In defense of US Environmental Protection Agency Administrator Christie Whitman, it is more difficult to correct bad regulations than it is to get them right at the outset. But that makes no less regrettable her decision to proceed with a huge mistake on sulfur in diesel fuel.
The new administration of George W. Bush needs to establish its environmental credentials, of course. And upholding a 15 ppm cap on the sulfur content of highway diesel looks like proper antipollution resolve. It's good politics.
But it's dreadful policy. The decision to cut sulfur content to 15 ppm instead of the 50 ppm level proposed by the refining industry will reduce supplies of diesel and drive up the fuel's price. It will probably force several refineries to close. It will hurt truckers.
Environmentally, the difference between EPA's 97% cut in diesel sulfur and a 90% cut is insignificant. It is significant mainly in how it affects US capacity to make diesel fuel and how it makes environmentalists feel.
Refiners support a sulfur reduction. They know sulfur shortens catalyst life in the emission-control equipment that truck and bus exhaust systems need to meet new standards for nitrogen oxide and particulates. They also know performance of the still-unproven equipment probably will change little, if at all, as a function of the difference between a 15 ppm and 50 ppm sulfur standard.
Against that negligible difference in environmental performance, regulators should have weighed the consequences for refiners and, therefore, diesel supply. The EPA under former Administrator Carol Browner said those consequences didn't matter. Whitman this month ratified the indifference.
Aboriginal monitors worked closely with Duke Energy International's construction crews along Australia's Eastern Gas Pipeline route as part of a cultural heritage program to preserve aboriginal cultural, wildlife, and their habitats. In the inset photo, a Duke employee rescues a snake from the trench dug for pipeline construction. Photos courtesy of Duke Energy International (Asia Pacific). So what are the consequences for refiners?
The 15 ppm diesel sulfur cap requires the purchase of much more new processing equipment than would have been required by a 50 ppm standard. Instead of retrofitting existing hydrodesulfurization units and increasing the severity of their operations, as many could have done to reduce sulfur in diesel streams at 50 ppm, most refiners now will have to add new units. Costs will be magnified by the strains on engineering and construction capacity likely to result from a looming surge in work required by fuel regulation.
Continuous output of diesel containing 15 ppm sulfur will require nearly perfect refinery operations, which will make interruptions very costly. And contamination will constantly threaten distribution operations.
Because the energy content of diesel will fall as its sulfur content shrinks, there will need to be compensating gains in product volumes. Yet the move to a 15 ppm sulfur standard will shrink diesel output of most refineries because of increased hydrotreating severity.
Diesel volumes will shrink for other reasons. Because of EPA insistence that the diesel-sulfur rule take effect as soon as legally possible, the associated investment requirements coincide with those related to the next step in gasoline reformulation. The financial load will be too heavy for specific refineries if not whole companies. Refiners unable to make the investment will either divert high-sulfur feedstock to products other than US highway diesel or shutter plants. In combination with capital requirements generated by other fuel regulations, the diesel-sulfur rule will tip decision-making toward the latter option.
It is therefore very unlikely that US refiners will meet US demand for highway diesel at forecast levels. And imports won't help much. Refiners outside the US don't make ultralow-sulfur diesel in great quantity. The National Petrochemical & Refiners Association puts the shortfall against projection for 2006, attributable to the diesel sulfur cut, at 10-20%. What that means is that the market will balance at a level of demand sharply lower than what is now forecast-and at a sharply elevated price.
This will be very good for refiners able to shoulder the investment load-mostly the large ones. There will be much less competition than there was before. But while a shake-out has long been in order for a business plagued until recently by chronically low profitability, economics, not regulation, should compel the exits.
Threats of diesel shortage and refining-industry contraction deserve serious attention in energy policy, which the Bush administration calls a priority. Here's an early test of the team's ability-or willingness-to reconcile energy interests with environmental politics. On that subject, more will appear here next week.
