HIGH COST OF U.S. ENVIRONMENTAL RULES TALLIED

U.S. consumers' price tag for new environmental regulations affecting the U.S. petroleum industry could run $38.7 billion/year.

Further, U.S. refining competitiveness in the international market will suffer while the new regulations benefit non-U.S. refiners.

The end result of this, says Ashland Oil Inc. Chief Economist Cyrus Tahmassebi, will be damage to the U.S. economy in general and consumers in particular as well as the export of U.S. refining capacity.

Tahmassebi sounded that warning at an international conference of energy economists sponsored by the International Research Center for Energy and Economic Development, Boulder, Colo.

SOARING COSTS

Just for the new and proposed regulations affecting the U.S. petroleum industry where estimates could be obtained, capital expenditures for regulations scheduled to be implemented within the next 5 years will be about $17.8-19.2 billion, Tahmassebi said.

Added operating costs as a result will average $13.2-14.3 billion/year. The capital and annual outlays translate to a cost of 6.5-7/gal of crude oil processed.

Factoring in possible near and long term regulations, the total for added environmental capital outlays jumps to about $44 billion and operating costs to about $25-29 billion.

That works out to 12.54-14.43/gal of crude oil volume processed.

The figures exclude legislative and regulatory items for which there are no cost estimates but for which the costs are expected to be staggering.

Other costs that are looming on the horizon would be attached to a number of things such as new benzene emissions limits, new refinery effluent guidelines, management of used oil under the Resource Conservation and Recovery Act (RCRA), mandatory methanol fuels for fleets, and offshore effluent guidelines on drilling fluids and cuttings.

CONSUMER, ECONOMY EFFECTS

Using the higher estimate of a 12.54-14.43/gal final cost, Tahmassebi assumed that 80% of the added cost can be passed on to the consumer on all products.

Moreover, assuming that product output equals crude oil input and taking the year to date average crude oil run total of 13.7 million b/d, Tahmassebi calculates that the price tag to the consumer will be about $26.3-30.3 billion/year.

Applying the added cost per gallon to only U.S. refining capacity underestimates the full cost to the consumer, Tahmassebi maintains. He expects imported product prices to rise in parity with U.S. product prices that include added costs from environmental regulations. So it is more accurate to assume 80% of the added cost applied to total U.S. product demand.

Thus at a demand level of 17.5 million b/d, cost to U.S. consumers could be as much as $33.6-38.7 billion/year, Tahmassebi said.

The figures do not include such indirect costs as higher inflation, higher unemployment, and export loss due to inflation.

NON-U.S. REFINERS' ADVANTAGE

Tahmassebi contends that as long as non-U.S. refiners are not subject to the same kind of environmental regulations as their U.S. counterparts, those new rules are likely to benefit foreign refiners by increasing their competitive edge.

That's because a non-U.S. refiner often can meet U.S. requirements on exported products with little or no capital investment, he said.

"For example, a U.S. refiner is required to manufacture lead free gasoline and yet maintain an octane level acceptable to the consumer. In lieu of lead, a relatively inexpensive octane enhancer, the U.S. refiner has to use much more expensive octane enhancers like MTBE.

"The foreign refiner, however, can blend export gasoline with octane components manufactured in the refining process and meet U.S. specifications. To compensate for the octane loss on gasoline slated for internal markets, the foreign refinery can increase the lead content, if there are no stringent regulations on lead use in that country.

"Thus, without any additional capital expenditures or operating costs, the foreign refiner can meet U.S. specifications on gasoline exported to this country."

U.S. REFINING SQUEEZE

Tahmassebi sees similar situations for a number of other environmental requirements for U.S. refiners.

Because the U.S. refining industry is a low margin, high volume business, the effect of an increase in non-U.S. competition could be very significant, he said.

At the least, it means increasing products imports for the U.S.

"Some of the European countries are expected to follow the U.S. and enact similar environmental measures," Tahmassebi said.

"Although it is not yet clear exactly when these laws will be in place, a time lag, which may span several years, is likely.

"Also, Europeans are not expected to adopt all the measures in effect in the U.S. And as long as this is the case, U.S. refiners may be at a disadvantage."

Tahmassebi also contends that enactment of environmental rules similar to those in the U.S. by developing countries is a very remote possibility, resulting in them also benefiting competitively from U.S. environmental regulations.

"As a result, U.S. refiners could very well be subjected to an unfair competition, the net result of which could be export of U.S. refining capacity," he said.

Of the 26 scheduled and proposed environmental regulations studied, U.S. refiners suffer competitively or at best break even with foreign refiners on 22, go either way on 1, and have an edge on 3.

Of the 26 regulations, U.S. imports of petroleum products would rise under at least 16.

Every one of the 26 regulations would harm the U.S. economy generally and consumers specifically, Tahmassebi said.