the Passat mid-sized sedan.

An American-made car that runs on diesel? Awesome.

It’s like the US is finally switching to diesel. The fuel companies must see what’s coming. While the percentage of diesel cars in the US has hovered below 5% (it’s over 50% in Europe), more diesel pumps are installed at fuel stations than ever — from 30% to 50% over the past ten years.

Ok, so back to the start of this post, American refineries may plan to upgrade diesel production 20% or more but can it meet what could become a much larger surge in domestic demand? The Houston Chronicle points out the refineries are way ahead — they have been moving to diesel regardless of American auto preferences. They highlight that refineries see gasoline as a losing proposition with low margin and have been smart to move away from a focus on the American market.

“If it weren’t for strong diesel demand around the world a lot of refiners would be seeing a lot of red ink,” said Gary Heminger, executive vice president in charge of refining at Marathon Oil Corp.

Indeed, domestic refiners exported an average of 450,000 barrels per day of diesel fuel in 2008, up from 175,000 barrels per day last year. During the last decade, average diesel exports were closer to 50,000 barrels per day, said Ron Planting, statistical director for the American Petroleum Institute, an industry trade group in Washington.

What that really means is diesel prices in America are tied to global demand. Scary? Not at all, although I have to say it does get slightly annoying to see diesel prices jump right after a refinery sells all its supply to South America since they are willing to pay four times as much per gallon.

This really highlights the beauty of diesel. It opens the market so demand can drive fuel innovation and change the entire energy paradigm.

Upgrading gasoline fleets from 20 mpg to today’s 120 mpg diesel vehicles shows one way that demand will be affected. A trend of reduced fuel demand by consumer vehicles could easily continue, as shown by the 260 mpg cars planned for 2013. You can not fight or change the price at the pump, but you can significantly improve your engine’s efficiency and waste less time at a station without a loss of power.

Alternative sources also are coming online. Whether it’s redirection of waste into fuel, or development of new forms of fuel like algae farms, sources of fuel do not have to follow the gasoline model. Take Intel’s recent announcement, for example. They are recycling their C02 waste into algae, which combined offsets their footprint while creating a fuel source.

The vision of this project is a “Zero Emissions Fab.” This sort of carbon recycling could reduce the overall carbon emissions of the fab and, by creating a sustainable alternative fuel, displace the carbon emissions of burning fossil fuels.

The alternative fuel will be diesel. You do not get to this level of technology innovation and benefit from gasoline.

Americans obviously can see Diesel’s original vision — that instead of being attached to the petroleum umbilical cord, other forms of oil can free a company, or even a country, and stimulate sustainable growth. With more diesel available from more sources, generating more power and more jobs while reducing waste and harmful emissions, the only question that remains is why the US and Japanese auto manufacturers are not yet announcing diesel vehicles in America.