Honda Delivers Diesel?

In good news for consumers, the average price of gasoline per gallon in the U.S. last week was down nearly $0.29 from the same period in 2005. Given this development, the timing of Honda Motors' (NYSE: HMC  ) recent disclosure that it has cracked a critical problem in fuel-efficient diesel engine technology might not seem particularly great. But with the global economy continuing to blossom, cheap gasoline is probably a thing of the past. If Honda can deliver an affordable clean-burning diesel, its future looks bright, indeed.

Honda revealed over the weekend that it plans to introduce a diesel engine that meets the California emissions standards, the world's toughest, within three years. These same regulations have precluded German companies DaimlerChrysler (NYSE: DCX  ) and Volkswagen, both of which have been pushing diesels in the U.S., from hawking their current diesel models in the Golden State's gigantic automotive market. The Japanese firm's system also doesn't require users to add ammonia to reduce nitrous oxide emissions, unlike the engines made by the German firms, making it a lot more user-friendly.

Obviously, if Honda can introduce such a diesel at a reasonable price, Daimler and Volkswagen have a lot to worry about. But then, so do makers of hybrid vehicles, including the hybrid leader, Toyota (NYSE: TM  ) . Granted, Honda promises that its diesels will be only 30% more fuel-efficient than conventional models, while some hybrids boast a 50% increase. And yes, diesel prices in the U.S. are actually somewhat higher than gasoline prices.

But depending on the model, hybrids may command a steeper premium than diesels. And just like hybrids, diesels are eligible for federal tax credits. As for the price of diesel fuel, most modern diesels can run on pure biodiesel, although Honda has not said whether its engine can utilize the biologically derived fuel. Additional biodiesel production continues to come online, so diesel prices should stabilize in the near future.

Honda admits that it still has some technical issues to work out before its diesel engine hits the market. What's more, it has its own hybrid line, and there's the chance that its diesel product could cannibalize some sales. But if the Japanese firm can make good on its plans, it will up the pressure on its competitors.

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Fool contributor Brian Gorman does not own shares in any of the companies mentioned.


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