INDUSTRY HITS CALIFORNIA REFORMULATION MOVE

Industry spokesmen and analysts are sounding warnings about economic blows that lie ahead as a result of California's move to impose stringent gasoline reformulation standards in 1996 and beyond. Part of industry's goal is to head off adoption of such standards in other parts of the U.S. Western States Petroleum Association (WSPA) earlier warned that the California Air Resources Board (CARB) plan will jack up gasoline prices by 23/gal and cost more than 80,000 jobs in California (OGJ,

Dec. 23, 1991

6 min read

Industry spokesmen and analysts are sounding warnings about economic blows that lie ahead as a result of California's move to impose stringent gasoline reformulation standards in 1996 and beyond.

Part of industry's goal is to head off adoption of such standards in other parts of the U.S.

Western States Petroleum Association (WSPA) earlier warned that the California Air Resources Board (CARB) plan will jack up gasoline prices by 23/gal and cost more than 80,000 jobs in California (OGJ, Dec. 2, Newsletter).

Now, Texaco Inc. and Amoco Oil Co. declare that California standards would cost too much money and provide too little benefit in cleaner air.

And Salomon Bros. Inc., New York financial firm, cites WSPA's estimate that the standards will hit California refiners with $6-10 billion in compliance costs with the greatest capital outlay for sulfur removal from gasoline and the greatest operating expense in substitution of oxygenates for aromatics.

The effect of the CARB rules on individual companies cannot be precisely measured, Salomon Bros. said. But its analysis of gross sensitivity to shifts in California downstream profit margins for seven major oil companies showed that Unocal Corp. and ARCO are most leveraged to shifts in their California downstream earnings.

Only ARCO, California's biggest gasoline marketer, has endorsed the CARB standards.

TEXACO'S WARNING

James W. Kinnear, Texaco president and chief executive officer, decried the CARB move in view of data showing alternative, "much more cost effective" methods to remove pollutants from the air.

He said, "The new California fuel mandates will place an enormous burden on residents and taxpayers of that state in terms of costs, jobs, and general economic degradation.

"Now, taxpayers are in danger of having billions more of our dollars wasted by new government mandates that are based on politics, not on science or on economics. These are mandates that take a meat ax to problems requiring a scalpel.

"This new California fuel will cost some 20/gal more and provide little benefit beyond the federally mandated formulation for gasoline in nine nonattainment areas, including Los Angeles, in 1995."

He said California regulators credit the new fuel with a reduction of smog by 30-40%.

"This is simply not true. What has not been made clear to the public is that this claimed reduction includes changes largely already mandated by the federal government for 1995. In effect, then, the new California fuels would reduce smog by only 1-2% but at a cost of a hundred times greater than alternative reduction strategies.

"The issue is not whether we want cleaner air. We want cleaner air, as does the American public. The issue is how we get cleaner air."

Kinnear cautioned other states not to rush prematurely into adopting costly California fuels, which could remove pollutants at an incremental cost of as much as $500,000/ton.

He pointed out that regulators in several states in the Northeast and mid-Atlantic regions are considering that strategy before examining more cost effective alternatives and without considering resulting economic losses.

So far, only Connecticut has declined to move toward adopting the California standards, based on the need for more economic and scientific data.

If California standards, including low emission vehicles and the severely reformulated gasoline recipe (Phase 2 fuel), are adopted in the Northeast, the result could be the loss of 146,000-298,000 jobs in 2000, according to economic consulting firm DRI/McGraw-Hill, Lexington, Mass., Kinnear said.

Kinnear offered other options he said could cost far less per ton of pollutants removed, compared with the severely reformulated components of CARB's Phase 2 fuel, including:

Enhanced inspection and maintenance programs at a cost of $3,000-8,000/ton of hydrocarbon removal.
Scrapping older cars. A study by DRI/McGraw-Hill found that removing the millions of vehicles dating prior to 1978 from U.S. roadways would provide one of the cheapest, fastest ways to cut pollution and oil imports at a cost of less than $2,000/ton, thus providing an environmental gain and a conservation benefit to the consumer.
Applying the 1995 federal fuel formula, which has been shown to be "reasonably cost effective."

AMOCO'S VIEW

Jerrold L. Levin, Amoco director of corporate studies, also warned of increased gasoline costs and job losses if California fuel and vehicle standards are adopted by states in the Northeast.

By contrast, Clean Air Act amendments and other standards already in place would yield 99% of vehicle hydrocarbon emission reductions but at about half the cost, he told freshmen legislators in Richmond, Va., at an energy briefing sponsored by the Virginia Petroleum Council.

"Pollution problems in the Northeast just aren't severe enough to warrant adoption of California standards, especially in light of the enormous cost and minimal benefit they would bring," Levine said.

He said California violated ozone standards on nearly 300 days/year during 198789, compared with just 11 days/year in Virginia. Four of Virginia's 11 violations were recorded on top of White Top Mountain, a rural, sparsely populated forest area where natural sources such as trees emit hydrocarbons that contribute to the ozone problem.

"Controlling ozone is a real tough problem, but different regions need different solutions," said Levine. "The Clean Air Act and its amendments will generate 99% of the improvement. California standards would make less than a 1% difference. So we would get very, very marginal incremental benefit from the California program in the Northeast-and at a tremendous cost."

Levine pointed out that the three main sources of hydrocarbon emissions are natural sources such as trees (60%), mobile sources such as automobiles (20%), and stationary sources such as factories (20%). The California standards cover mobile sources only and at "tremendous expense" would reduce vehicle hydrocarbon emissions by only 1% during the next 20 years if adopted in the Northeast region.

By contrast, Levine said, getting older cars off the road would reduce emissions by 46%. Selling lower Reid vapor pressure gasoline, which is already occurring in Virginia, reduces emissions 28%. And the 1990 CAA Amendments will reduce emissions another 12%, with new car evaporative systems and Stage II onboard canisters reducing emissions by 13%.