Clean fuel regulations: EPA, oil industry vie over effect on gas prices

EPA on Friday proposed new regulations to require refineries to make cleaner gasoline. The cost? EPA says less than a penny a gallon. Oil industry says nine cents a gallon – and higher gas prices.

The Obama administration proposed on Friday new – and more costly – regulations of the refining industry to produce cleaner gasoline and clearer skies.

If the new rules are implemented as scheduled in 2017, the Environmental Protection Agency (EPA) says, they will spare thousands of people from premature death and prevent respiratory problems in tens of thousands of children. The cost: on average less than a penny a gallon.

Not so, says the oil industry, which has been battling the EPA over the proposed rules. The new rules will add as much as nine cents a gallon to the cost of making fuel and will produce “ambiguous” results, says The American Petroleum Institute. API, the industry’s lobbying arm in Washington, refers to the proposed new rules as part of a “tsunami of regulations” the industry faces this year that could add as much as 65 cents to the cost of producing a gallon of fuel in the future.

Gasoline prices are politically sensitive. Consumers often know how much they have paid for a gallon of gasoline compared with their prior fill-up. When pump prices are rising, consumers grumble and, if prices get high enough, cut back on other discretionary purchases. As a result, economists refer to rising fuel prices as a tax on the economy.

But will Americans pay more for fuel and smile about it if they believe it will result in cleaner air?

“Some will, but the majority won’t,” answers Tom Kloza, chief oil analyst at GasBuddy.com. “There is a sense among a lot of people that we are entitled to cheaper fuel prices than the rest of the world.”

The proposed changes would make US standards the same as those in most of Europe, Japan, and South Korea, Mr. Kloza says. “We would be joining 45 other countries with tougher fuel standards,” he says.

Republicans quickly attacked the proposed regulation. “The Obama Administration is modeling our regulations after California, which has the worst economy in the nation, and today’s announcement is essentially a guaranteed energy tax hike and unfortunately is just one of many radical policies coming out of this Administration that will deal a heavy blow to middle-class families and small businesses,” said Rep. Steve Scalise of Louisiana, chairman of the Republican Study Committee, in a statement.  

In January, Greenberg Quinlan Rosner Research, often associated with Democratic issues, conducted what it termed a “bipartisan survey” of 800 registered voters for the American Lung Association on whether Americans favored tougher fuel regulations and improved antipollution laws. It found 62 percent of voters supported new gasoline and vehicle standards, and 32 percent opposed them.

If the new rules are implemented as proposed, the EPA says, the new standards would cut smog-producing chemicals by 80 percent, cut down on particulate matter by 70 percent, and reduce vapor emissions to near zero.

In the case of sulfur, one culprit in producing smog, the new standard would cut the emission to 10 parts per million in 2017 compared with the current standard of 30 parts per million. Only eight years ago the standard was 300 parts per million.

Implementing the new standards will, by 2030, avoid 2,400 premature deaths per year, 23,000 cases of respiratory ailments in children, 3,200 hospital admissions, and 1.8 million lost school days, workdays, and days when activities would be restricted due to air pollution, the EPA estimates. Total health-related benefits in 2030 would be between $8 billion and $23 billion annually, according to the agency.

One proponent of the new standard is the auto industry, which is under pressure to boost fuel mileage to meet tougher government regulations on greenhouse-gas emissions and fuel economy. In a background press release on Friday, the Alliance of Automobile Manufacturers, a lobbying group, called the EPA announcement “a big step forward.”

According to the alliance, cleaner fuel immediately reduces emissions from vehicles of any age. Sulfur damages catalytic converters over time, so the new regulation would be especially helpful in older vehicles.

“And, cleaner fuel allows for new energy-efficient technologies like lean-burn engines that are going to be necessary to comply with the challenging 2017-2025 greenhouse gas and fuel economy standards,” said the alliance in its release.

The auto industry would also like to see the EPA’s proposed new standards implemented because they would then be closer to those used in California. This would allow the auto companies to sell the same cars in all 50 states, says the EPA.

In fact, the EPA in its release mainly talked about the benefit to the auto industry, which the US government rescued during the height of the Great Recession.

“The Obama Administration has taken a series of steps to reinvigorate the auto industry and ensure that the cars of tomorrow are cleaner, more efficient and saving drivers money at the pump, and these common-sense cleaner fuels and cars standards are another example of how we can protect the environment and public health in an affordable and practical way,” said EPA Acting Administrator Bob Perciasepe, in a statement.

The proposed rules come at a time when refinery profit margins are relatively high, says GasBuddy.com's Kloza.

“Let’s just say the environment for refining is prosperous,” he says, noting that the cost of natural gas used to make gasoline is low, and that the price of oil produced in the US is lower than oil produced in other parts of the world. This gives the refineries a cost advantage.

However, he says, the industry can see a turnaround in a hurry. “We know refining can go from a renaissance to the dark ages in a heartbeat,” he says.

The API says it sees nothing but rising costs ahead because of proposed federal regulations. If the EPA adds an additional mandate to lower vapor pressure, that will cost an extra 25 cents a gallon to make gasoline, the API calculates. Moreover, the API says, gasoline costs during manufacturing will rise another 30 percent if federal mandates to use more ethanol by 2015 are not relaxed. The API also worries that the EPA will propose new ozone reduction standards at the end of the year.

“That’s why we call it a tsunami of regulations,” says Carlton Carroll, a spokesman for the API in Washington.

The EPA will take public comments on the new regulations before finalizing them, possibly by year's end.