API lowers projected impact of Tier 3 requirements on gas prices, refinery closures

Source: Nick Juliano, E&E reporter • Posted: Friday, March 23, 2012

An upcoming rule to lower the sulfur content of gasoline and diesel will not force any refineries to shut down but will increase their operating costs by between 6 and 9 cents per gallon, according to an industry-backed study released today.The American Petroleum Institute released an updated assessment of U.S. EPA’s upcoming Tier 3 fuel rule based on assumptions that more closely mirror the requirements EPA officials have said they will include in the rule. A study released last year, which was based on more aggressive assumptions, predicted price increases in the range of 12 to 25 cents per gallon and that four to seven refineries would close.The 6- to 9-cent increase is not a direct projection of how much more consumers will pay if the Tier 3 rule is implemented; rather, it is an estimate of how much refineries would see their costs rise, said Bob Greco, director of API’s downstream and industry operations group. The study does not estimate how much of those costs would be passed on, but Greco indicated that customers would likely see prices rise.

“We can’t predict or judge how much is passed along,” Greco said. But “if refineries can’t recover their costs, they can’t lose money for an extended period of time” without going out of business.

API’s earlier estimate was frequently cited by EPA critics on Capitol Hill who accused the agency of conspiring to force consumers to pay an extra quarter per gallon for gasoline. Its new, lower estimate may weaken the case against EPA slightly, but it is unlikely to lessen its intensity, as gas price politics have consumed lawmakers’ attention in recent weeks.

Rep. Ed Whitfield (R-Ky.) is among those leading the charge, and he will get a chance to further argue that EPA rules are increasing pain at the pump on Wednesday, when legislation he authored will receive a hearing in the Energy and Commerce subcommittee on energy and power, which he chairs. Whitfield’s bill would require the president to assemble an interagency panel to examine the effect of various EPA rules on gas prices, including the upcoming Tier 3 proposal (E&E Daily, March 20).

EPA’s Tier 3 rule had been expected to be proposed this month, although that schedule is likely to slip as the proposal has not yet been sent to the White House Office of Management and Budget for interagency review. A rule would not be finalized until “next year at the earliest,” EPA Administrator Lisa Jackson said today.

Speaking to reporters this morning, before API’s latest study was released, Jackson panned API’s earlier estimate as “ridiculous” and said the agency would be “very mindful to consider costs” when it does propose the rule.

Jackson has previously said the Tier 3 rule will not include new limits on Reid vapor pressure (RVP), a measure of fuel volatility, that were assumed in API’s earlier study. EPA officials have cited a competing study commissioned by the National Association of Clean Air Agencies, a coalition of state regulators supportive of the rule, that pegged the cost impacts of the Tier 3 rule at less than a penny per gallon.

Frank O’Donnell, president of the environmental group Clean Air Watch, said API’s new study is in line with the lower estimate touted by fans of the rule, once one takes into account an assumption that industry estimates inflate the costs of rules.

“To put the new API study into quick context, I recalled the words of an old friend who was a corporate lobbyist. He told me that in evaluating corporate estimates of environmental controls, one should always divide by 5 to get the true cost. That’s how much an insider says these guys generally inflate the estimate,” O’Donnell wrote in an email to reporters.

“So that brings us back to about a penny a gallon.”

API’s new study, conducted by energy consulting firm Baker and O’Brien, assumes no change to RVP requirements in the Tier 3 rule and a reduction in allowable sulfur content of gasoline to 10 parts per million from the current 30 ppm standard.

While the newest study estimates significantly lower cost increases than its earlier effort, API still says EPA should not propose the new rule. Greco said EPA has not demonstrated the need for further sulfur reductions in fuel, which was as high as 300 ppm sulfur a decade ago, and he urged the agency to conduct a full cost-benefit analysis before proposing the rule.

Furthermore, Greco said, domestic refineries still could be at risk of shutting down because of additional rules EPA is expected to impose, such as limits on greenhouse gas emissions and criteria pollutants as well as biofuels blending mandates.

“We’re looking at this train of regulations coming at us, and Tier 3 is just one of those,” he said.

EPA considering refinery waivers

Amid increasing concern over gas prices, some lawmakers, such as Sens. Lisa Murkowski (R-Alaska) and Bob Casey (D-Pa.), have said EPA should consider issuing waivers from summer blending requirements refiners must meet to combat smog pollution. Murkowski has said she would like the Energy Information Administration to see how that would affect prices, and Casey has asked for a temporary waiver of Pittsburgh-area fuel standards this summer.

Jackson said the agency is mulling Casey’s request and has been reaching out to the Department of Energy and companies to respond to any potential supply disruptions that could emerge this summer.

“Of course we’re considering it. We’re happy to work with the state and to do what we can to ensure that they know that we’re concerned,” Jackson told reporters today. “The Clean Air act allows us that flexibility, provided the standards in the Clean Air Act are met. We’re happy to look at those requests.”