VW diesel debacle: The fallout for fuel

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The Volkswagen emissions scandal already stretches far and wide – and, as diesel itself gest swept up in the storm, fuel suppliers could be next to feel buffeted.

"The headlines themselves have clearly raised a lot of questions around diesel. We've also seen anti-diesel rhetoric from cities like Paris and London," George Galliers, autos analyst at Evercore ISI, told CNBC.

VW customers "in the next few days" will be told to retrofit diesel models equipped with the manipulated software, new VW chief executive Matthias Mueller said in a speech at the beleaguered car company's Wolfsburg headquarters late Monday.

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However, as can be seen by diesel's progress in the auto industry, the pace of change is likely to be relatively slow. Consumers tend to hold on to their cars, and are unlikely to immediately scrap them because they look more environmentally damaging than before.

It took close to 15 years for diesel to go up from 18 percent to the current 41 percent of the European car fleet with around 50 percent of total car sales, as analysts at UBS point out in a research note. Yet that share of the market is now set to decline, with analysts forecasting a slip to closer to 30 percent of total sales.

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This increased adoption was motivated by a perception that diesel-fueled cars are "fun to drive" and have greater fuel economy, according to Galliers.

There were already signs that the tide was turning for diesel before the admission that Volkswagen had cheated on U.S. emissions tests.

"Diesel's reputation was already deteriorating because of air pollution concerns, and regulatory support for diesel had started declining," UBS analysts argued.

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For European refiners, the scandal might actually be "a small positive over the medium term", according to UBS, as it will shift consumers to less efficient (and therefore higher volume) gasoline.

There is also the possibility that it will encourage a shift to hybrid/electric cars.

"Decline in diesel penetration has been expected, but it remains to be seen whether this accelerates the decline," Galliers said.

- By CNBC's Catherine Boyle

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