U.S., state rules seen forcing 13% plunge in Calif. fuel use by 2020

Source: Anne C. Mulkern, E&E reporter • Posted: Wednesday, March 19, 2014

California’s consumption of gasoline and diesel will fall as much as 13 percent within six years because of the effect of state and federal rules, a report released today said.
Bloomberg New Energy Finance projected that consumers in the nation’s most populous state by 2020 will have pared their fossil fuel purchases by more than 1 billion gallons annually.”California will experience a significant shift in the makeup of both transport fuel demand and the composition of the vehicle fleet,” said Salim Morsy, advanced transportation analyst at Bloomberg New Energy Finance. “A drop in net fossil fuel demand may put pressure on California oil refiners’ margins in the coming seven years.”The group studied California because “it’s an outlier in the U.S. in terms of the policies that are driving what we perceive to be changes in fuel demand,” Morsy said. “It’s a state that’s fairly proactive in driving down carbon emissions.”

Bloomberg wanted a picture of what the next six to seven years would look like in the liquid fuel demand market, he said. That morphed into a broader look at components of demand.

The drop in consumption is expected even as California’s population will swell to 40.6 million people in six years from 38 million in 2012, according to state Department of Finance projections. Given that growth, the Bloomberg analysis forecast a boost in vehicle miles traveled to 396 billion in 2020 from 356 billion in 2012.

The motor fuels demand drop will occur even with that increased driving because of four policies, it said, two state and two federal. In addition, within California, there’s general acceptance of the regulations, analysts said.

“The will is there to operate more electric vehicles, consume gasoline more economically, blend the right type of biofuels and do it at more affordable levels for the consumer,” said Harry Boyle, head of applied research at Bloomberg New Energy Finance.

The analysis identified the biggest driver of lower fuel use, however, as coming from the federal government. By 2020, the corporate average fuel economy, or CAFE, standard, which requires that automakers’ light-duty fleets achieve an average 54.5 mpg by 2025, will displace 1.9 billion gallons of blended gasoline demand in California, Bloomberg said. CAFE was modeled on an earlier California policy.

The federal renewable fuels standard ranks second in terms of influence, Morsy said. It mandates an increased amount of green fuels and has resulted in replacing part of each gallon of gasoline with ethanol.

The study also factored in California’s zero emissions vehicle, or ZEV, standard, which forces many automakers selling in the state to make an increasing percentage of cars with no tailpipe emissions. All-electric vehicles like Tesla’s Model S or Nissan’s Leaf receive full credit, while plug-ins with hybrid drivetrains like the Honda Civic Hybrid earn partial credits.

ZEVs will grow to 3 percent of California’s market from the current 1 percent, the analysis projected. The program will displace 3 billion gallons of blended gasoline from 2014 to 2020, Bloomberg said.

The analysis looked only at the minimum number of ZEVs needed to be sold to meet the regulation. There could be more EV purchases, it said, which could lead to lower fuel demand.

Bloomberg also looked at California’s low carbon fuel standard, or LCFS, which aims by 2020 to lower the carbon intensity of fuels sold in the state by 10 percent. The analysis projected an increase in demand for biomass-based diesel because of the rule.

The four policies will combine to cut demand in a “base case scenario” 9 percent to 11.2 billion gallons annually in 2020 from 12.3 billion gallons this year. In a slightly more aggressive outlook, where efficiency standards are strictly met, the drop in demand would be 13 percent to 10.6 billion gallons yearly in 2020.

That cutback wouldn’t be unprecedented, Bloomberg New Energy Finance said. Since 2002, gasoline demand in the state has dropped by more than 3 billion gallons per year, “as consumers have opted to drive fewer miles, partly in response to increases in fuel prices” and as the fleet has become more efficient.

Independent economists and analysts were unable to critique the Bloomberg findings because the report was not made publicly available until late this morning. Economists in interviews said they would need to look at Bloomberg’s assumptions to evaluate the results.

Will refiners leave?

Overall, declining demand for gasoline and diesel could lead refiners to make changes, Morsy said.

“By 2020, there’s going to be a lot more gasoline refining capacity in California than there is demand,” Morsy said. While some companies might have the ability to ship product out of the state, he said, there could also be consolidation with companies choosing to sell in-state refineries. Some refiners also could find themselves making less money, he said.

Catherine Reheis-Boyd, president of the Western States Petroleum Association, said that California’s policies on fuels could lead to instability in the marketplace. There are not sufficient substitutes to meet the LCFS requirements, she said.

A study by the Boston Consulting Group, which the Western States Petroleum Association funded, found that California “would definitely lose 40 to 50 percent” of its refining capacity, she said, as some companies could not withstand the added costs.

Those that could afford to stay would look at other opportunities such as shipping oil products to other parts of the country and world that do not have California’s policies, Reheis-Boyd said.

“We’re not a regulated utility,” she said. “We are not obligated to sell into this marketplace at loss.”

There is a question about whether the LCFS will be changed, said Max Auffhammer, professor of agricultural and resource economics at the University of California, Berkeley.

“The question is, ‘Can we meet the standard as it was originally written?'” he said. “Many people have doubts that we can do it.”

The state’s Air Resources Board later this year is expected to consider amendments to the LCFS. Advisers are crafting several revisions that they say would give businesses more options while still meeting goals of the program (ClimateWire, March 12).

Auffhammer, however, said he doubts the state’s rules would trigger the kind of upheaval that leads to consolidation.

“I wouldn’t go that far,” he said. Auffhammer had not seen the Bloomberg analysis.

A refiner with excess capacity in California could pare back production of California-formula gasoline and instead manufacture a different type for sale in another market, Auffhammer said.

“Part of the reason we have a CAFE standard is because we do want demand to go down,” Auffhammer said. The goal of the other standards examined by Bloomberg also “is to drive down gas consumption. I would consider that a good thing.”

Cap and trade not examined

The Bloomberg analysis did not look at the impact of what happens next year when California expands its cap-and-trade program for carbon emissions to include motor transport fuels.

Right now, the mandate only requires stationary sources of greenhouse gas pollution — including utilities, manufacturers and food processors — to report their emissions and submit sufficient allowances.

A comprehensive look at what will happen to California’s fuel demand in years ahead should have factored in cap and trade, Reheis-Boyd said.

“It’s a pretty important thing that’s going to be happening in eight months,” she said. “That’s a pretty big hole” in the analysis, she added, given that the state’s Air Resources Board has said that it could add 15 to 24 cents per gallon to the cost of fuel.

“You can imagine how consumers will react,” Reheis-Boyd said. “Will they drive as much? There are some people who won’t be able to afford to.”

But Severin Borenstein, an economist at UC Berkeley who advised the state on the design of its emissions system, said that expanding cap and trade to include fuels would add a cost but probably wouldn’t significantly dampen fuel demand. He had not seen the Bloomberg analysis.

The added expense to oil refiners “would be almost entirely passed through to the retail price,” Borenstein said. “At today’s [carbon] allowance price, that would add about 12 cents per gallon.”

“Most likely the price of emissions allowances will stay near the price floor so the impact on price of gasoline will most likely be 15 cents or less,” he added. “The impact of a 15-cent price increase on [California] consumption would likely be less than 1 percent. So, it’s probably not going to be a major factor compared to CAFE.”