Mr. Chairman and members of the committee, my name is A. Blakeman Early. I am pleased to appear today on behalf of the American Lung Association. Celebrating its 100th anniversary this year, the American Lung Association has been working to promote lung health through the reduction of air pollution for over thirty years. I am here today to discuss elements of the Clean Air Act that impact the oil refining industry and gasoline policy.
Clean Fuels Are a Cornerstone of the Clean Air Act
The Clean Air Act programs that we believe most affect the refining industry are the Reformulated Gasoline Program (RFG) and the low-sulfur requirements for gasoline, on-road diesel, and very soon we hope off-road diesel fuel. We recognize that there are important stationary source requirements of the Clean Air Act that impact the refining industry. However, because of their importance, I will limit my comments to the most significant fuel requirements of the law.
As has been demonstrated in California and across the nation, reformulated gasoline can be an effective tool in reducing both evaporative and tailpipe emissions from cars and trucks that contribute to smog. Based on separate cost effectiveness analyses by both EPA and California, when compared to all available emissions control options, reformulated gasoline (RFG) is a cost-effective approach to reducing the pollutants that contribute to smog. Compared to conventional gasoline, RFG has also been shown to reduce toxic air emissions from vehicles by approximately 30 percent. A study done by the Northeast States for Coordinated Air Use Management, an organization of state air quality regulators, estimated that ambient reduction of toxic air pollutants achieved by RFG translates into a reduction in the relative cancer risk associated with conventional gasoline by a range of 18 to 23 percent in many areas of the country where RFG is used.
The benefits from RFG accrue from evaporative and tailpipe emissions reductions from vehicles on the road today, as well as from non-road gasoline powered engines, such as lawn mowers. They begin as soon as the fuel is used in an area. As with most Clean Air Act programs, the RFG program has cost less than estimated and the emissions benefits have been greater than expected or required by law. It is no wonder that RFG or other clean gasoline programs are in use in 15 states, according to EPA.
Low Sulfur Conventional Gasoline
This year begins the phase in of sulfur reduction requirements for all gasoline, which will be fully implemented by the end of 2006. These requirements derive from the Tier 2/Gasoline Sulfur rule issued during the Clinton Administration. This program is even more significant than the RFG program because the lower sulfur levels required in conventional gasoline will reduce tailpipe emissions from vehicles and other engines used today not just in RFG areas, but virtually across the nation. More importantly, the limit on sulfur in gasoline enables the use of very sophisticated technology on a new generation of gasoline- powered vehicles (including SUVs) that will generate very low rates of tailpipe emissions. These emissions reductions will grow as the new cleaner vehicles replace older dirtier ones. This program is so important to offset the growth in vehicle emission attributable to the fact that each year more people are driving more vehicles more miles than ever before.
The estimated benefits from the Tier2/Gasoline Sulfur rule will be enormous. EPA estimates that when fully implemented, the program will reduce premature mortality, hospital admissions from respiratory causes and a range of other health benefits that have a monetized benefit of over $24 billion each year. The actual benefits will likely be higher if history is any guide in these matters.
At this point I am going to say something unexpected. It is important to note that with respect to the RFG program and the Tier 2 sulfur reduction program the refining industry is getting the job done and at a cost below what it and others predicted. Moreover, refiners are reducing toxic emissions from RFG by a significantly larger percentage than the minimum required by the Clean Air Act Some refiners, such as BP have met low sulfur goals ahead of legal requirements and are using their success as a marketing tool and even have received public recognition from American Lung Association state affiliates. We at the American Lung Association want to give credit where credit is due.
Low Sulfur On-Road Diesel Fuel
While the Tier 2 rule was issued by the Clinton Administration, the value of clean fuels has not been lost on the Bush Administration. The Heavy Duty Diesel Engine/Diesel Fuel rule was first issued in the Clinton Administration reaffirmed by the Bush Administration in January 2000. Like the Tier 2 rule, this rule will provide immediate benefits from reductions of both NOx and particulate emissions from diesel fueled vehicles on the road today but also enable the application of new technology to a new generation of heavy duty diesel engines used in trucks and buses in the future that will reduce particle and NOx emissions from the vehicles by 90%. The sulfur reduction requirements for on-road diesel fuel are phased in beginning in 2007.
Diesel emissions are an important contributor of NOx, a precursor of smog. More importantly, heavy-duty diesel emissions generate a large amount of fine particle air pollution that is associated with premature mortality and cancer. The EPA estimates that when fully implemented, the HD Diesel Engine/Diesel Fuel rule will provide health benefits that approximately double the Tier 2 rule at a monetized calculation of nearly $51 billion each year.
Finally, in further recognition of the importance diesel emissions play as a contributor to both smog and fine particle pollution, the Bush Administration issued just yesterday a new Off-Road Diesel Engine/Diesel Fuel rule Through phased reductions of sulfur in off-road diesel fuel this rule will achieve immediate emissions reductions from a diverse group of diesel engines used in construction, electricity generation and even trains and marine vessels. The clean fuel requirements of this rule, too, will enable a new generation of much cleaner off-road diesel engines which will result in lower diesel emissions far into the future as older engines are replaced.
My understanding is that the estimate of health benefits from this rule will be even greater than the HD Engine/Diesel Fuel rule in large part because this category of engines and their fuel have been under regulated in comparison to other engine sectors. EPA projects that, when fully implemented, health benefits to include: 12,o00 fewer premature deaths, 15,000 fewer heart attacks, 6,000 fewer emergency room visits by children with asthma, and 8,900 fewer respiratory-related hospital admissions each year.
We Oppose Changes to Clean Fuels Programs That Weaken or Delay Emissions Reductions
Each of the regulations implementing the clean fuels programs and requirements were the product of a broad, lengthy and public process that ultimately reached a delicate political and substantive compromise. No party got everything it wanted. Each rule provides large and critical emissions reductions needed to protect public health. Any attempt to modify these rules at this juncture without thorough evaluation risks disrupting these programs in ways to could reduce or delay the large public health benefits we need them to deliver. Such changes also risk penalizing those refiners who have made the commitment to meet the requirements of these programs, some times earlier than required. Those who propose changes bear a heavy burden of showing the need and demonstrating the benefit.
Air Pollution Still Threatens Millions of Americans
Although we have made important progress in reducing air pollution, the battle is far from being won. This is true in part due to improved research in recent years which indicates that exposure to lower levels of smog over longer periods can have adverse health effects. The adverse impact of smog is being magnified also by the increase in the number of people with asthma. Smog is an important trigger of asthma attacks. New research has also revealed the lethality of so-called fine particle air pollution not only among those previously known as vulnerable such as people with asthma or chronic lung disease, but also among those with cardiovascular disease. This research is the foundation of the establishment of the eight-hour NAAQS for ozone and the NAAQS for PM 2.5 promulgated in 1997. Additional research since then has reinforced the need for these standards.
This committee received testimony from Dr. George Thurston just a few weeks ago demonstrating that the progress in reducing eight-hour levels of ozone has stalled in recent years. A graph in his testimony, based on EPA monitoring data shows the decline in eight-hour ozone levels to be essentially flat between 1996 and 2002.
At the end of April, the American Lung Association released its State of the Air 2004 report identifying all the counties nation-wide with air pollution monitors that monitored unhealthy levels of smog and fine particles over the 2000-2002-time period. The report found that counties that are home to nearly half the U.S. population, 136 million people, experienced multiple days of unhealthy ozone each year. The report further found that over 81 million Americans live in areas where they are exposed to unhealthful short-term levels of fine particle air pollution. In all, the report found that 441 counties, home to 55% of the U.S. population have monitored unhealthy levels of either ozone or particle pollution. Among those vulnerable to the effects of air pollution living in these counties include 29 million children, 10 million adults and children with asthma and nearly 17 million people with cardiovascular disease. As impressive as these numbers may seem, it is undoubtedly an under estimate of the nature of the air pollution problem in this country because far from every county has a monitor for either smog or particle pollution.
We Need Greater Use of Clean Fuels in Areas with Unhealthy Levels of Smog and Particulate Air Pollution
As you know, on April 15 EPA designated all or part of 474 counties in non-attainment with the eight-hour National Ambient Air Quality Standard for Ozone. EPA has committed to designate counties in non-attainment for the fine particle or PM 2.5 air quality standard in December. These areas will be required to evaluate and select emissions reduction strategies that, in combination with the federal programs aimed at air pollution transported over long distances, will enable them to achieve the eight-hour standard and fine particle standards. The American Lung Association believes that many new non-attainment areas may want to adopt a clean fuels program using either RFG or a low volatility alternative or obtaining low sulfur diesel sooner than required by the regulations previously described. We believe that should congress choose to change the law or otherwise influence gasoline policy, it should do so in a way that makes it easier for areas that exceed air pollution standards to adopt clean fuels programs and not “lock in” the use of dirtier conventional fuels. We need clean fuels programs to be broadly adopted to obtain clean air and protect the public health as soon as possible.
There is No Evidence That Current Clean Fuels Programs Significantly Influence Current Gasoline Price Increases
As is customary when gasoline prices spike, some have recently suggested that the clean fuels programs, often referred to as “boutique fuels” are responsible. While it appears that clean gasoline programs in both California and the Chicago/Milwaukee area have contributed to temporary price spikes in the past, we believe there has been little evidence presented publicly demonstrating that clean fuels programs across the country are contributing in any significant way to today’s high gasoline prices. Indeed, the evidence would suggest that systemic influences in gasoline production and marketing are the reason gasoline prices are as high as they are today. We believe this to be the case because: 1) gasoline prices have increased nation-wide, 2) conventional and clean gasoline prices are rising at the same rate, 3) in some areas, conventional gasoline is priced at or near the price of clean gasolines, 4) refiners are posting higher profits than they did a year ago when prices were lower.
Both conventional and clean fuels have risen in price $.30 cents a gallon or more from a year ago. This increase has occurred in virtually all parts of the country regardless of where their gasoline comes from or who makes it. More significantly, the increases in price for conventional gasoline and clean gasolines have pretty much been the same. Attached to the end of my testimony I have prepared an unscientific chart that illustrates my point. I believe a more comprehensive examination of the data will support my conclusions. I encourage the committee to ask DOE or EPA to conduct such an examination.
If the cost of producing clean gasoline were a major factor, the prices of these fuels would be rising at a faster rate. As my chart shows, this does not appear to be happening. What is noteworthy is that in the West, the “rack” or wholesale cost of conventional gasoline in the states that border California, which has the most stringent fuel requirements in the country, has risen more than in California. In Las Vegas conventional gasoline is actually more expensive than the average rack price in California and Reno is almost the same. When I first began to research the explanation for this counter-intuitive alignment of prices I was shocked, shocked to learn that there is gambling in Las Vegas and Reno! Could it be that refiners were callously over-charging for gasoline in Las Vegas and Reno because of the proliferation of so many high rolling gamblers in these two cities? Then I noticed Portland also had the same expensive conventional gasoline and was forced to abandon my theory. In New York the RFG sold in the New York City/Connecticut area will for the first time use the same low volatility blend-stock used in the Chicago/Milwaukee market because of new state MTBE bans. Yet the price of conventional gasoline in Albany has risen at the same rate and maintains the same price spread as a year ago. Note also that Atlanta, which has required the use of a low volatility; low sulfur “boutique” for several years has experienced a price increase no greater than Macon, which uses conventional gasoline. Atlanta’s fuel prices have consistently been below the national average price for conventional gasoline for reasons that remain a mystery.
The point is that the many other factors that impact gasoline price, lead by unsustainable growth in demand and the price of crude oil which is currently at or near $40 per barrel, have historically driven price and do so today. Clean fuel requirements have an insignificant impact in comparison.
Finally, I must note that across the board, refiners are making more money this year than a year ago. The attached USA Today story pretty much tells the story. The cost of gasoline is high because demand continues to grow at an unsupportable pace. Refiners could make money by producing more gasoline, but selling it at a lower price. It is pretty obvious that they are not choosing this strategy. It is apparently easier and more profitable to maintain a larger gap between demand and supply and earn higher profits on a lower level of production.
RETAIL PRICE RISE COMPARISON OF CG & RFG
(Cents per gallon)
5/6/03 5/6/04 Change
Chicago (RFG) 158.10 201.30 +43.20
Champaign (CG) 141.70 186.00 +44.30
St. Louis (RFG) 137.80 183.60 +45.80
Milwaukee (RFG) 156.40 196.40 +40.00
Madison (CG) 150.20 192.00 +41.80
Allentown (CG) 147.80 179.30 +31.50
Philadelphia (RFG) 160.30 182.60 +22.30
Atlanta (GG-low S, Low RVP) 133.10 173.70 +40.60
Macon (CG) 129.80 169.50 +39.70
Denver/Boulder (CG-low RVP) 144.70 182.30 +37.60
Colorado Springs (CG) 145.60 185.10 +39.50
Albany (CG) 162.60 186.10 +23.50
New York (RFG) 174.80 200.10 +25.30
GASOLINE RACK PRICES
(Cents per gallon)
5/1/03 4/29/04 Change
Portland 97.22 152.05 +54.83
Reno 95.95 148.25 +52.30
Las Vegas 98.83 153.03 +54.20
California Average 100.73 151.27 +50.54
James R. Healey
29 April 2004
Copyright (c) 2004 Bell & Howell Information and Learning Company. All rights reserved.
The high prices that consumers are paying for gasoline and natural gas are fattening oil companies' profits dramatically.
ConocoPhillips, the No. 3 U.S. oil company, reported first- quarter earnings Wednesday of $1.6 billion, up 33% from $1.2 billion in the first quarter last year and about 17% more than Wall Street had forecast. It cited higher prices for its products and cost savings from merging Conoco and Phillips.
BP reported Tuesday that first-quarter profit was $4.2 billion, up 24% over a year earlier, boosted by a gain on the sale of stakes in two Chinese companies. Higher profit margins on refining also were cited. Smaller and independent refiners reported earnings increases of 45% to more than 100% vs. the first quarter a year ago.
Average gasoline prices have set daily records this month, finally easing this week. The nationwide average for unleaded regular is $1.807, AAA reported Wednesday, slightly less than the record $1.81 reported Saturday.
Rather than being exploitive of consumers, industry analysts agreed, oil companies are either making money off high crude-oil prices caused by speculators or are reaping the benefits of investing in lower-cost refining.
"I'm not defending the oil companies, but almost every one reported losses" in the late 1990s, said A.F. Alhajji, oil expert at the Ohio Northern University's College of Business Administration. "The only thing that could rain on the parade is if the economy would crash. As long as demand outpaces supply, your margins are good," said Mary Rose Brown, spokeswoman for Valero, the largest independent U.S. refiner. Valero's first-quarter earnings were $248 million, vs. $170 million a year ago.
Gasoline demand is up 3.4% this year, she said, despite high prices. Valero does not produce oil and must buy it. However, it has invested in technology allowing it to use so-called sour crude. That's much cheaper than the sweet crude other refiners must use to meet tightening federal standards for low-sulfur, clean-air gasoline. Kerr-McGee and Unocal said first-quarter results were twice as good as they were a year ago. Amerada Hess was up 60%.