Prices and regulation

March 13, 2000
The refining industry should try to parlay concern over the price of oil into attention to the costs of environmental regulation.

The refining industry should try to parlay concern over the price of oil into attention to the costs of environmental regulation. In the US, those costs are soaring.

Last year, while oil inventories were plummeting, the Environmental Protection Agency was opting for the strictest possible regulation in several crucial issues. Inevitably, its aggressiveness will raise prices of oil products.

Toughest options

The agency last December chose the toughest option available to it for reducing the sulfur content of gasoline. Earlier, it abandoned its support for the gasoline additive methyl tertiary butyl ether. It still wants to tighten controls on emissions of ozone precursors and small particles. And it probably will lower sulfur limits for diesel fuel. With these challenges mounting and new Clean Air Act requirements coming due, refiners must invest quickly and heavily in processing changes promising little or no economic return.

Even there, EPA is regulating as aggressively as possible and threatening progress toward achievement of its own goals. It is reinterpreting permitting requirements of the Clean Air Act and investigating whether refiners have worked without necessary permits for the past 20 years.

At issue is the so-called new source review (NSR) triggered when equipment and other changes create major increases in emissions of air pollutants. Companies planning changes of that type must obtain NSR permits prior to construction, install emission-control technology, and meet other requirements. Securing an NSR permit takes 11/2-2 years.

According to written Senate subcommittee testimony last month on behalf of the National Petrochemical & Refiners Association and American Petroleum Institute, EPA's reinterpretations "enable the agency to allege that virtually any change a source [of emissions] might make requires NSR permitting and controls, even if emissions have not increased."

Part of the problem, wrote Bob Slaughter, NPRA general counsel and director of public policy, is EPA's practice of comparing actual emissions before an equipment or process change to estimates of potential emissions after the change. Because of the need for a safety margin, there is always a difference between past actual and future potential emissions, which can be a interpreted as an increase necessitating NSR control.

EPA's administration of the program also makes uncertain whether normal repairs and improvements require permits. "We know that EPA is increasingly aggressive in its claims that such repairs and improvements trigger NSR," Slaughter wrote.

And the agency has called into question the permitting decisions of states to which it delegates NSR program implementation. It is examining and might reverse state decisions dating back to 1980.

Refiners thus might face a massive, retrospective enforcement action as well as time-consuming permitting requirements for new projects aimed at complying with air-quality regulations. The period in question is one in which refineries slashed emissions directly from their plants and indirectly from consumption of their products. A toughened NSR program would retard the progress.

Effect on prices

What's more, EPA's pattern of toughest-possible regulation keeps upward pressure on the prices of oil products. The main price factor is not the gains in operating cost that come with each new regulation. Rather, it is the ever-climbing commitment of capital that refiners must make just to participate in the business. As more and more refiners unable to justify the investment shut down, it will be increasingly difficult to keep capacity in line with demand for oil products. Prices will rise.

With oil prices again in the spotlight, the message should resonate. Today's high prices result from an exporter's group too slow with its supply response. Tomorrow's high prices will result from an environmental agency too quick with its urge to regulate.