While recent increases in US gasoline and diesel fuel prices result mainly from a global surge in the price of crude oil, room must be reserved in any explanation for regulatory changes that have lifted the costs of fuel manufacture and distribution. At present, crude prices mask the effects of these changes. The costs, however, are firmly in place. They set floors below which the prices of oil products can’t stay for long. And more of them are in prospect.
During the next few years, regulations will evolve on at least three fronts in ways that will keep upward pressure on the costs of vehicle fuels. The ethanol mandate will grow. The requirement for ultralow-sulfur diesel will expand, including into off-highway markets. And new federal standards for ozone pollution will move some number of regions toward, if not into, noncompliance.
Interacting effects
These developments interact. Ethanol, for example, aggravates ozone pollution in some areas. Requirements for the gasoline additive, set in the Energy Policy Act of 2005 and greatly increased in last year’s Energy Independence and Security Act, are increasing in annual steps. The mandate this year is 9 billion gal, mostly from corn. Eventually it will reach 36 billion gal, 15 billion gal of which can come from corn.
The natural market for ethanol is reformulated gasoline, where the material has value as an oxygen and octane booster. Reformulated product, required in areas with chronic ozone pollution, accounts for about one third of US gasoline supply.
According to the Energy Policy Research Foundation Inc., Washington, DC, ethanol had saturated the reformulated gasoline market by the end of last year. To meet escalating mandates, it will have to be blended into growing amounts of conventional gasoline. The result will be increased tailpipe and evaporative emissions of ozone precursors—another push toward noncompliance with air-quality standards. An increase in the number of such nonattainment areas would expand the requirement for reformulated gasoline and further raise the costs of making gasoline.
Growth of the ethanol mandate also portends increased demand for diesel, the cost of making which jumped in response to requirements for sharply reduced sulfur content. Little ethanol moves via pipeline because of the substance’s affinity for water and potential to cause stress corrosion cracking of steel. Most ethanol transport, therefore, occurs in trucks and rail cars.
While ethanol requirements, and therefore diesel-fueled transportation, expand, so will application of the ultralow-sulfur mandate. In 2010, refiners will lose their regulatory ability to produce as much as 20% of their highway diesel at an elevated sulfur concentration. In the same year, the ultralow-sulfur requirement will take in nonhighway uses other than locomotives and marine engines. In 2012, those diesel users will enter the ultralow-sulfur realm. And in 2014, exemptions for small refiners will expire.
In terms of affected volumes, none of these steps will be nearly as large as the one taken in 2006 when the ultralow-sulfur requirement for highway diesel began taking effect. Each one nevertheless represents substitution of one grade of fuel with another notably more costly to make.
Other changes
Other changes with potential to raise fuel costs loom. The second phase of the Mobile Source Air Toxic program administered by the Environmental Protection Agency, for example, will begin taking effect in mid-2011. The program, which provides for the banking and trading of compliance credits, mainly affects benzene. It applies a content cap for reformulated gasoline but not for conventional fuel—a distinction with possible cost implications if requirements for the reformulated product grows.
And, despite federal efforts to suppress the proliferation of fuel specifications applied at state and local levels, the boutique fuel problem remains in place. Refiners still must deal with the reduced flexibility that comes from having to produce fuel to multiple sets of specifications.
With some exceptions, these and other regulations have improved the environmental performance of US vehicle fuels. They have, however, raised the costs of making, and ultimately the retail prices of, diesel and gasoline. More fuel changes are just a few years away. So are higher costs.
