US lawmakers started too late to do anything useful about the threat of rising prices for natural gas next winter. They shouldn't make the same mistake with vehicle fuel.
With gas, lawmakers should have acted when supply challenges became obvious at least 4 years ago—if not before. Because they didn't, nearly stagnant deliverability has become the market's main constraint. Recent exits from the market of large gas buyers have enabled inventories to begin a late-season build, but the price—literally and figuratively—is high. Now lawmakers are scrambling for some politically heroic intervention that won't do more harm than good. They won't find any.
Gas supply warnings
A tight market surprises no one. Lawmakers had all the warning they should have needed. The industry has buzzed with concern about rising gas consumption and rapid depletion for several years and about political limits on supply for much longer. At a Ziff Energy Group conference in Houston in mid-1999, for example, Forrest Hoglund, then chairman of the former Enron Oil & Gas Co., noted that dry gas production in the US hadn't risen in 5 years despite increased drilling and that the decline rate for US gas production had increased to 23%/year in 1998 from 14%/year in 1990. "The difference between 23% and 14% means you need to have 50% more production coming on in new wells each year just to stay flat on production," Hoglund said (OGJ, May 31, 1999, p. 24). By the end of 1999, the National Petroleum Council was projecting increases in US gas consumption to 29 tcf in 2010 and 31 tcf by 2015 and highlighting politically constricted access to federal land—a longstanding industry concern—as an unwarranted lid on supply.
The next year, a price surge demonstrated the limits of North American gas deliverability. Even since then, however, lawmakers have voted each year to ban leasing of the Outer Continental Shelf outside the Central and Western Gulf of Mexico and a laughably small area of the Eastern Gulf. And they've done nothing but talk about improving access to federal land onshore. Of course, if Congress had unshackled the federally owned gas resource in 1999, the major part of any supply response would have come after this winter. But the promise of future supply would provide comfort at a time when, despite the current urgency, all Congress can do about gas prices without making things worse is hope for warm winter weather.
With the crunch shaping up for vehicle fuel, especially diesel, lawmakers have time to act constructively. The Environmental Protection Agency has mandated a 97% cut in the sulfur content of most highway diesel by June 2006. A reduction that large, more than necessary to accommodate exhaust systems debuting in 1997-model vehicles, would challenge refiners under any circumstances. But it coincides with costly regulations affecting gasoline, including sulfur reduction, a restrictive rule on mobile-source air toxics (MSAT), and bans on use of methyl tertiary butyl ether. The consequent investment load will force some refineries to close and keep others from making ultralow-sulfur diesel, eventually to be required for offroad transportation, too. Imports of the product, from refiners facing similar challenges, might not always be available in needed amounts.
The regulatory siege thus will raise refining costs, shrink product supply, and lower the number of refineries, if not refiners. The prices of vehicle fuels seem destined to rise.
Complicating challenges
What can Congress do? For starters, it can quit complicating vehicle-fuel challenges. The Senate last month voted 67-29 to require a doubling of the amount of ethanol blended into gasoline by 2012. This not only will raise costs of making and distributing a subsidized and inferior fuel but also will make it hard for non-Californian refiners now making the least-toxic gasoline—those using MTBE—to meet MSAT requirements.
If Congress can be persuaded to rescue fuel consumers from that mistake, it might prove sensible enough after all to rationalize the diesel-sulfur rule or at least help refiners with the timing of unprecedented investments. Then lawmakers wouldn't have to reassume in just a few years the unbecoming posture in which they find themselves now, groping in panic for solutions to problems that should have been addressed before they developed into economic hazards.
