50 reasons gasoline isn't cheaper

As big driving season dawns, refiners must make as many blends of gas as there are states.

The Marathon Oil Co. refinery in Detroit is only about 200 miles from Chicago. That's not an uncommon distance to transport gasoline, but it might as well be on the other side of the continent as far as residents of the Windy City are concerned.

The reason: The gasoline Chicagoans use is a different blend, formulated to match the city's environmental needs.

This Balkanization of the gasoline market - there are literally 50 different blends used in the country - is a major reason prices might approach $2.00 per gallon in some areas this summer.

In fact, now that the summer driving season is near, boosting demand in an era of tight supplies, the nation's refiners face daunting challenges - and criticism from all sides. They find themselves blamed for shortages, and for air pollution.

They are accused of price-gouging, while they themselves claim they can't make enough money to build new plants. Meanwhile, summer is also smog season, and as metro areas struggle to meet clean-air laws, refiners must find ways to get 50 gas blends through a maze of pipelines to the right storage tanks without making a mistake that might cause motorists to see red.

"They are in a difficult position, it's tough to make everyone happy," says Mark Zandi, chief economist for Economics.com, a web site.

It's a situation that has not escaped the White House, which will be releasing its energy policy in only a few weeks. This week, Vice President Dick Cheney said the nation has to increase its refining capacity to prevent gasoline prices from spiking.

"As matters stand, it's been about 20 years since a large refinery was built in the United States," said Mr. Cheney.

To encourage new refinery capacity, the industry wants the White House to ease up on environmental rules that govern the changes that have to be made in existing facilities. The Environmental Protection Agency (EPA) requires strict standards for the refineries. "The most severe standards should only be required when needed," says Bob Slaughter, a lawyer at the National Petrochemical and Refiners Association (NPRA) in Washington.

For example, the EPA rules require burners that use little nitrogen oxide (a pollutant). But the burners are expensive, and the industry says not all refineries need them. "You have some places like in Yorktown, Va., or Billings, Mont., where it does not always make sense," says Mr. Slaughter.

The environmental community opposes these types of changes. "It's a basic concept of the Clean Air Act, going back as far as 1970, that if you build any new facilities, you must put on the most stringent air pollution technology available," says Blake Early, an environmental consultant to the American Lung Association in Washington. "These companies should not be allowed to get away with this."

Mr. Early says this is not the time to ease up on the rules, since the Lung Association's most recent report found 9 million more Americans living in areas with unhealthy smog levels today, compared with the prior year's report. "It's not like we licked the problem, and it won't hurt if we weaken the requirements."

In fact, on Wednesday, an environmental consortium released a study of ExxonMobil's gigantic Baytown, Texas, refinery. The group alleges scores of environmental problems, ranging from a failure to report emissions to possible violations of federal law. "This is bad news for Texans who want clean air," says Peter Altman, executive director of the coalition.

ExxonMobil, in a press release, said it operates the refinery in accordance with all regulatory requirements. It said the report has misrepresentations and uses "hysterical" language.

Because of strict environmental laws, it's extremely expensive to build a new refinery. Jerry Thompson, a senior vice president at Tulsa-based Citgo, one of the nation's largest refiners, estimates a state-of-the-art refinery processing 300,000 barrels per day would cost about $3 billion. Instead of building new facilities, the industry is adding about 1.5 percent to the capacity of its existing ones each year. This is about in line with demand, but leaves no cushion.

As long as there are no refinery outages or pipeline problems, Mr. Thompson, also the chairman of the NPRA, predicts the industry will be able to supply most of America. But he warns there could be regional problems in California and the Great Lakes regions, areas with specific gasoline requirements to cut smog.

To try to minimize these problems, the refiners would prefer to see only three blends in the entire country. "The real pinch point is distribution and tankage," Thompson says.

For example, until this year, the city of Tulsa had its own blend of gasoline for the summer. Now, it's been modified so it's the same blend used in Dallas. "It will be a little bit easier for the industry to supply that," Thompson says.

Atlanta and 43 counties around it also have a unique fuel. Thompson says they came up with this new blend to avoid having to use reformulated gas, the other main way to meet federal air-quality standards.

The demands on the refining industry are only expected to increase. It must produce low-sulfur gasoline by 2004, and low-sulfur diesel by 2006.

Thompson doubts the industry can make the $8 billion to $11 billion in needed diesel investments in time.

(c) Copyright 2001. The Christian Science Monitor

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