According to the US Environmental Protection Agency's latest proposal to change gasoline chemistry, the refining industry was wrong in its warnings about economic effects of a previous initiative so it must be wrong now. The assertion here is flawed, the conclusion unsound.
In its Mar. 29 proposal for new vehicle-emission and gasoline standards, called Tier 3, EPA looked back to Tier 2 and said: "While there were claims at the time [2000] that the program would cause fuel prices to increase far in excess of EPA's estimates and would result in closures and fuel-supply shortages, the Tier 2 program was a success and resulted in gasoline sulfur reductions up to 90% and enabled the use of new emission control technologies in cars and trucks with no serious negative impacts on the refining industry."
Like Tier 2, as well as requirements for ultralow-sulfur diesel imposed in 2001 and 2004, Tier 3 reasonably addresses air emissions by treating vehicles and fuels as systems. EPA said its diesel regulations cut sulfur emissions, "again with no serious impacts."
Forecasting difficult
Forecasts about the costs of fuel regulation never can be right. Forecasters can't know in advance every method regulated companies will find to comply with new rules.
For that reason alone, they're bound to be wrong. Worse, regulatory costs can't be identified in retrospect as shares of retail prices but only estimated by what companies spend on compliance. Even then, the record is muddled by the many regulations on which refiners have had to invest money over the past couple of decades.
History is clear enough, however, to make nonchalance about cost seem misdirected—if not deliberately misdirecting.
Since 2000, the number of operating refineries in the US, by Oil & Gas Journal's definition, has fallen to 125 from 152. Some of that decline reflects the closure of small, poorly located facilities. And some closures resulted from the deterioration of processing economics, as gasoline prices doubled over the period while crude prices tripled.
But costs were climbing, too. On the basis of a survey, the American Petroleum Institute estimates US refiners during 2000-11 incurred capital costs totaling $43 billion to improve the environmental performance of their products, facilities, and operations. They incurred operating costs over the period of $42 billion. Much of that spending was for regulatory compliance, representing expenditure required just to stay in business.
While it's impossible to isolate the cost components of product price amid all the other always-changing influences, especially the price of crude, diesel has demonstrated a clear effect. Federal requirements for the lowest sulfur content allowed by law greatly increased the cost of making diesel and reversed the product's historic price relationship with gasoline.
Once almost always cheaper than gasoline at the pump, diesel now routinely sells for 20-30¢/gal more because, since 2001, it has been costlier to make. Professional truckers might call that a serious impact.
Refiner responses
To meet the proposed Tier 3 cut in gasoline sulfur to 10 ppm from 30 ppm, refiners would have to add and revamp desulfurization units, raise operating severities of existing units, and increase hydrogen inputs. EPA also proposes to make all cars and light trucks perform to low-emission-vehicle standards of California.
So by follow-on regulation or practical necessity, the Tier 3 proposal probably would require a lowering of gasoline volatility, which would be especially difficult to achieve as mandated volumes rise for high-volatility ethanol. Lowering volatility means pulling light components out of gasoline streams. At a given level of demand, lowering gasoline volumes raises price.
All these responses represent new costs in the ever-churning mix of pressures on the price of gasoline. How much? No one really can tell. But the environmental benefits EPA claims and will have to defend must be assessed in relation to cost, which the agency puts at a penny a gallon at retail.
Apparently, no one at EPA has had to buy or run a hydrotreater lately.
