ENVIRONMENTAL COSTS CLEAR IN GASOLINE PRICE SPIKE

Price gripes by Carol Browner, administrator of the US Environmental Protection Agency, deserve rebuke by the oil and gas industry.

Jun 23rd, 2000

Price gripes by Carol Browner, administrator of the US Environmental Protection Agency, deserve rebuke by the oil and gas industry.

While gasoline prices were leaping past the $2/gal mark in parts of the US this month, Browner was complaining of gouging and possible collusion among oil companies.

Then, when wholesale prices began to ease as they inevitably do, Browner demanded an explanation from oil companies about why retail prices weren't immediately following suit.

After a meeting with company executives, the wrong people to ask about retail prices, Browner, according to the Associated Press, had this to say: "No one has explained to us why these prices were so high, why when we call for an explanation, when we call for an investigation...suddenly the prices begin to drop."

There's just no pleasing this bureaucrat. She gripes when prices rise and gripes when they begin to fall. And where was she early last year, when gasoline prices were historically low?

Browner is flat wrong about the absence of explanation for recent price phenomena. There have been plenty of explanations, including those of the Department of Energy's Energy Information Administration, which has done a commendable job of tracking what is essentially a cycle of the oil market through a period of very tight supply.

Browner doesn't like the explanations because they inevitably cast unflattering light on the contribution that environmental regulation and her agency's heavy-handedness play in consumer hardship, current and future.

Browner unjustly denies that requirements for reformulated gasoline have anything to do with current product prices.

A look at US refining since passage of the Clean Air Act Amendments of 1990, which established the requirement for reformulated gasoline, puts her denials in context.

At the beginning of 1990, there were 190 refineries in the US; at the start of this year, there were 154. Distillation capacity increased during the period, mostly because of debottlenecking as refiners upgraded processing capability to make lighter products and meet environmental requirements-from just under 16 million b/d in 1990 to 16.5 million b/d this year.

The only state to gain in the number of refineries during the decade was Louisiana. Plant counts declined in Arizona, California, Colorado, Georgia, Indiana, Kansas, Michigan, Mississippi, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Washington, West Virginia, and Wyoming.

While refineries were closing by the dozen, demand was increasing. The average volume of product supplied in the US grew from 16.988 million b/d in 1990 to 19.519 million b/d in 1999. Imports, of course, had to grow to make up the difference between refinery output and total product supplied.

Not all the refinery closures relate directly to the requirement to produce reformulated gasoline, of course. It is fair to say, however, that the investment required to make the fuel and to meet other, always-tightening, environmental requirements raises the cost of participating in the business of supplying the very competitive US market for oil products. When business conditions become difficult, as they often do for refiners, current and prospective environmental costs hasten decisions to quit.

Partly because of environmental regulation, therefore, refining capacity concentrated within a shrinking number of facilities in the past decade. Yet the market itself was becoming what the American Petroleum Institute calls a "boutique" business, with fuel specifications and product codes varying from area to area. Logistical difficulties are inevitable under these conditions. They become acute, price-spiking problems when inventories drop due to a market swing.

In no way can Browner deny the role of reformulation requirements, which toughened June 1, in the gasoline-market fragmentation now so evident. It's just a fact. And it goes a long way toward explaining the wide regional variations this month in the prices of gasoline.

Browner's accusatory denials of all this gain useful perspective from the National Petroleum Council report issued this week on the refining industry's ability to meet new fuel specifications. NPC, an industry group that advises the Secretary of Energy, said:

"The timing and size of the necessary refinery and distribution investments to reduce sulfur in gasoline and diesel, eliminate methyl tertiary butyl ether, and make other product specification changes such as reducing toxic emissions from vehicles are unprecedented in the petroleum industry.

"Large investments will be required at essentially all domestic refineries and many terminals."

Browner can't deny her role in this. Her department has consistently taken the most aggressive approach possible in its regulation of refiners. The costs are clear. And so is the blame.

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