Written Statement of the
National Petrochemical &
Senate Committee on Environment and Public Works
Subcommittee on Clean Air, Climate Change, and
National Energy Policy fuel provisions
20 March 2003
Petrochemical & Refiners Association www.npra.org
National Petrochemical & Refiners Association
Chairman Voinovich, Senator Carper and other members of the Subcommittee, thank you for the opportunity to appear before you today to discuss the need for a comprehensive U.S. energy policy and particularly issues involving fuels and fuel components. My name is Bob Slaughter, and I am President of NPRA, the National Petrochemical & Refiners Association.
NPRA is a national trade association with about 450 members who own or operate virtually all U.S. refining capacity, as well as petrochemical manufacturers who operate similar manufacturing processes. NPRA’s refining members include large integrated refiners, large independent refiners, and regional independents as well as small refiners.
Needed: A Focus on Increased Supply
To summarize our message, today NPRA urges policymakers in Congress and the Administration to encourage production of an abundant supply of petroleum products. A healthy and growing U.S. economy needs a steady, secure and predictable supply of petroleum products, at reasonable cost. NPRA believes that federal policy in recent years has drifted away from the need to emphasize the supply side of the energy equation, and that an adequate energy supply has been largely taken for granted. We need to reinstitute an energy supply ethic in federal policy to provide both national energy security and maintain U.S. economic growth.
To summarize our energy policy recommendations, NPRA urges Congress to: repeal the 2% RFG oxygenation requirement; reject calls for an ethanol mandate; avoid a federal ban or mandatory phase-out of MTBE; extend product liability protection to MTBE and ethanol; and avoid unnecessary changes in fuel specifications. We will discuss these recommendations in more detail in subsequent sections of this statement.
Domestic Refining is a Critical Asset, But a Challenging Business
We also ask policymakers to extend the concern over petroleum product supply to include the domestic refining industry. Total daily U.S. demand for petroleum products is approximately 20 million barrels, and only 17 million barrels of this is supplied by U.S refineries. The remaining 3 million barrels of demand is supplied from a combination of several sources: the Caribbean, South America, Canada, Europe, and more rarely, the Middle East and Asia.
No new refinery has been built in the United States since 1976, and it is unlikely that one will be built here in the foreseeable future, due to economic and political considerations, including siting costs, environmental requirements, industry profitability and public concerns.
U.S. refining capacity has grown somewhat in recent years, but it is becoming harder to keep pace with growth in demand for petroleum products. As it is, refiners have increased capacity at existing sites to offset the impact of capacity lost elsewhere due to refinery closures.
It is also more difficult to add capacity at existing sites due to increasingly stringent environmental regulations and the challenging economic climate faced by the refining industry. EIA projects that U.S. refining capacity may grow by 2 million barrels per day by 2010; this would still not keep pace with the rise in U.S. demand for petroleum products, which EIA estimates will grow by 1.6% per year each year through 2025.
Product Imports Could Increase
This means that the United States, which has had a hard time adjusting to the fact that 60% of its crude is now imported, may have to become accustomed to another unpleasant fact: a larger percentage of petroleum products such as gasoline, diesel, jet fuel and heating oil may also come from imports.
NPRA suggests that balanced and temperate actions, adopted now, can prevent excessive dependence upon foreign refined products. It seems clear that it is in the nation’s best interest to manufacture a significant portion of the petroleum products we need here in domestic refineries. Reduced U.S. refining capacity clearly affects the amount of control we have over our supply of refined petroleum products and the flexibility of the supply system, particularly in times of stress or disruption.
Currently, about 95% of such products are manufactured in U.S. refineries. (U.S. exports of refined products to non-U.S. destinations are relatively insignificant.) This indicates that this is a good time to adopt a policy to maintain a healthy and diverse U.S. refining industry. Although the precise percentage of refined product manufactured here will vary, adopting this policy now will help mitigate or prevent any abrupt slide in U.S. refining capacity and any adverse impact on the nation’s energy security. And that policy is founded in good common sense.
Refiners Are Investing Billions to Improve the Environment
Refiners currently face a massive task of complying with four regulatory programs affecting fuels with significant investment requirements, all in the same timeframe. Refiners must invest about $20 billion to sharply reduce the sulfur content of gasoline and both highway and much of off-road diesel. Refiners face additional investment requirements to deal with state and possible federal limitations on ether use, as well as compliance costs with Mobile Source Air Toxics reductions and other limitations. This does not include additional significant investments needed to comply with stationary source regulations affecting refineries.
On the horizon are other environmental requirements which will necessitate significant investment. They are: the challenges and cost of increased ethanol use, expected federal or state programs mandating changes in diesel fuel properties (cetane and aromatics content, lower gravity), and the potential for significant proliferation of new fuels caused by the need to comply with the new 8 hour ozone NAAQS. These factors will also significantly impact fuel manufacture and distribution.
Average Refining Returns Are Modest
Refining earnings have recently been more volatile than usual, but refining returns are generally quite modest when compared with other industries. The average return on investment in the industry is about 5%; this is about what investors could receive by investing in government bonds, with little or no risk. This relatively low level of return, which incorporates the cost of investments required to meet environmental regulations, is one reason why domestic refinery capacity additions are difficult and new facilities are unlikely to be constructed here.
A Key Government Advisory Panel Urged Prudent Regulation
The National Petroleum Council (NPC) issued a landmark report on the state of the refining industry in 2000. Given the limited return on investment in the industry and the crushing investment required for environmental regulations, the NPC urged policymakers to pay special attention to the timing and sequencing of any changes in product specifications. Failing such action, the report cautioned that adverse impacts on the industry with fuel supply ramifications could result. As the above discussion shows, this warning has been widely disregarded.
Refiners Face Additional Facility Investment Requirements
In fact, release of the NPC report was roughly concurrent with a problematic “enforcement effort” under the New Source Review Program, an effort that threatens to add additional billions of unanticipated cost to refiners just to stay in business. The enforcement initiative went forward despite near-universal agreement that the NSR program requirements were hopelessly confused and thus fertile ground for arbitrary enforcement. The refining industry has been struggling to resolve the enforcement issue on top of the many other challenges it faces. (Going forward, the recently effective final rule reforming NSR will add much-needed clarity and consistency to that program’s requirements. That rule, and the current proposal to clarify the definition of routine maintenance under NSR, are rare instances in which policymakers heeded the NPC’s warning.)
Refiners Will Meet the Challenges, But Some Facilities May Close
Petroleum refining has never been an industry for the faint of heart. Domestic refiners will rise to meet the challenges of the current situation. They have demonstrated the ability to adapt to new challenges and keep the flow of critical fuels going to consumers across the nation. But certain economic realities cannot be ignored and they will impact the industry. Thus, refiners will, in most cases, make the investments necessary to comply with the environmental programs outlined above. In some cases, however, where refiners are unable to justify the costs of investment at some facilities, those facilities may close.
EIA summarizes the impact of past and future refinery closures: “Since 1987, about 1.6 million barrels per day of capacity has been closed. This represents almost 10% of today’s capacity of 16.8 million barrels per calendar day…The United States still has 1.8 million barrels of capacity under 70 MB/CD (million barrels per calendar day) in place, and closures are expected to continue in future years. Our estimate is that closures will occur between now and 2007 at a rate of about 50-70 MB/CD per year…All refineries face investments…But smaller refiners may find their lack of economies of scale and the size of the investments required put them at a competitive disadvantage and would keep them from earning the returns needed to stay in business.” (EIA, J. Shore, “Supply Impact of Losing MTBE & Using Ethanol,” October 2002, p. 4.)
Reasonable Regulation Will Help Refiners Maintain Supply
As the Committee can see, the domestic refining industry has major challenges ahead. NPRA’s members ask that policymakers help by insisting that future fuel specification changes be carefully timed and sequenced consistent with the National Petroleum Council’s recommendations. This should be adopted as part of the nation’s energy policy revisions.
In addition, NPRA asks that an updated energy policy adopt the principle that in the case of new environmental initiatives the environmental objectives must be balanced with energy supply requirements. As explained above, the refining industry is in the process of redesigning much of the current fuel slate to obtain needed improvements in environmental performance. This trend will persist because consumers desire higher-quality and less-polluting fuels. And our members want to satisfy their customers. We ask only that the programs be well-designed, appropriately timed and cost-effective. The Committee can advance both the cause of cleaner fuels and preservation of the domestic refining industry by adopting this principle as part of the nation’s energy policy.
Industry Diversity Benefits Consumers and the Nation
As demonstrated above, a healthy and diverse U.S. refining industry best serves the nation’s interest in maintaining a secure supply of energy products. Rationalizing and balancing our nation’s energy and environmental policies will protect a key American resource, the domestic refining industry. Given the challenges of the current and future refining environment, the nation is fortunate to retain a refining industry that has many diverse and specialized participants. Some of the largest companies in the world maintain their positions in U.S. refining, while a vibrant set of entrepreneurial independents, among the largest in the industry, are increasing their prominence and importance in that industry. At the same time, regional and smaller independents reliably and conveniently serve regional or smaller niche markets. The U.S. refining industry has experienced difficult periods before, but the continuing diversity within the industry suggests that it has more than enough vitality to continue the industry’s important work, especially with the help of a supply-oriented national energy policy.
The Market Situation Demonstrates a Need to Focus on Supply
NPRA believes that a new national energy policy initiative is long overdue. And our testimony thus far has shown why that new policy must be supply-oriented, and why it should view the need for a healthy and diverse domestic refining industry as a cornerstone of a pro-supply policy. We believe that any neutral observer would see the wisdom of these two policy elements, especially because current events in the crude oil and product markets demonstrate the need for them.
As this testimony is written, speculation about crude and product price and supply is a hot topic in the media. Once again, the supply of crude and products is stretched tight due to a confluence of external factors. In this case, those factors are: the consequences of a strike in Venezuela that crippled that country’s export capability for months; weather much colder than normal in parts of the country where energy use is extremely sensitive to temperature; and uncertainty over crude oil supply in the immediate future due to the international situation involving Iraq.
The U.S. Energy Information Administration (EIA) Helps Explain the Market
NPRA urges anyone interested in how we got where we are to take a look at EIA’s webpage in order to read the articles “This Week in Petroleum” since the beginning of this year. They will find each step in the process explained, along with accurate predictions of subsequent developments.
In summary, according to EIA, these are the facts: the strike in Venezuela deprived the U.S., that country’s largest customer, of a significant amount of crude imports for several weeks. This happened when crude oil inventories were at modest levels because OPEC lowered production quotas for most of 2002. That action had already limited the supply of crude.
Refiners tried to keep up refinery runs, and hence production, by utilizing the crude available in the market and by drawing on crude stocks. This delayed the impact of the Venezuelan disruption for a short period and helped meet strong product demand. That is a considerable achievement, given the extent of the crude supply impact and the difficult time of year in which it occurred. It is another example of the expertise and resourcefulness of the domestic refining industry.
As crude inventories fall, crude runs to refineries decrease because less crude is available. When crude runs are reduced, product output declines. This may require tapping product inventories to meet demand. The reduced product inventories then give rise to concerns about the sufficiency of gasoline, diesel and heating oil supplies. EIA refers to these possible occurrences as “Dominos” in its January 15 “This Week in Petroleum.” Subsequent issues of that analysis described what happened as the domino scenario unfolded. We have attached the January 15 publication for your information.
Strong evidence such as this, and broad agreement that these are the key factors should answer questions about the genesis of today’s crude and product supply situation. The fact that the nation is on the brink of war in Iraq certainly offers an additional reason to believe that these are uncertain times when concern about crude availability and supply are understandably present. And those concerns have impacts in the marketplace.
Refiners are Working Hard to Supply Needed Products
Unfortunately, some of the media and a few policymakers have alleged that industry misconduct is somehow responsible for the current situation. This is not so now, just as it was proven not so in past supply disruptions and uncertainties. Refinery runs are close to where they were last year at this time, despite general agreement that crude supplies are tight. Slightly lower utilization rates this time of year are often due to planned maintenance when product demand is usually low. Refinery maintenance is often non-discretionary and scheduled well in advance of a largely inflexible date. The need for the refining industry to run at high rates of utilization, 92-93% on average, well above the 85% utilization rate considered full utilization in other industries, is an important reason why the time available for turnarounds is at a premium and hard to change. Another factor is that some maintenance cannot be postponed for safety reasons, which cannot be compromised.
This is also a difficult time of the year for refiners to face so many market uncertainties. They will soon implement the required changeover from winter to summer grade gasoline, which often requires a delicate balance as winter product is drawn down to make way for summer gasoline in time for the required certification date.
Many California refiners will experience the first seasonal turnaround involving CARB3 and California RFG with ethanol, due to the partial phase-out of MTBE in California this year. Please do not misunderstand this point. It is not clear that today’s market conditions reflect problems involving seasonal changeovers. We mention this subject to remind non-industry observers that this time of year is an especially sensitive one if available crude supplies are stretched thin and demand remains high, which is the case at present.
The current situation is not totally dissimilar to the summer of 2000 and early summer of 2001, when supply problems surfaced due to market-related and operational difficulties beyond industry’s control. Investigations conducted of industry behavior at that time found no basis for legal action against the industry. We are certain that the investigations now being called for will result in the same findings which exonerate the industry. And please bear in mind that resources spent to answer these charges every time prices increase could be spent to improve industry operations and production. EIA responded very effectively to recurrent charges of “price gouging” in last week’s issue of “This Week In Petroleum” which is attached.
Refiners are constantly responding to difficult situations like the present one, which make it a challenge to maintain adequate product supplies. Modern energy policy has given them a tool which helps them determine the most efficient way to continue meeting consumer demand. The free market swiftly provides the industry with price and supply information which they can respond to. Refiners also need maximum flexibility to respond to this market information in their decisions about product manufacture and distribution. Mandates and other command-and-control policy mechanisms reduce flexibility and add unnecessary cost to gasoline manufacture. Congress should remove existing mandates and avoid legislating new ones, such as the proposed ethanol mandate.
A modern, supply-oriented fuels policy would give refiners greater flexibility to meet fuel demand within broad performance standards. Such a fuels policy would also rely on the free market to determine appropriate product supply and allocation. It would avoid inflexible command-and-control regulation such as prescriptive mandates, and emphasize the development of new fuel legislation and regulation through an open process involving all stakeholders, aimed at obtaining the best practical answer rather than one that satisfies temporary political aims. But most importantly, such an energy policy must focus on balancing the dual goals of increased energy supply and continued environmental progress.
NPRA Policy Recommendations
With this concept of a supply-oriented energy policy as a backdrop, NPRA has reviewed the National Energy Policy legislation approved by the House in 2001 and by the Senate last year. The Association offers the subcommittee these specific recommendations regarding the fuels provisions that may be under consideration for inclusion in this year’s energy bill.
First: Repeal the 2% by weight RFG oxygenation requirement [Clean Air Act section 211(k)] to provide refiners with more flexibility to meet supply and air quality requirements.
Elimination of this 2% requirement will give refiners increased flexibility to deal with changing market conditions. It will also allow them to blend gasoline to meet the standards for reformulated gasoline most efficiently and economically, without mandated oxygenate content. In some cases, refiners would probably continue to use some MTBE, because of its good blending qualities and demonstrated ability to reduce air emissions. The overall volume of MTBE in gasoline would very likely decline, while providing relief to those who are concerned about MTBE usage.
Second: Reject calls for an ethanol mandate
Imposing an ethanol mandate on gasoline suppliers will make it more difficult and expensive to manufacture gasoline and provides no compensating benefit to consumers or the environment. An ethanol mandate immediately creates winners and losers among fuel providers and regional consumers based on their geographic location and history of ethanol usage or non-usage. It is thus both highly arbitrary and unfair. Inclusion of a credit trading mechanism in the mandate proposal does nothing to temper the injustice and economic inefficiency of the provision, because it requires fuel manufacturers and their customers to pay for the “privilege” of not using ethanol in their gasoline.
Many NPRA members already use significant volumes of ethanol, and they expect to increase their ethanol usage in the years ahead. EIA and other policy analysts also predict a large increase in ethanol markets in coming years, without a mandate. In short, given the relative scarcity of quality gasoline blend stocks, ethanol has a bright future without any need to resort to the dubious policy of a national ethanol mandate.
Ethanol already enjoys a generous subsidy in the form of a 52 cent exemption from the gasoline excise tax; this subsidy costs the Highway Trust Fund in excess of $1.2 billion annually. A federal tariff offsets the benefit of the gasoline tax exemption for most imports, making them uncompetitive with domestic ethanol production. Ethanol also receives tax incentives in 17 states.
The 5 billion gallon ethanol mandate included in last year’s Senate ethanol bill was the product of private discussions among a limited group of stakeholders. It was never considered by the Committee of jurisdiction in the Senate. NPRA opposes that provision. We urge the subcommittee to make a clean break with the market intervention theory typified by both the existing 2% requirement and proposals for a cumbersome, expensive and unnecessary ethanol mandate.
The Senate-approved language includes language intended to require widespread usage of ethanol even in the summer months, when ozone concerns are most severe. This despite the fact that the increased volatility of ethanol blends requires additional investment and extraordinary measures to allow ethanol use in gasoline during these periods. Extra pollution caused for the local environment, supply problems for fuel suppliers, or cost problems for consumers should be no less important than the desire of one industry for consistent demand.
Few proposals on any subject unite the editorial pages of the Wall Street Journal, New York Times and Washington Post. But the ethanol mandate is one of them. All three papers have denounced the ethanol mandate proposal in no uncertain terms. NPRA agrees with this unusual consensus, and hopes that the Senate will reject the mandate proposal.
Third: Avoid a federal ban or mandatory phase-out of MTBE use in order to maintain adequate gasoline supplies at reasonable cost; direct DOE and EPA to work with any states that implement limitations on MTBE usage to coordinate the implementation of these restrictions and to maintain adequate supply.
NPRA is concerned about proposals to ban MTBE nationally or to mandate a national phase-down of MTBE. Last year’s Senate bill called for an MTBE ban in four years. (A Governor could allow continued use of MTBE in his own state, but this would be unlikely.) EIA predicts that an MTBE ban would raise the national average price of RFG in 2006 by several cents per gallon and reduce supply. (“Supply Impacts of an MTBE Ban,” September 2002)
MTBE elimination may cause an 11% reduction in some gasoline volumes when fully implemented. (MTBE provides over 10% of RFG volume in many RFG areas.) NPRA is concerned about the possible impact of this change on supply and manufacturing costs. The supply and demand balance in the nation’s gasoline market is increasingly tight. Supply and price can be affected by weather, unforeseen outages, and accidents, resulting in economic losses and negative public reaction, and we are seeing this happen with increasing frequency.
Therefore, we should not exacerbate a tight supply situation by arbitrarily eliminating a significant contributor to the nation’s gasoline supply. If concerns about MTBE usage continue, more deliberate but responsive measures can be taken. But recent experience in the gasoline market suggests that such significant changes should be taken only with caution, and with full disclosure to the public regarding any possible supply and cost impacts.
NPRA also does not believe that current evidence warrants the drastic step of a national ban on MTBE. Taking such action based on limited current knowledge would set a dangerous precedent for all chemicals in widespread commerce. EPA is currently evaluating MTBE’s status under TSCA (the Toxic Substances Control Act), and NPRA suggests that is the only appropriate course of action based on the evidence today.
As EIA noted in a presentation last October: “MTBE is a very clean component from an air emission standpoint. It contains oxygen and has no sulfur, no aromatics, no olefins and an RVP that is very close to the RVP of the remaining gasoline components.”
The author also wrote: “What is not appreciated by many people outside of the petroleum business, is that losing MTBE is more than just losing the volumes of this blending component…no other hydrocarbon or oxygenate equals the emission and engine performance characteristics of MTBE. Hence, losing a barrel of MTBE results in losing more than a barrel of gasoline production. When you remove a clean, high performance gasoline stream from the gasoline pool, it is difficult to find material to replace its volume and quality contributions.” (EIA, J. Shore, “Supply Impact of Losing MTBE & Using Ethanol,” October 2002, pp. 10, 12)
Recent EIA studies confirm that elimination of MTBE will also affect many refiners’ abilities to comply with the Mobile Source Air Toxics rule, which requires refiners to maintain their average 1998-2000 gasoline toxic emission performance levels. Loss of MTBE would make it difficult to match historical toxics performance, and the result might be that those refineries would have to reduce their production of RFG to achieve compliance.
NPRA believes that these circumstances support a policy of considerable caution towards any proposal to eliminate the option of continued MTBE use, at least until there is certain and convincing evidence that adequate supplies of replacement fuel components are available.
Some stakeholders advocate a federal ban or phase-down of MTBE as a means of securing an “orderly” market transition away from that product in states where large quantities of MTBE are currently used. This is a largely theoretical argument that assumes that federal regulators and those who seek to eliminate MTBE can choose the one appropriate date when MTBE usage should end. This argument ignores actual experience in which affected states have modified their plans to limit MTBE usage as they become aware of the difficulties inherent in replacing it without adverse impact on gasoline supply.
In short, imposition of a uniform federal scheme to restrict or eliminate MTBE usage runs a considerable risk that the decision will be uniformly wrong. Experience with the 2% RFG oxygenation mandate has taught us that if this occurs, political power can be brought to bear to block the changes necessary to meet unanticipated problems.
For example, even the largest state in the nation found it impossible to obtain a waiver of the 2% provision under similar conditions, when it was clear to most observers that a waiver was justified. This suggests that supply problems arising from an arbitrary federal phase-out or ban of MTBE might be difficult or impossible to correct, or that they might only occur accompanied by dubious new policy initiatives influenced by the politics of the moment.
Fourth: Extend product liability protection to MTBE and any mandated fuel component
When it passed the Clean Air Act Amendments of 1990 with the 2% RFG oxygenation requirement, Congress clearly understood that MTBE would be widely used to comply with that provision. In fact, the percentage of oxygen required by weight was selected to allow MTBE and perhaps other ethers to be used for that purpose. It was so clear that MTBE usage would predominate, in fact, that the Clinton Administration came forward with a rule that would have required some of the oxygen content to be met by “renewable” oxygenates, i.e. ethanol, to ensure usage of that product in the RFG pool. [That attempt, a clear end-run of the statute and subsequent reg-neg agreement, was overturned by the U.S. Court of Appeals for the District of Columbia in the case API and NPRA v. EPA, 52 F.3d 1113, 1119 (D.C. Cir. 1995). In the decision, the court also noted that U.S. EPA had “conceded that use of ethanol might possibly make air quality worse.”
The amendment establishing the reformulated gasoline program was added to the Clean Air Act amendments in the Senate by Senator Daschle. When the 2% requirement became part of the final bill, the refining industry acted to comply. As foreseen, MTBE became the oxygenate of choice because of its good blending characteristics, the fact that, unlike ethanol, it could be shipped in pipelines, and the reality that the higher volatility of ethanol blends makes their use in RFG during the summer ozone season problematic.
U.S. MTBE production increased from 146 thousand barrels per day in 1993 to roughly 230 thousand barrels per day in both 2001 and 2002. The air quality improvements made possible by RFG use in the cities where it has been required are well known. MTBE has contributed to those air quality improvements.
In recent years, product liability suits have been brought against refiners and petrochemical manufacturers due to MTBE contamination found in groundwater. Those suits seek to overlook the fact that the Clean Air Act amendments clearly required and contemplated widespread usage of MTBE in the RFG program. As discussed above, Congress was also aware that large quantities of MTBE would be needed in the RFG program.
No one should be penalized for obeying the law. Yet this is the position in which refiners and petrochemical producers find themselves because of these liability suits. Money spent to defend against these unfair suits could be better used to produce additional supplies of petroleum and petrochemical products for consumers and the nation’s economic benefit.
During the energy bill conference last year, the House recognized the need for product liability language that would help fuel suppliers defend themselves against these unfair charges. NPRA encourages Congress to include the same or similar language in the energy bill this year. It is only fair that any fuel producer who responds to a congressional mandate for use of a product be protected against legal action based solely upon production or use of the mandated product.
Fifth: Avoid unnecessary changes in fuel specifications
As discussed previously, the refining industry faces significant investment requirements in order to comply with regulations to improve the environmental performance of both gasoline and diesel fuel in coming years. Significant investments will also be required to respond to regulations affecting facilities. NPRA urges the subcommittee and committee to limit additional fuel specification changes while work is in progress to comply with these existing requirements. Although we do expect a proposed rule this year to reduce the sulfur level in off-road diesel over the period 2007-10, industry has been consulting with EPA and OMB in the hope of coordinating the off-road requirements with the existing highway diesel rule. We ask that this subcommittee monitor developments on that regulation.
Particular care should be used in considering so-called “boutique fuel” gasoline programs. In many cases these programs represent a local area’s attempt to address its own air quality needs in a more cost-effective way than with reformulated gasoline. NPRA welcomes further study of the “boutique fuels” phenomenon, but urges members of the committee to resist imposition of additional fuel specification changes in a vain attempt to curtail state and local experimentation.
NPRA is also concerned about provisions in last year’s bill that facilitated certain opt-ins to the reformulated gasoline program. In creating the RFG program, Congress established requirements for RFG opt-ins that recognized the need to limit access to that program due to supply and investment considerations. If anything, the reasons underlying those concerns are stronger now than they were ten years ago. Therefore, NPRA urges that current Clean Air Act language regarding access to the RFG program be retained, rejecting any changes to current language that limits participation in the RFG program to those areas with a demonstrated need for that fuel.
NPRA looks forward to working with the subcommittee and full committee to accomplish these and other objectives as part of a supply-driven national energy policy. I would be glad to answer any questions raised by our testimony today.
EIA’s “This Week In Petroleum” January 15, 2003
Released on January 15, 2003
Although the origins of weekly crude oil imports are very preliminary and thus not published, it appears that some crude oil from Venezuela continues to arrive into the United States. And, while crude oil imports from Venezuela have increased some over the last two weeks, they continue to be much lower than normal. As Venezuela’s largest customer, a dramatic cut in oil exports from Venezuela as a result of their ongoing strikes, has led to U.S. oil imports declining. U.S. crude oil imports over the last three weeks are more than 300,000 barrels per day less than over the same period a year ago. With U.S. oil production relatively flat and unable to increase to make up for the lost Venezuelan imports, less supply into the U.S. crude oil market means either that less crude oil gets processed through refineries, crude oil inventories are drawn down to replace the lost supply, or a combination of both. As the accompanying graph shows, while crude oil refinery inputs did initially decline following the Venezuela disruption, they recovered somewhat, while inventories have continued to drop. U.S. crude oil inventories now are less than 3 million barrels above the Lower Operational Inventory level of 270 million barrels. While there is nothing to prevent inventories from falling below 270 million barrels, were that to occur, less flexibility would be expected, and according to the National Petroleum Council, localized disruptions in refinery operations could be expected. Clearly, refiners, for many reasons (healthy refinery margins, expectations of higher prices ahead encouraging stock building for the future, building product inventories ahead of schedule refinery maintenance, etc.), have decided to use inventories to maintain refinery inputs.
But just as the reduction of Venezuela imports led to lower U.S. oil imports, which led to lower crude oil inventories, if the situation continues, the next likely domino to fall could be a reduction in crude oil refinery inputs. If crude oil inventories fall further, they will be down to levels that couldn’t be drawn down much further, forcing refiners to curtail crude oil inputs into refineries. If this happens, refinery output would also fall and product inventories would need to be drawn down to supply demand for these products. So while all of the dominoes haven’t fallen yet, unless additional crude oil supply arrives in the near future, we could be watching the dominoes topple each other over the next month or two.
Retail Gasoline Price Increases For Fifth Week In A Row
Retail diesel fuel prices decreased last week, falling to a national average of 147.8 cents per gallon as of January 13. Retail diesel prices were down throughout the country, with the largest price decrease occurring in the Midwest, where prices dropped 2.8 cents per gallon to end at 146.7 cents per gallon.
Heating Fuel Prices Show Modest Gains This Week
Propane Inventories Sharply Lower
Released on March 12, 2003
Current High Petroleum Product Prices Reflect Price Gouging?
“Price gouging” is a term laden with emotion, and is in fact difficult to define objectively. In a technical sense, it refers to a situation where a seller attempts to extract a higher price (and profit) than would normally result from underlying supply and demand fundamentals. It is that last phrase, however, that makes gouging so hard to define, because in a free market, when supply and demand are out of balance, prices change to restore equilibrium. What consumers seem to expect is that no matter how much demand may exceed supply in the short run, prices should not rise to more than an “acceptable” level, which may leave sellers unable to cover their own increased costs, or fail to provide sufficient incentive to bring increased supplies into the market.
So do current prices for petroleum products, particularly gasoline, reflect gouging? In EIA’s estimation, the answer is “no.” EIA continually monitors and analyzes data and trends in the U.S. petroleum markets. Gasoline prices are currently elevated largely due to high crude oil prices, and to a lesser extent, strong refining margins. Distribution and marketing margins are not unusually high, and there is no evidence of price gouging at any level. There are a number of factors driving gasoline prices higher:
At $1.712 cents per gallon as of March 10, 2003, the U.S. average retail price of regular gasoline is at its highest level ever at this time of year, and 49 cents higher than a year ago. However, it should be noted that West Texas Intermediate crude oil is up about $13 per barrel (31 cents per gallon) over the same period, and average spot gasoline prices are up 38 cents. Thus, about two-thirds of the year-over-year increase in gasoline prices can be ascribed to crude oil, while refining margins are up about 7 cents over year-ago and distribution/marketing margins are up 11 cents (from unusually low levels in March 2002).
The Energy Information Administration has found that retail gasoline and diesel fuel prices are almost entirely driven by changes in spot prices over the previous few weeks, to such an extent that near-term retail prices can be predicted with accuracy. (See Gasoline Price Pass-Through and Diesel Fuel Price Pass-Through.) Price gouging, when it occurs (which is rare), is usually a very localized phenomenon, and only at the retail level. As long as retail prices conform to the predicted pattern of pass-through, it can be assumed that no significant gouging is occurring.
Unfortunately, incidents of apparent gasoline price gouging have been seen, most recently in the wake of the terrorist attacks of September 11, 2001. In that case, a few local marketers quickly raised retail prices to exorbitant levels, apparently fearing that supplies would be interrupted, and/or that wholesale prices would rise dramatically, making replacement supplies much more expensive. Reassurances by major suppliers, that they would hold the line on prices, quickly stabilized the markets, and reportedly some of those marketers that had briefly raised prices granted refunds to customers who had bought during that period. A number of States now have anti-gouging laws and enforcement programs in place to prevent this type of problem. Unfortunately, the greater test would come if there were indeed a major global, national, or even regional supply interruption. While anti-gouging laws, if enforceable, might keep prices under control, they cannot assure continuity of supply.
The Department of Energy maintains a toll-free hotline for consumers to report suspected gasoline price gouging, at (800) 244-3301.
Retail Gasoline Price Continues To Climb
Retail diesel fuel prices increased for the eighth straight week, rising 1.8 cents per gallon to a national average of 177.1 cents per gallon as of March 10. This is the highest diesel price since EIA began recording this data in March 1994, and the fourth week in a row that diesel fuel has topped its previous record price. Retail diesel prices were up throughout most the country, with the largest price increase occurring on the West Coast, where prices rose 8.1 cents per gallon to end at 188.6 cents per gallon. Prices in New England rose again, by 4.7 cents to reach 200.1 cents per gallon, the highest price in the nation. The Gulf Coast was the only region that saw a price decrease, with prices falling by 0.3 cent to end at 169.7 cents per gallon.
Oil Price Shows Slight Increase While Propane Price Begins to Decline
Residential propane prices decreased 6.9 cents per gallon for the week ending March 10, 2003 to reach 165.3 cents per gallon, but are still 53.2 cents higher than one year ago. Wholesale propane prices decreased 34.4 cents per gallon, from 114.8 cents per gallon to 80.4 cents per gallon, reversing the increase seen in the previous week.
Inventories Continue Lower