While upstream controversies attract most attention in debates over US energy policy, downstream issues likely to be settled within the next year will greatly affect the supplies and prices of oil products.
New attention to downstream questions in all branches of the federal government raises hope for refiners. The regulatory status quo hurts their ability to meet anticipated fuel requirements in terms of both volume and chemistry. Change is essential. At present, however, it's far from clear that change, if it occurs at all, will be constructive.
Fresh looks
The Environmental Protection Agency is taking fresh looks at three big issues.
At the direction of President George W. Bush, EPA has been studying enforcement changes it made to the New Source Review program during the administration of former President Bill Clinton. The Clinton-era reinterpretation adds permitting burdens to refinery projects that had been exempt. Without promising any significant environmental benefit, it threatens refiners' abilities to meet environmentally related fuel requirements and to add processing capacity.
EPA missed a mid-August target for the review Bush ordered and more recently broadened the inquiry's scope. The issue is now entangled with legislative efforts to regulate emissions from power plants of sulfur dioxide, nitrogen oxide, mercury, and-possibly-carbon dioxide.
The Department of Justice is conducting a separate inquiry of the New Source Review program but has made no report.
EPA also is studying supply problems created by the proliferation of gasoline specifications. Late last month it sent Bush a report identifying two areas of challenge for so-called boutique fuels: flexibility of fuel marketers during transitions from winter to summer reformulated gasoline and growth in the number of state and local boutique fuel programs. The report promised immediate regulatory steps, including allowing refiners more flexibility during seasonal transitions and reclassifying fuels as reformulated gasoline during disruptions to distribution systems.
EPA's steps are welcome but insufficient. EPA could disallow nonfederal fuel programs in states other than California, although the politics of such a move would be difficult. And its report says little about transportation batching complexities other than to declare pipeline capacity adequate.
With boutique fuels, too, EPA's moves are contingent on action on Capitol Hill. Related questions under debate there include removal of the oxygen requirement for reformulated gasoline, phaseout of the oxygenate methyl tertiary butyl ether, and a mandate for additives from renewable sources, meaning grain-based ethanol. Support for replacement of the oxygen requirement with an ethanol mandate for all gasoline has carried over from the Clinton administration. The move would, among other things, mean new trouble for refiners not now making reformulated gasoline.
The other big issue under EPA review is sulfur in diesel fuel. An industry coalition has challenged in court the agency's Clinton-era requirement for a 97% cut in highway diesel sulfur levels, the extent and timing of which will jeopardize diesel supply when it begins taking effect in 2006. EPA recently announced what it calls an independent review of that requirement.
In deference to pressure from groups wanting no change, however, EPA will assemble a panel to conduct the inquiry. A truly independent inquiry by the National Academy of Sciences, as suggested by some refiners, would have been better. A reputable source outside the industry needs to point out that the 90% diesel-sulfur reduction supported by refiners differs little in environmental outcome from the more-costly 97% cut mandated by EPA. The EPA panel will give environmentalists a forum from which to promote the fiction that any relaxation of the 97% reduction seriously compromises environmental protection. EPA also is looking at the sulfur content of off-road diesel and might issue a notice of proposed rulemaking next year. There's no indication yet of the amount and timing of sulfur cuts that might be required.
Restore balance
Downstream issues are as crucial to energy policy as leasing of the Arctic National Wildlife Refuge coastal plain and correction of tax laws that discourage oil and gas production. They have comparable implications for national security and profoundly affect consumers.
Current regulation of refiners serves environmental zealotry at the growing expense of fuel supply and cost. Congress, the courts, and the administration have the chance to restore balance. They can do so without compromising environmental values. In fact, they must.
