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Regulations and American Refineries

May 30, 2012 by 1 Comment

 

American refineries are closing and more closures are likely, often because of overly-burdensome regulation as well as lower gasoline demand. Several refineries in Pennsylvania are idle and possibly closing if no buyers come forward. The refining industry is one of the most highly regulated in the country and has been struggling for years to maintain minimal profit margins. In the face of even more regulations from the Environmental Protection Agency (EPA), who are, imposing carbon-emission regulations as well as proposing overly-strict ozone regulations and other regulations, more closures are likely. Not only do EPA’s federal standards impose burdens on the industry, but state and local regulators are also part of the problem.[i]

Regulations Affecting Refinery Operations

The Clean Air Act of 1970 was the first regulation to significantly change the refinery industry by prohibiting lead additives in gasoline. Later amendments were added that created oxygenated and reformulated gasoline bringing about the “boutique fuel” issue. Each of these fuels are available in 3 grades (regular, mid, and super) and are adjusted for winter/summer and northern/southern driving conditions.[ii] When refineries must switch over from winter grade to summer grade gasoline in the spring, motorists have historically seen gasoline prices rise.

Reformulated gasoline was the result of Amendments to the Clean Air Act in 1990 and mandated gasoline that burned more cleanly than conventional gasoline. Areas of the country that did not meet the EPA’s ozone regulations were required to use reformulated gasoline. Reformulated gasoline burns cleaner by reducing smog-forming and toxic pollutants, is less prone to evaporation, and uses an oxygenate to improve combustion.

There are currently 15 distinct boutique fuels required in portions of 12 states by federal regulation.  But, in addition to the federal standards for reformulated gasoline, State Implementation Plans (SIPs) require low-Reid Pressure conventional gasoline. California, whose gasoline prices are higher than the rest of the nation, requires a cleaner fuel than the federal reformulated gasoline and the Midwestern states require an ethanol-blended reformulated gasoline.

The Energy Policy Act of 2005 amended the Clean Air Act and limited the number of boutique fuels to those existing as of September 1, 2004. The Boutique Fuel Reduction Act of 2009 further amended the Clean Air Act to provide temporary waivers for unexpected problems that would not allow delivery of the additives and to allow the EPA Administrator to reduce the number of boutique fuels if any became identical with a federally approved fuel or was no longer included in a SIP.

Between 1992 and 2005, oxygenated fuel blends were required by EPA to reduce ground-level ozone and smog. At that time, methyl tertiary-butyl ether (MTBE) was used as the oxygenate for states other than the Midwest and ethanol was used as the oxygenate in the Midwest. MTBE and ethanol served as an octane booster, a volume extender in gasoline, and as the oxygenate for reformulated gasoline. Later, MTBE was banned in many states because of ground water concerns, leaving ethanol as the most cost-effective oxygenate. While MTBE could be blended at the refinery, ethanol, because of its corrosive nature, has to be blended at the storage facility where the fuel is dispensed to the fuel truck.

The Energy Policy Act of 2005 created the Renewable Fuel Program that mandated the use of renewable fuels in gasoline. That act required the production of 7.5 billion gallons of renewable fuels for 2012. The Energy Independence and Security Act of 2007 increased the target volume to 36 billion gallons by 2022, mandating that 15 billion gallons could be from corn-based ethanol and the remainder had to come from advanced biofuels, namely cellulosic ethanol. EPA administers the program and can lower the targets for cellulosic ethanol if not commercially available. However, the lowered EPA targets are still difficult for refineries to achieve since cellulosic ethanol does not exist commercially. As a result, refiners have had to purchase waivers, needlessly increasing the cost of gasoline. The penalties are estimated to be $6.8 million in 2011 and higher for 2012 since EPA is mandating that 30 percent more of the nonexistent fuel be purchased by refiners.[iii] EPA has also determined that vehicles of model year 2001 or newer can use a blend of 15 percent ethanol and 85 percent gasoline without hurting those engines. Currently, the maximum blend is 10 percent ethanol and 90 percent gasoline.

In 2007, the Supreme Court ruled that the EPA had the authority to regulate carbon dioxide emissions under the Clean Air Act. In response to the FY 2008 Consolidated Appropriations Act, EPA required suppliers of fossil fuels, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more of greenhouse gas emissions annually to submit reports to EPA (the Mandatory Reporting of Greenhouse Gases Rule). The rule provides the basis for future legislation or regulation to limit greenhouse emissions from refineries and other industrial users.

While a ‘cap and trade’ program to limit greenhouse gases did not pass in Congress as the Obama Administration had wanted, because of the Supreme Court’s ruling allowing the EPA to regulate carbon dioxide emissions, additional regulations are being levied upon industries.

Among the upcoming regulations for refineries are Tier III and emission standards for refineries and U.S. smog and particulate matter air-quality standards. Since 2004, when EPA’s Tier II standards were implemented, refiners cut sulfur levels in gasoline by 90 percent, from an average of 300 parts per million in 2004 to an average of 30 ppm today, at a cost of $10 billion.[iv]  EPA’s Tier III rules would cut the sulfur content of gasoline more from 30 to 10 parts per million.  A reportconducted by Baker and O’Brien for the American Petroleum Institute (API)[v] found that the rule would add $2.4 billion in annual compliance costs, resulting in an increase of  6 to 9 cents per gallon of gasoline.[vi] Achieving the incremental sulfur reduction would require large capital investments in equipment that would emit more carbon dioxide and could lead to as many as seven additional refinery closures.[vii]

Refinery Closings and Purchases

U.S. refiners are closing plants that have become uneconomic. In recent years, refineries closed in Westville, New Jersey, and Yorktown, Virginia and this past December a large refinery in southeastern Pennsylvania and one in New Jersey were shuttered.[viii]

Two refineries in Pennsylvania with a joint capacity of 363,000 barrels per day owned by Sunoco and Conoco Phillips were recently idled due to losses resulting from increased regulatory requirements and lower demand for petroleum products.  Sunoco estimates that environmental regulatory costs represent about 15 percent of its operating budget. The two idled Pennsylvania refineries along with a third Sunoco refinery still operating in the Philadelphia area employ 1,200 workersand almost as many salaried and contract workers, manufacturing 50 percent of the petroleum fuels produced on the East Coast of the United States.[ix]   However, while these refineries are experiencing losses and two are idled, there seems to be some recent interest.

Energy Transfer Partners and Sunoco have entered into a merger agreement where Energy Transfer Partners will acquire Sunoco for $5.3 billion, creating one of the largest and most diversified energy partnerships in the country. According to Sunoco, its Marcus Hook plant, which it idled in December, will remain closed under the merger.  Its Philadelphia refinery, which is the largest on the East Coast, is still operating, employing about 850 workers.[x]

The Conoco Phillips refinery in Trainer, Pennsylvania produces 185,000 barrels a day.[xi]   Over the last 10 years Conoco Phillips invested 100 percent or more of its profit into its Trainer refinery to meet regulatory requirements and has lost money in each of the previous three years.[xii]  Delta Airlines just purchased the Conoco Philips facility as a hedge against increasing jet fuel prices for $150 million. Delta plans to invest $100 million in maximizing the refinery’s jet fuel output, cutting the airline’s fuel bill by $300 million a year.[xiii]

A major Caribbean export refinery supplying the East Coast (Hovensa’s U.S. Virgin Islands refinery) has closed.  The Hovensa refinery in the U.S. Virgin Islands was located in a region that was in attainment with the Clean Air Act.   However, EPA required the company to spend an additional $700 million replacing turbines.  After losing $1.3 billion in last three years, the refinery could not afford the additional regulatory compliance costs.[xiv]

According to a March 2011 Department of Energy report, in the past 20 years, federal regulations were a significant factor in the closing of 66 U.S. refineries. (See chart below.) Refinery closures and the recession have led to a loss of over 3,000 direct jobs and 506,000 barrels per day decrease in capacity.

Source:  U.S.  Department of Energy, Office of Policy and International Affairs, Small Refinery Exemption Study – An Investigation Into Disproportionate Economic Hardship, p.  28-30, found at:  http://www.epa.gov/otaq/fuels/renewablefuels/compliancehelp/small-refinery-exempt-study.pdf

According to the Energy Information Administration, the recent refinery idlings and closures have not affected markets so far because the loss of fuel from the Sunoco and ConocoPhillips refineries has been partially offset by the start up of a refinery in Delaware City, Delaware, that opened in October 2011. The refinery had been shut down for two years by Valero and was recently purchased by PBF Energy, which is attempting to make a profit from it.[xv] However, according to PBF Energy chairman, Tom O’Malley, under Tier III, the sulfur removed from PBF’s total gasoline production at its three refineries, which produce about 4.5 billion gallons, would be less than one-eighth of what a 500 megawatt coal plant emits in a year, questioning the benefits of the EPA’s latest refinery rule.[xvi]

The closures and potential closures mark a change taking place in the refinery business, due to the differences in the prices of different crude oil grades from different global producing areas. U.S. east coast refiners pay a higher price for imported crude than other U.S. refiners using Canadian or domestic crude. Other problems affecting the refinery industry are lower demand for gasoline, increasing volumes of ethanol, improvements in vehicle fuel efficiency, permitting delays, and policies to encourage the purchase of electric and other alternate fuel vehicles. Some researchers believe that the United States and other developed nations have reached “peak travel,” and that the number of miles driven per year is not expected to increase as it has in the past.

Conclusion

The U.S. refinery industry has spent $128 billion since 1990 to comply with federal environmental regulations[xvii], which adds significantly to the costs of manufacturing refined products.  Historically, refiners have supported regulations that were clearly beneficial to the environment.  However, as environmental standards are tightened, the cost to meet those standards increases exponentially, threatening the competitiveness of American refineries in the global marketplace.  

According to Bill Klesse, former Chairman of the National Petroleum and Refiners Association, overregulation is not only likely to cause expansion of existing plants to slow down if not stop altogether, it could curtail improvements to those facilities. That was a warning he made 2 years ago. But the warning is not being heeded by the Obama Administration and his Environmental Protection Agency. According to Environmental Protection Agency (EPA) official, Region VI Administrator Al Armendariz, EPA’s “general philosophy” is to “crucify” and “make examples” of oil and gas companies.[xviii]

Bob Greco, API downstream and industry operations director, well-stated what the regulatory situation should be:

“We must be sure that new regulatory proposals are necessary, properly crafted, practical and fair to allow US refiners to remain competitive, preserve good paying refinery jobs and ensure our energy security.”

That should be true of all regulations.

[i] Politico, Far-reaching effects of refining regulations, January 13, 2012,http://www.politico.com/news/stories/0112/71396.html

[ii] Congressional Research Service, The U.S. Oil Refining Industry: Background in Changing Markets and Fuel Policies, November 22, 2010, http://www.fas.org/sgp/crs/misc/R41478.pdf

[iv] U.S. House Of Representatives, Committee on Homeland Security, Testimony of American Fuel and Petrochemical Manufacturers, The Implications of Refinery Closures for U.S. Homeland Security and Critical Infrastructure Safety,” March 19, 2012

[v] American Petroleum Institute, Addendum to Potential Supply and Cost Impacts of Lower Sulfur, Lower RVP Gasoline, March 2012, http://www.api.org/news-and-media/news/newsitems/2012/mar-2012/~/media/Files/News/2012/12-March/Addendum-Potential-Impacts-of-Lower-Sulfur-Lower-RVP-Gasoline-Report.ashx

[vi][vi] Fuel Fix, EPA low-sulfur rule could hike cost of making fuel, industry says, March 22, 2012,http://fuelfix.com/blog/2012/03/22/epa-low-sulfur-rule-could-hike-cost-of-making-fuel-industry-says/

[vii] U.S. House Of Representatives, Committee on Homeland Security, Testimony of American Fuel and Petrochemical Manufacturers, The Implications of Refinery Closures for U.S. Homeland Security and Critical Infrastructure Safety,” March 19, 2012

[viii] Oil Price, Peak Oil Crisis Being Compounded by Refinery Closures, January 26, 2012, http://oilprice.com/Energy/Oil-Prices/Peak-Oil-Crisis-Being-Compounded-by-Refinery-Closures.html

[ix] National Geographic, With Gas Prices High, U.S. Refinery Closures Hit Workers and Drivers , April 4, 2012,http://news.nationalgeographic.com/news/energy/2012/04/120404-northeast-us-refinery-closures-gas-prices/

[x] Texas-based natural gas company buys Sunoco for $5.3 B, May 1, 2012, http://www.nj.com/gloucester-county/index.ssf/2012/05/texas-based_natural_gas_compan.html

[xi] AOL Energy, Refinery Closures Would Disrupt Supply Chain, Marketers Say, February 7, 2012,http://energy.aol.com/2012/02/07/refinery-closures-would-disrupt-supply-chain-marketers-say/

[xii] U.S. House Of Representatives, Committee on Homeland Security, Testimony of American Fuel and Petrochemical Manufacturers, The Implications of Refinery Closures for U.S. Homeland Security and Critical Infrastructure Safety,” March 19, 2012

[xiii] USA Today, Delta buys oil refinery in a bid to offset rising fuel costs, May 1, 2012,http://travel.usatoday.com/flights/story/2012-04-30/Delta-buys-oil-refinery-in-a-bid-to-offset-rising-fuel-costs/54648888/1

[xiv] U.S. House Of Representatives, Committee on Homeland Security, Testimony of American Fuel and Petrochemical Manufacturers, The Implications of Refinery Closures for U.S. Homeland Security and Critical Infrastructure Safety,” March 19, 2012

[xv] Energy Information Administration, Potential Impacts of Reductions in Refinery Activity on Northeast petroleum Product Markets, February 27, 2012, http://www.eia.gov/analysis/petroleum/nerefining/update/

[xvi] U.S. Congress Joint Economic Committee, Testimony of Thomas D. O’Malley, Chairman of PBF Energy, Gas Prices in the Northeast: Potential Impact on the American Consumer Due to  Loss of Refining Capacity, April 26, 2012

[xvii]U.S. House Of Representatives, Committee on Homeland Security, Testimony of American Fuel and Petrochemical Manufacturers, The Implications of Refinery Closures for U.S. Homeland Security and Critical Infrastructure Safety,” March 19, 2012

[xviii] Cnsnews, EPA Official’s ‘Philosophy’ On Oil Companies: ‘Crucify Them’ – Just As Romans Crucified Conquered Citizens, April 25, 2012, http://cnsnews.com/blog/craig-bannister/epa-officials-philosophy-oil-companies-crucify-them-just-romans-crucified

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats, Tier 3 Standards Tagged With: , , , ,

AEA President Opposes Obama Push for More Wind Handouts

May 24, 2012 by Leave a Comment

For Immediate Release
May 24, 2012

WASHINGTON D.C. — In advance of President Obama’s campaign-year stop in the State of Iowa to tout his administration’s support for wind energy handouts, AEA President Thomas Pyle released a letter to all Members of the 112th Congress opposing the administration’s call for more deficit spending on renewable energy.

“Decades of clamoring for subsidies and cash handouts by wind power proponents have done nothing to mature the industry into a viable competitor in a free energy market,” Pyle wrote.  “If the past three years have proven anything, they have demonstrated that record deficit spending does not create jobs. Neither does limitless taxpayer-funded handouts to an uneconomic, uncompetitive renewable sector reduce the cost of electricity for American consumers nor midwife a sustainable industry.”

To read Pyle’s letter, click here.

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Filed Under: Press Releases Tagged With: , , , , ,

Ethanol Hasn’t Made Gasoline Cheaper

May 24, 2012 by 1 Comment

The Renewable Fuels Association (RFA) is touting a new study claiming that ethanol reduced gasoline prices by more than a dollar per gallon in 2011. As with similar studies in the past, the methodology used here to calculate this number rests on a basic fallacy in how they frame the question, which we’ll explain below. Beyond framing the question incorrectly, there is the obvious point that ethanol has lower energy content than conventional gasoline. If ethanol really were efficient, it wouldn’t take government favors to prop up the industry.

The Alleged Benefits of Ethanol

Here’s an excerpt from the RFA’s media blitz:

America’s growing use of domestically-produced ethanol reduced wholesale gasoline prices by an average of $1.09 per gallon in 2011, according to updated research conducted by economics professors [Dermot Hayes and Xiaodong Du] at the University of Wisconsin and Iowa State University…

“Growth in US ethanol production has added significantly to the volume of fuel available in the US,” said Professor Hayes. “It is as if the US oil refining industry had found a way to extract 10% more gasoline from a barrel of oil. This additional fuel supply has alleviated periodic gasoline shortages that had been caused by limited refinery capacity…” [Bold added.]

The part we’ve put in bold gives away the game; it shows how Professor Hayes and Du got the ethanol rabbit in the hat. Although their study relies on apparently impressive regression analysis, what they are doing in a nutshell is looking at the U.S. refinery infrastructure in 2011 and asking, “What would happen to gas prices if all ethanol production suddenly disappeared overnight?” Based on their careful statistical tests, they conclude that gasoline prices at the pump would jump more than a dollar per gallon.

Yet that is a totally different claim from saying that if the U.S. government had never subsidized and mandated the increased use of ethanol, that gasoline prices would now be higher.

The basic mistake underlying the paper is that it assumes the conventional refining capacity of the petroleum sector would have developed in the same way, under a free market in fuels. But on the contrary, had the government not artificially carved out market share for ethanol, then conventional refining capacity would have grown more quickly than it did in reality. In that alternate timeline, the lack of ethanol in 2011 wouldn’t have made gasoline more expensive; in fact, because ethanol needs to be propped up by the government to maintain its current market share, gasoline would have been cheaper in 2011 if the U.S. had had a free market in fuels for the last decade.

The authors actually admit all of the above criticism when they wrote in their original 2008 paper:

These [theoretical] reductions in retail gasoline prices [reported in the paper] are surprisingly large….The availability of ethanol essentially increased the “capacity” of the U.S. refinery industry and in so doing prevented some of the dramatic price increases often associated with an industry operating at close to capacity. Because these results are based on capacity, it would be wrong to extrapolate the results to today’s markets. Had we not had ethanol, it seems likely that the crude oil refining industry would be slightly larger today than it actually is… [p. 13, bold added]

Unfortunately, the authors don’t seem to realize the full significance of this admission, and they don’t appear to have carried forward these caveats into their latest update of results.

Pro-Ethanol Results Make No Sense

Perhaps the best way to show that there is something fundamentally wrong with the Hayes and Du paper, is to look at their Table 3 where they provide their disaggregated, regional results. The two extreme ends of the spectrum show that they think ethanol in 2011 made gasoline 73 cents cheaper per gallon in the Gulf coast, while ethanol in 2011 made gasoline a whopping $1.69 cheaper in the Midwest.

Stop and ask yourself: Does that make any sense at all? Can it possibly be that in the absence of ethanol, gas prices would have jumped only 73 cents in the Gulf coast, while prices would have risen more than twice as much—$1.69—in the Midwest?

Of course not; that wouldn’t have happened. Market forces and competition would have spread out the price rise uniformly; there couldn’t be such a huge discrepancy laid on top of the small differences already present.

So what then is generating the strange result in the Hayes and Du paper, showing that ethanol apparently is much stronger at slowing gas price hikes in the Midwest than it is in other parts of the country?

The answer relates to the development of refining capacity. Given the government’s support and mandates for ethanol, it makes sense that the Midwest (where corn is grown) would see the biggest deviation from how the market would have normally developed. So then if we ask—as the study does—which region of the country would be shocked the most if ethanol suddenly disappeared, it would naturally be the one that was most distorted by the ethanol programs in the first place. Yet this hardly shows that Midwest gasoline prices were held down more than in other areas of the country; instead it shows that the whole premise of the study is flawed.

Common Sense

Besides all of the high-brow statistics, we can tell there is something fishy about the RFA’s claims by considering the obvious fact that ethanol contains less energy by volume than conventional gasoline. Indeed, AAA has estimated that even at today’s relatively high prices, once we adjust for BTUs (i.e. energy contain), E85 (i.e. fuel with 85% ethanol content) is more expensive than conventional gasoline mixtures. The government isn’t helping motorists by using tax dollars and mandates to force refiners to incorporate a fuel that gets less mileage for the money.

Conclusion

Ethanol may have a niche in the fuel market, even without government intervention. But in order to tell just how it fits in, we need a level playing field. Government subsidies and mandates for ethanol do not help consumers and they don’t make gasoline cheaper.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , ,

Nothing Convenient About RFS

May 22, 2012 by Leave a Comment

 

A recent study by the National Association of Convenience Stores (NACS) found that two most prominent regulations affecting fuel use in the United States—the Renewable Fuel Standard (RFS) and the Corporate Average Fuel Economy (CAFE) standards—have competing requirements that will have a negative impact on the more than 120,000 convenience stores that sell motor fuel around the country, as well as the Americans that frequent them.

Under the RFS, which was set by Congress in 2005 and is administered by the Environmental Protection Agency, increasing amounts of biofuels like ethanol must be blended into our fuel every year, culminating in a target of 36 billion gallons per year in 2022.  However, under the CAFE standards that President Obama has set, automakers will be required to make automobile fleets with a combined average fuel economy of 54.5 miles per gallon by the year 2025.  As such, the ratio of ethanol to gasoline will increase, while fuel economy lessens the overall amount of gasoline we use.  An excerpt from NACS’ press release on the recent study notes, “The cumulative effect of the two mandates is that renewable fuels will be required to represent a significantly greater share of the market than originally anticipated — perhaps as much as 40%, or four times higher than today.”

According to the NACS, the combined impact of these two regulations is extremely problematic for the retail fuels market.  NACS Vice President of Government Relations John Eichberger said, “to meet such a high renewable fuels concentration, it is likely that most retailers in the country will have to replace their underground storage tank systems and fuel dispensers.  For the convenience industry alone, this will require a minimum infrastructure investment that will add nearly $22 billion to the cost of retailing fuels.”  These costs will ultimately be passed on to consumers in the form of higher prices.

Ironically, using CAFE to decrease consumption while increasing the ethanol mandate will  also have a significant impact on how much bang consumers get for their buck at the pump in terms of gas mileage.  A gallon of ethanol contains about 30 percent less energy than a gallon of gasoline; this is one of the reasons that  the May 15th AAA Daily Fuel Gauge report shows that, on an energy-output basis, gasoline containing 15 percent ethanol is 58 cents more expensive than regular grade gasoline.  If CAFE drops gasoline demand from 140 billion gallons per year to 100 billion gallons, and the RFS requires 36 billion gallons of ethanol by 2022, the current blend of E10 (gasoline with 10 percent ethanol) will need to be increased to E40 nationwide.

In addition to being much less efficient than gasoline, E40 cannot be used in most current car models, lawn mowers, and other small engines.  The U.S. Energy Information Administration forecasts that even in 2022, just 16 percent of on-road vehicles will be able to use flexible fuel.

Mandating the use of renewable fuels has, thus far, been a failed experiment; the lack of commercial-scale cellulosic biofuels plants in the U.S. has left it unclear if even a drop of cellulosic biofuel was blended into the fuel supply in 2011.  Nonetheless, refiners incur fines for not using fuel that isn’t available, and this situation will be exacerbated as CAFE standards and the RFS are ratcheted up.  NACS’s Eichberger notes that, “unless something dramatic happens, we will hit the ‘blend wall’ within the next two years and will not be able to meet RFS requirements. This will trigger massive fines throughout the petroleum distribution system that will increase the cost to sell motor fuels.”  Again, these are costs that are passed on at the pump.

The NACS’ findings show that, despite their stated goal of decreasing the amount of gasoline we use here in the United States, the Obama administration’s proposed RFS and CAFE standards conflict with each other, and in doing so the regulations negate the beneficial effects that they are supposed to provide.   And not only will these regulations make fuel more expensive for less miles per gallon, they reduce the ability of drivers to choose what is most appropriate for their needs. Selecting a vehicle that has the attributes they want should be a choice that Americans are able to make for themselves, rather than being forced to buy a car that is more fuel efficient over the long term but costs thousands more up front.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard Tagged With: , , , ,

EPA Staff’s Attempt to Regulate Greenhouse Gases Under the Clean Air Act

May 21, 2012 by Leave a Comment

 

Explaining the ANPR

The Environmental Protection Agency announced in 2008 that it was well on its way to regulating at least 85 percent of the energy used in America in the name of global warming (nevermind the fact that global temperatures have inexplicably not increased since at least 2001).[1] Because energy is an indispensable part of economic activity, if EPA’s plans go forward they will exercise some regulatory control over most of the American economy.

The problems created by regulating greenhouse gases under the Clean Air Act are legion. Nothing says it better than the following statement by former EPA Administrator Johnson himself:

If EPA were to regulate greenhouse gas emissions from motor vehicles under the Clean Air Act, then regulation of smaller stationary sources that also emit GHGs—such as apartment buildings, large homes, schools, and hospitals—could also be triggered. One point is clear: the potential regulation of greenhouse gases under any portion of the Clean Air Act could result in an unprecedented expansion of EPA authority that would have a profound effect on virtually every sector of the economy and touch every household in the land. [2]

Administrator Johnson is correct. Eighty five percent of the energy used in America comes from fossil fuels.[3] Carbon dioxide emissions are an unavoidable byproduct of the combustion of fossil fuels. EPA staff is seeking to regulate the most widespread sources of energy in the United States.

To understand the scope of EPA’s potential regulations, below is a diagram of the sources of greenhouse gas emissions in the United States. [4] To reduce greenhouse gas emissions, EPA’s regulations will affect all of these sectors, industry, transportation, commercial, residential, and agriculture. It will raise the price of energy and thereby increase the cost of doing business.

How did we get here?

Since at least the late 1990s, environmental activists have tried to get EPA to regulate greenhouse gases. [5] In 1998, EPA General Counsel, Jonathan Cannon, wrote a legal opinion stating that EPA had the authority to regulate greenhouse gases under the Clean Air Act. [6] Despite this opinion, EPA declined to regulate greenhouse gases. One reason EPA did not attempt to regulate greenhouse gases at the time is because Congress attached riders to appropriations bills forbidding EPA from spending any money on greenhouse gas regulations.

To force EPA to take action, in 1999, a coalition of environmental activists used Mr. Cannon’s opinion to sue EPA in an attempt to force EPA to regulate greenhouse gas emission from mobile sources. [7] These environmental activists realized that if a court would find that EPA had the authority to regulate greenhouse gases under §202 of the Clean Air Act (the section that regulates emissions from vehicles), then EPA would be forced to regulate greenhouse gases under the rest of the Clean Air Act and apply regulations to all fossil fuel use in the United States.

The Supreme Court Weighs in—Massachusetts v. EPA

A group of attorneys general, led by the Attorney General of Massachusetts, also sued EPA in an attempt to bolster the case against EPA. This case became Massachusetts v. EPA. [8] On April 2, 2007, in a 5-4 decision, the Supreme Court agreed with the environmental activists that EPA had the authority to regulate greenhouse gas emissions from motor vehicles under the Clean Air Act because they found that greenhouse gases are an “air pollutant.” Because greenhouse gases, in the Court’s opinion, are air pollutants under the Clean Air Act, the act then requires EPA to regulate greenhouse gases. The Supreme Court held that EPA had to regulate greenhouse gases or for EPA to justify its decision not to regulate greenhouse gases.

The Supreme Court’s Tortured Logic

To reach this result the Supreme Court had to use some tortured logic. Section 202 of the Clean Air Act requires EPA to regulate “any air pollutant” . . . “which may reasonably be anticipated to endanger public health or welfare.” [9] The question is, what is the definition of an “air pollutant” under the Clean Air Act? The majority decided that an air pollutant was any “airborne compound of whatever stripe.” [10] They even went so far to say that the CAA was unambiguous on this point.[11] Sadly they are unambiguously wrong.

The Clean Air Act defines a pollutant as, “any air pollution agent or combination of such agents, including any physical, chemical, … substance or matter which is emitted into or otherwise enters the ambient air.” [12] For something to be a pollutant, therefore, it must be an “air pollution agent,” not merely anything in the air.

Carbon dioxide sure doesn’t sound like an “air pollution agent.” It is inert, colorless, odorless, and it isn’t toxic to human at 20 times ambient levels. Justice Scalia in dissent explained how flawed the majority’s misconstruction of this term was. He wrote from the majority’s opinion “it follows that everything airborne, from Frisbees to flatulence, qualifies as an ‘air pollutant.’ This reading of the statute defies common sense.” [13] Regardless of Massachusetts v. EPA defying common sense, it is the law.

EPA’s Renewed Efforts to Regulate Greenhouse Gases

After Massachusetts v. EPA, EPA had a few options: 1) promulgate a new rule regulating greenhouse gases from vehicles; 2) attempt to extend their authority in the Clean Air Act to the fullest extent and try to regulate all U.S. greenhouse gas emissions; or 3) provide a “reasonable explanation” of why they weren’t going to regulate greenhouse gas emissions. [14]

The problem with declining to regulate greenhouse gases is that EPA has in the past essentially stated that greenhouse gases are harmful to human health and welfare. The Supreme Court also made it somewhat difficult for EPA not to regulate greenhouse gas emissions. For example, the Court wrote:

Under the clear terms of the Clean Air Act, EPA can avoid taking further action only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do. [15]

The real question is not if greenhouse gases contribute to climate change (greenhouse gases obviously contribute to the greenhouse effect), but whether greenhouse gases “endanger public health and welfare” as defined by the Clean Air Act. For EPA to avoid taking further regulatory action, they would need to rebut the Supreme Court’s claims of alleged harms from global warming and EPA’s past claims of harms from greenhouse gas emissions.

The Advance Notice of Proposed Rulemaking

Instead of taking the difficult path of explaining the latest climate science and data and refusing to regulate greenhouse gases, EPA instead is attempting to expand their regulatory reach. In late 2007, EPA unofficially announced that it was going to find that greenhouse gases endangered public health and welfare and should therefore be regulated under the Clean Air Act. Before this rule came out, however, other Administration officials questioned the wisdom of such a move. Because of the complexity of potentially regulating 85 percent of all energy use in America, EPA decided to ask the American public for comments on how to proceed. To do this, they put out an “Advance Notice of Proposed Rulemaking” (ANPR). [16]

In many cases, an ANPR is a short document that asks the public for comment without revealing an agency’s policy preferences. But instead of a small request for comment, EPA released an enormous 588 page ANPR explaining some of the possible ways to regulate greenhouse gases using the Clean Air Act. The worst part of the ANPR is that EPA staff has essentially predetermined their course of action—regulating greenhouse gases.

What will the ANPR Lead To?

The ANPR envisions massive amounts of regulation on all forms of greenhouse gas emissions and the activities that lead to greenhouse gas emissions. Massachusetts v. EPA dealt with the regulation of mobile sources and EPA will likely start by regulating anything that has an engine such as automobiles, light-duty trucks, heavy-duty trucks, motorcycles, planes, ships, boats, recreational vehicles, farm tractors, construction equipment, garden equipment, and even lawnmowers just to name a few.

And what will these potential regulations look like? EPA is proposing to require a 10 percent reduction in the output of America’s energy-intensive industries, lowering the speed limit back to 55 mph, and requiring ocean-going vehicles to take 10 percent longer to deliver their cargo.

EPA’s regulation will not be limited to mobile sources. By starting to regulate greenhouse gases under one section of the Clean Air Act, EPA would be forced to regulate it under other sections, including a program called Prevention of Significant Deterioration. This program regulates sources that emit 100 tons or more of emissions a year. [17] This may sounds like a lot, but a 100,000 square foot building (more or less 10 stories) would emit that much in a year. This means that EPA would regulate the energy use of all large buildings, and any buildings, such as computer data centers, which use large amounts of energy. There are likely one million new sources that EPA would have to regulate [18] and require the buildings to use “Best Available Control Technology”—whatever EPA decides that is for the buildings. [19]

These regulations could extend to the heating sources of large single-family homes, as well as stores, church, hospitals, and police stations.

EPA would also likely regulate all large beef or dairy operations in the country because cows emit (to put it delicately) large amounts of the potent greenhouse gas methane. Who knows how EPA will propose to control these emissions.

EPA Regulation of Greenhouse Gases Will Lead to Higher Energy Prices

Reducing the greenhouse gas emissions from 85 percent of the energy used in the United States would require tremendous amounts of regulation. The form of these regulations is unclear, but what is clear is that the regulations would dramatically increase energy prices and the price of everything that uses energy, including computers, cars, trucks, washing machines, lawnmowers, and air conditioning units. The economy is already suffering from high energy prices and EPA’s plan will just make that worse.

EPA Regulation of Greenhouse Gases Will Not Affect the Climate

Maybe the most amazing thing about EPA plan is that it won’t affect the global temperature unless the developing world reduces their greenhouse gas emissions. China, not the United States is the world’s largest emitter of carbon dioxide. The U.S. will emit a smaller and smaller share of the world’s total greenhouse gas emissions. [20] If the U.S. were to reduce our carbon dioxide emissions from the transportation sector to zero, the rest of the world would replace those emissions in less than 2 years. [21] A unilateral U.S. reduction in greenhouse gas emissions from the transportation section will have not have a noticeable impact of global climate because of the increases from other countries.

The developing world’s carbon dioxide emissions are far outpacing the emissions from the United States. From 2000 through 2007, China’s carbon dioxide emissions increased 98%, India’s increased 36%, the global total increased 26%, Russia’s increased 10%, the U.S.’s increased 3%. [22]

Worldwide emissions continue to increase, however, because the developing world is more concerned about the health and welfare of their citizens than greenhouse gas emissions. For example, India recent released its National Climate Action Plan on Climate Change. In the plan they stated, “It is obvious that India needs to substantially increase its per capita energy consumption to provide a minimally acceptable level of well being to its people.” [23]

India and other developing nations are not going to limit their energy consumption to pacify EPA. Because they won’t, EPA’s regulation of energy use will only drive up energy prices in America without having any affect on global temperatures.

[1] The Intergovernmental Panel on Climate Change (IPCC) projected that temperature should increase about 2 degrees Celsius per century because of greenhouse gas concentrations and temperatures should increase linearly. So far this century global temperatures have not increased. See http://rankexploits.com/musings/2008/result-of-hypothesis-tests-very-low-confidence-2ccentury-correct/ The lack of warming is especially evident in the satellite temperature record. The satellite temperature data from the University of Alabama at Huntsville is available here: http://vortex.nsstc.uah.edu/public/msu/t2lt/tltglhmam_5.2 and the satellite temperature data from Remote Sensing Systems is here: ftp://ftp.ssmi.com/msu/monthly_time_series/rss_monthly_msu_amsu_channel_tlt_anomalies_land_and_ocean_v03_1.txt.

[2] Environmental Protection Agency, Regulating Greenhouse Gas Emissions under the Clean Air Act, p. 5.

[3] Energy Information Administration, Greenhouse Gases, Climate Change, and Energy, http://www.eia.doe.gov/bookshelf/brochures/greenhouse/Chapter1.htm.

[4] Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2006, p. ES-16, http://www.epa.gov/climatechange/emissions/downloads/08_CR.pdf.

[5] One of the first attempts was the International Center for Technology Assessment’s petition for EPA to regulation greenhouse gases in 1999. See http://www.icta.org/doc/Chronology%20Short%208-31-06.pdf.

[6] Jonathan Z. Cannon, The Significance of Massachusetts v. EPA, May 21, 2007, http://www.virginialawreview.org/inbrief.php?s=inbrief&p=2007/05/21/cannon.

[7] The groups which sued are: Alliance for Sustainable Communities, Applied Power Technologies, BioFuels America, California Solar Energy Industries, Clements Environmental Corporation, Environmental Advocates, Environmental and Energy Study Institutes, International Center for Technology Assessment, Friends of the Earth, Full Circle Energy Project, Inc., Green Party Rhode Island, Greenpeace U.S.A., Network for Environmental and Economic Responsibility of the United Church of Christ, New Jersey Environmental Watch, New Mexico Solar Energy Association, Oregon Environmental Council, Public Citizen, Solar Energy Industries Association, and the SUN DAY Campaign.

[8] www.supremecourtus.gov/opinions/06pdf/05-1120.pdf.

[9] 42 U.S.C. § 7521(a)(1).

[10] Mass. v. EPA, 127 S.Ct. at 1460.

[11] Id.

[12] 42 U.S.C. § 7602(g).

[13] Mass. v. EPA, 127 S.Ct. at 1476.

[14] Id. at 1462.

[15]Id. at 1462.

[16] Environmental Protection Agency, Advance Notice of Proposed Rulemaking: Regulating Greenhouse Gas Emissions under the Clean Air Act, http://www.epa.gov/climatechange/anpr.html

[17] Specifically this is defined as a source that emits at least 100 tons per year of an air pollutant of any other source with the potential to emit 20 tons per year of an air pollutant.

[18] Portia M.E. Mills & Mark P. Mills, A Regulatory Burden: The Compliance Dimension of Regulating CO2 as a Pollutant, http://www.uschamber.com/assets/env/regulatory_burden0809.pdf.

[19] For a more complete explanation of the issue with Prevention of Significant Deterioration see William Kovacs’ testimony before the United States Committee on Environment and Public Works: http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=9cc4d7e4-f066-4534-9337-9bf53154b0e1 and Marlo Lewis’ testimony before the same committee: http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=38ed7b76-2817-4f03-9e51-537515c9ffd2.

[20] According to the Global Carbon project in 2007 China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[21] Calculated using the emission data from the Global Carbon Project. According to the ANPR, the GHG emissions from the transportation sector total 28% of total U.S. emissions. ANPR at 44403. Twenty eight percent of the U.S.’s 2006 carbon dioxide emissions are 436,141 GgC. From 2005 to 2007, the world’s emissions, with the emissions from the U.S., grew by 476,324 GgC.

[22] Calculated using the emission data from the Global Carbon Project. In 2000, China emitted 910,950 GgC, India 316,804 GgC, Russia 391,652 GgC, and the U.S. 1,541,013 GgC. By 2007, China emitted 1,801,932 GgC, India 429,601 GgC, Russia 432,486 GgC, and the U.S. 1,586,213 GgC.

[23] Government of India, National Action Plan on Climate Change, http://pmindia.nic.in/Pg01-52.pdf

 

Filed Under: Facts, News, Products and Power, Threats Tagged With:

Fracking and Job Creation

May 17, 2012 by 1 Comment

One of the few booming sectors in the U.S. economy is oil and natural gas. Domestic development has been helped by high worldwide prices for crude, but the improvements in horizontal drilling and hydraulic fracturing—“fracking”—have also been very important. In a new report, researchers at the University of Texas at San Antonio (UTSA) estimate that the Eagle Ford shale alone generated $25 billion in economic activity in 2011 alone, in addition to creating over 47,000 jobs. These gains could be increased if federal policies opened up more of the country’s natural wealth to development—eventually adding $273 billion to annual GDP and 1.2 million jobs, according to a 2009 study.

An E&E article by Nathanial Gronewold summarizes the report’s findings:

Researchers at the University of Texas at San Antonio (UTSA)…estimate that the oil and gas industry in the Eagle Ford generated around $25 billion in economic activity for the region in 2011, leading to the addition of 47,097 full-time jobs that year.

…

Oil and gas exploration through horizontal drilling and hydraulic fracturing began there in 2008, when Petrohawk Energy Corp. is said to have first drilled into the formation. The zone’s close proximity to the well-established Texas oil and gas industry and related infrastructure has seen activity there spreading rapidly.

UTSA figures presented in the new study show that from 2010 to 2011, natural gas production has doubled, while crude oil production from the Eagle Ford zone has increased by a factor of six in one year. Natural gas liquids output is estimated to have tripled.

…

By 2021, the shale oil and gas field is seen as generating total economic activity of $90 billion and adding about 117,000 full-time jobs to the region. By then, total wage and salary benefits are seen as more than doubling, to $7.7 billion, while the state of Texas will enjoy an added $1.76 billion in tax revenue just from that one shale oil and gas play.

Unlike the dramatic increase in production on private and states lands in 2011, production on federal lands fell because the federal government is dragging its heels on allowing the development of domestic oil and gas resources, as the following chart clearly shows:

 

Americans are currently suffering from high unemployment, high gas prices, and a monstrous federal budget deficit. Unshackling entrepreneurs to develop oil and gas on federal lands would help on all three fronts.

Filed Under: Emissions Standards, Facts, Products and Power, Renewable Fuel Standard, Threats, Tier 3 Standards Tagged With: , , , ,

Federal Intervention in Energy Markets Isn’t SAFE

May 16, 2012 by Leave a Comment

The proponents of laissez-faire in energy markets keep winning argument after argument, but their critics keep moving the goalposts. For decades, Americans have been warned that they needed to wean themselves from oil because the U.S. would always be dependent on hostile foreign regimes. Now that new technological developments and further discoveries have shown that North America has centuries’ worth of fossil fuels, the argument is shifting. Now the alleged danger—“proving” that we still need the federal government to shift American energy consumption away from traditional sources—is volatility in prices.

Consider the recent report on “The New American Oil Boom,” issued by the cleverly named group, Securing America’s Future Energy (SAFE). The following excerpt from its own summary gives the flavor:

Between 2009 and 2011, the United States experienced three consecutive years of crude oil production increases for the first time since the early 1980s, as well as the largest surge in output within a three year period since the late 1960s. This marks a sharp reversal from conventional wisdom of only a few years ago, suggesting U.S. crude oil production was in a decades-long state of decline.

[T]his shift in domestic production is substantial, and has profound positive implications for the domestic economy.…However, these benefits are tempered by the realities of the global oil market, especially in light of continued instability in oil-producing regions, and soaring demand from China, India, and other emerging markets. Most importantly, the paper examines the myth of “energy independence,” underlining that even dramatic increases in domestic production cannot fully insulate the country from the costs of oil dependence, such as high prices and continued volatility, capital flows overseas, and the burden to the military in securing global oil supplies.

…

[W]hile encouraging policymakers to support increased domestic oil production, SAFE presents a number of long-term policy recommendations. To complement the benefits of the oil boom, vehicle fuel-economy standards, and a long-term transition away from petroleum based fuels in the transportation sector are essential steps the country must take towards breaking oil’s stranglehold over our economic and national security.

Contrary to the report, it wouldn’t be “safe” at all to allow the federal government to steer the U.S. energy and transportation markets. The arguments in the report fail to understand the resilience of a market economy, and the dangers of government intervention.

First of all, the reason the market gravitates towards fossil-based energy sources—particularly for vehicles—is that they are far cheaper and more convenient than alternatives, at least with current technologies and consumer preferences. Talk of “price volatility” is silly in this context. It is much better to have a fossil-price bounce around between low and medium, rather than switch to an alternative-energy price that is consistently high. If it really were the case that in the long run, consumers would end up paying more on average for fossil-based energy, then it wouldn’t take government measures to effect a transition. The market would naturally move to the cheaper (on average) energy sources.

The people pushing the SAFE line apparently don’t understand how market economies use futures and other derivatives markets to anticipate future interruptions in supply. The basic function of speculators in a market is to do just that—to provide a “shock absorber” as it were, and smooth out price volatility. So long as the government stood back and let people in the energy sector and the financial do their respective jobs, without threats of punishments whenever somebody made an “unconscionable” amount of money, then market prices would give the proper information as to where investments should go, for future energy development.

As a final observation, the SAFE argument about military action is also nonsensical, from an economic viewpoint. Without taking a stand on the diplomatic and strategic motivations for various military operations by the U.S. government, we can safely say that it is simply not true that U.S. consumption of oil is based upon large military expenditures. After all, if you are a foreign dictator and seize control of vast stockpiles of oil, what are you going to do with it? Drink it? Of course not. The whole point of seizing oil reserves is that you now get to pocket the money when you sell it on the world market.

People have been decrying America’s alleged vulnerability to OPEC nations for decades. So far, the world hasn’t collapsed on that score. Had Americans back in, say, 1980 implemented a full-scale switch to electric cars and wind power, the U.S. standard of living would be far lower today than it is. Ironically, faulty government policies themselves—in the form of uncertainty over future penalties on carbon emissions, on-again-off-again bans on offshore drilling, and of course the Keystone Pipeline decision—contribute to the volatility in the petroleum markets, and make oil prices higher than they otherwise would be.

The market economy has many in-built mechanisms for properly anticipating supply interruptions and guiding entrepreneurs to make the most profitable long-term investments. There is no reason to think that government officials can steer the economy more wisely than the combined knowledge of everyone in the worldwide market.

 

 

Filed Under: Emissions Standards, Facts, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , , ,

Growing Skepticism About Government Regulations

May 14, 2012 by Leave a Comment

 

Results of a new national survey conducted for the American Energy Alliance reveal healthy skepticism among likely voters regarding the real value of Federal Government regulations. According to the survey results,  a large majority of Americans now believe that increasing regulations on energy and manufacturing companies often result in more cost than benefit.

Sixty five percent of survey respondents agreed that federal regulation result in more cost than benefits. The President has argued that federal regulations spur innovation and technological progress, however just 22% of respondents believe that is true.

“Federal regulations are increasingly onerous, and a growing majority of the American people recognize how overregulation costs them every day,” said Thomas Pyle, President of the American Energy Alliance. “Consumers clearly understand that when the federal regulators increase the cost of doing business for energy and manufacturing industries, ultimately those costs are going to be paid by the consumers themselves.”

The survey also revealed sentiments regarding the dysfunctional nature of federal rulemaking More than half (52%) strongly agree (77% total agree) that the federal government needs to adopt a more reasonable approach to regulation.  Almost all respondents (87%) think that the government should allow time to determine if existing regulations are effective before adding additional burdens on industry.

These sentiments about overreaching government regulation were even present among self-identified liberals. For example:

  • 78% of moderates and 55% of liberals think that the federal government must adopt a more reasonable approach to regulations;
  • 64% of moderates and 49% of liberals think that federal agencies sometimes demand changes that result in little or no environmental benefit;
  • 29% of moderates and 17% of liberals think that federal regulations get in the way of innovation and technological progress all or most of the time;
  • 58% of moderates and 36% of liberals think that federal regulation results in more costs than benefits.

“It’s clear that the days of people supporting big government regulation are over,” said Pyle.  “Policy makers should understand that people see the benefits of high paying energy and manufacturing jobs and a revived economy, not more bureaucracy and needless burdens on our energy industry,” Pyle added.

The national survey of 1,000 self described likely voters was conducted by MWR strategies April 6-13. The survey has a margin of error of +/- 3.1%.

To read the full survey results, click here.

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Filed Under: News, Products and Power

Does Ethanol Make Gasoline Cheaper?

May 14, 2012 by 1 Comment

 

The federal mandate to blend corn-based ethanol into the U.S. vehicle fuel mix is an economically absurd practice. On a level playing field, conventional gasoline would be used for the foreseeable future, as it is the most efficient method (all things considered) to deliver energy to U.S. vehicles. At most ethanol would have a small share of the market in the absence of federal government support.

However, a study from Iowa State University argues that the growth in ethanol production from 2000 – 2010 has suppressed gasoline prices by an average of 25 cents per gallon and 89 cents per gallon in 2010. The study also warns that if ethanol production were suddenly halted, gasoline prices could rise a shocking 41 to 92 percent.

As we’ll see, these figures are very misleading, because they look at the history of conventional gasoline refinery capacity (in the face of government-supported ethanol output) and assume it wouldn’t have been any different over the last ten years, had the government never supported ethanol. Once we realize the trick involved, the study’s pro-ethanol conclusions fall away.

The Iowa Study’s Claims

The study is heavy on econometrics jargon; quoting portions of it would be virtually useless in conveying to the layperson how the study actually gets its results. The closest to a plain English explanation comes in the authors’ discussion of their final result:

In the scenario in which ethanol is totally eliminated from domestic supply, the system [of equations] specified [earlier in the paper] is used to simulate the gasoline price responses after taking into account (i) the gasoline stocks at the level of 2010, and (ii) the full utilization of the spare capacity of US oil refineries in 2010. Three sets of simulation results are generated under different levels of elasticities (high, medium, and low). The results summarized in Table 4 indicate that if the ethanol supply were eliminated from the domestic gasoline market, wholesale gasoline prices may change by 41%– 92% in the short run depending on the sensitivity of producers and consumers to prices. (“The Impact of Ethanol Production on U.S. and Regional Gasoline Markets: an Update to May 2009,” [.pdf], p. 5.)

As this quotation explains, the study takes as a given that U.S. refining capacity and gasoline stocks start at their actual values for 2010, and then combines them with traditional measures of how gasoline prices move in response to increases in demand, in order to estimate the impact of a sudden disappearance of the entire ethanol industry. Not surprisingly, such an unexpected and massive event would lead to massive spikes (in the short run) of gasoline.

Does the Iowa Study Justify Government Favoritism for Ethanol?

Clearly the groups promoting this study want the reader to draw the inference that the U.S. government’s preferential tax treatment of ethanol is good for U.S. consumers. Yet the study doesn’t prove this at all. The reason conventional gasoline refining capacity is at its current level, is the existence of such a massive program of support for ethanol over the years.

If the U.S. government didn’t give special tax treatment and other mandates to guarantee ethanol a fraction of the market, gasoline would have filled the gap. In other words, government policies have displaced conventional gasoline from the market, and that’s why a sudden removal of all the ethanol would lead to a temporary shock in the gas market. Yet the fact remains that consumers would have been better off, had the government never intervened to support ethanol in the first place.

For an analogy, suppose Chick-fil-A begins running commercials touting the advantages of eating white meat over burgers. In response, the burger joints put out statistics claiming that if all the McDonald’s and Burger King franchises magically disappeared next Tuesday, then there wouldn’t be enough chicken sandwiches to feed Americans at lunchtime. Therefore, the burger joints would conclude, Americans should disregard the Chick-fil-A ads, because clearly there aren’t enough chickens to go around.

Such an argument would be absurd. If American consumers stopped eating burgers and switched to chicken, then McDonald’s and Burger King franchises would close down (or revamp their menus) and be replaced by Chick-fil-A and other such restaurants. The nation’s cattle ranchers would lose business, but the chicken farmers would see growing business. The market would switch over to cater to what consumers wanted.

A similar process would occur if the government treated ethanol the same way it treated gasoline. On a level playing field, it would be unprofitable for refiners to blend billions of gallons of ethanol into their mix, certainly in the long run. The market would gradually adapt to what made economic sense, namely the refining of oil into conventional gasoline. The share of ethanol would shrink, and ultimately consumers and taxpayers would be richer than they otherwise would have been.

While ethanol would have likely penetrated the market without government subsidies, its production would not have reached the levels that were mandated by the government by the Energy Independence and Security Act of 2007.

Explaining the “Regional Effect” of Ethanol Production on Gasoline Prices

The best way to see that the ostensible benefits of ethanol are due to its displacement of traditional gasoline refining, is the regional effect noted by the paper. The authors note in the abstract:

This report…concludes that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. The Midwest region experienced the biggest impact, with a $0.39/gallon reduction, while the East Coast had the smallest impact at $0.16/gallon.

The wording in the quotation above is extremely misleading. The reader gets the impression that gasoline prices were zooming upward, only to be held back by the farsighted politicians who fortunately kickstarted an ethanol program.

In particular, since the “Midwest region experienced the biggest impact” of 39 cents per gallon, while the East Coast “had the smallest impact” at only 16 cents, the innocent reader might get the idea that over the period in question (from January 2000 to December 2010), gasoline prices increased more in the East Coast than in the Midwest. After all, the quotation above makes it sound as if ethanol “helped” drivers in the Midwest 23 cents more than it helped drivers on the East Coast.

Yet the data don’t show this at all, as illustrated in the following table (constructed from EIA’s interactive database) of average refiner prices (through retail outlets) of regular gasoline over the period and regions in question:

Region

Jan 2000 Price

Dec 2010 Price

Price Difference in Same Region, Across Dates
Midwest $0.905 $2.504 + $1.60
East Coast $0.863 $2.508 + $1.65
Price Difference on Same Date, Across Regions – $0.04 $0.00

As the table above demonstrates, motorists in the Midwest got nowhere near the ostensible 23-cent relative advantage from ethanol, compared to the poor saps on the East Coast. In reality, the roughly 4-cent advantage held by the East Coast (in terms of cheaper wholesale gasoline prices) prevailing on January 2000, had been whittled away to basically zero by December 2010. Looking at the data from a different angle, wholesale prices increased about 5 cents per gallon more in the East Coast, than they did in the Midwest, over the period in question. (The two approaches are yielding apparently different numbers—namely 4 cents in the bottom row versus 5 cents in the far-right column—because of rounding. The two approaches actually give the same number.)

When we step back and think about it, the result reported by the Iowa study couldn’t possibly be right—at least not in the way most casual readers would have interpreted it. If the boost in ethanol production really held wholesale gasoline prices in the Midwest down by 39 cents, versus a smaller impact of only 16 cents in the East Coast, then retailers in the East Coast would have wanted to buy Midwest-produced gasoline because of the 23-cent-per-gallon advantage.  Special environmental regulations particular to each region would not have permitted that purchase directly (i.e. East Coast gas stations can’t literally use gasoline currently produced for Midwest specifications), but if the price discrepancy were large enough, it would make sense for the Midwest refiners to cater to the East Coast market. Competition between regions would still tend to suppress the large gaps in wholesale prices implied by the Iowa study results.

As the data in the table above show, the alleged 39-cent versus 16-cent savings of ethanol don’t exist out in the actual price histories. So where do these numbers come from, and why is the “advantage” to the Midwest so much higher than for the East Coast?

As we explained in the previous section, the study generates its estimates by looking at conventional gasoline refining capacity, inventories of gasoline, and other factors for a certain region (or the country as a whole), and then simulating what would happen if the ethanol production in that region (or country) disappeared.

The reason the effect appears so much more dramatic in the Midwest—thus giving rise to the high 39-cent figure, versus the low 16-cent figure on the East Coast—is that there is naturally more ethanol production in the Midwest. Consequently, industry in the Midwest adapted over the period 2000-2010 to the ethanol availability, which only existed because of federal support. That’s why the Iowa study’s technique spits out the “fact” that ethanol production has held down gas prices more in the Midwest than anywhere else in the country, because the conventional oil refining system there has been relatively displaced by the (artificial) growth in the ethanol sector.

One way to see this in the data is to look at the change in refining utilization rates between the Midwest and the East Coast over the period in question:

Utilization of Crude Oil Refinery Operable Capacity

Source: EIA

As the chart shows, since 2005 oil refinery utilization rates have dropped more in the East Coast than in the Midwest. Loosely speaking, when it comes to refining oil into gasoline, the situation in the Midwest is much “tighter” than on the East Coast.

More investigation would be needed to determine exactly how these different paths of adaptation played out. Yet the numbers show the sense in which the Midwest currently has less “room for error” with respect to conventional refining of crude oil. This factor is partly responsible for the Iowa study’s regression results, showing that ethanol “held down” gas prices more in the Midwest than on the East Coast.

To reiterate the most important point: When the Iowa study says ethanol “held down” gas prices, it is very misleading. The actual wholesale prices between the two regions have stayed within 5 cents of each other over the decade. Rather, what happened is that the development of the (federally supported) ethanol sector retarded the development of the rest of the market, either in capacity or its ability to import gasoline produced elsewhere (such as Canada).  We should not conclude that if the government had never supported ethanol, then drivers in the Midwest would currently be paying 39 cents more per gallon.

Conclusion

The Iowa State study claiming that ethanol production has suppressed the growth in gasoline prices is very misleading. It takes for granted the current refinery capacity and other infrastructure that industry uses to deliver gasoline to motorists, without realizing that federal policies over the years have distorted the development of these markets. Ethanol only survives in the market place at its current levels because it is propped up by artificial mandates and preferential tax treatment.

The regression analysis of the Iowa study doesn’t accurately capture the timeline that would have occurred had the free market been allowed to operate. Of course a sudden disappearance of all ethanol would cause a bigger price spike in the Midwest than in the East Coast. That’s because the artificial federal support has displaced the development of oil-based gasoline delivery in the Midwest more than in other regions. The fact still remains that ethanol (at its current market share) is very inefficient. Taxpayers and consumers would be richer if the government dropped its support programs for it.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard Tagged With:

CBO Wants to Launch Preemptive Strike on American Energy Prices

May 11, 2012 by 1 Comment

Those who have followed the political debates over energy through the decades have observed a familiar pattern: The critics of American “dependence” on oil will keep coming back with new arguments, no matter how many times their earlier arguments are refuted. So it is with a new Congressional Budget Office (CBO) study on “Energy Security in the United States.”

In its introduction the CBO paper explains that it “examines energy security in the United States—that is, the ability of U.S. households and businesses to accommodate disruptions of supply in energy markets—and actions that the government could take to reduce the effects of such disruptions.”

Now this is a lengthy study and there are many comments we could make about it. However, for the present blog post let’s focus on this gem:

Policies that promoted greater production of oil in the United States would probably not protect U.S. consumers from sudden worldwide increases in oil prices stemming from supply disruptions elsewhere in the world, even if increased production lowered the world price of oil on an ongoing basis. In fact, such lower prices would encourage greater use of oil, thus making consumers more vulnerable to increases in oil prices. Even if the United States increased production and became a net exporter of oil, U.S. consumers would still be exposed to gasoline prices that rose and fell in response to disruptions around the world. [Page vi, bold added.]

The part put in bold shows that the rules of the debate have shifted yet again. For years, the standard objection to allowing for drilling in ANWR and the Outer Continental Shelf was that (allegedly) the U.S. didn’t have enough oil reserves to provide relief at the pump for motorists. This objection, however, was refuted by what happened to crude prices when President George W. Bush in July 2008 lifted the Executive Branch moratorium on offshore drilling, and further when Nancy Pelosi announced in September 2008 that the Congress would not be renewing its own ban:

In light of this history of the debate, and the stunning chart above, the CBO’s position is very interesting. They are now saying that even if the United States found so much domestic oil that it became a net exporter of crude, then it still would be a good idea to “wean” Americans from their “dependence” on oil.

The logic here is astounding. It would just as well “prove” that the people right now in Saudi Arabia should start developing alternative forms of energy, rather than use the incredibly dense energy source that is literally flowing up from the ground all around them.

In a sense, the CBO is recommending a preemptive strike on American energy prices. Notice that it says falling oil prices would make Americans more vulnerable to—wait for it—rising oil prices! Yes, that is true. By the same token, a man who starts eating healthy and going to the gym, is “more vulnerable” to a sudden increase in body fat if he should abandon the program and go back to junk food.

Although couched in the language of prudence, the CBO analysis implicitly admits what proponents of laissez-faire energy markets have been saying all along: Given current technologies and relative resource supplies, it is cheaper and more convenient for Americans to consume large amounts of fossil-fuel-based energy. The government isn’t “protecting” Americans from potentially high oil prices at some unknown future date, by preemptively imposing high energy prices from alternative sources on them today.

Filed Under: Facts, Products and Power, Renewable Fuel Standard, Tier 3 Standards Tagged With: , ,
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