The purpose of today’s hearing is to examine the environmental regulatory framework affecting gasoline refining. It seems every time gasoline prices rise, some member of Congress calls for an FTC investigation for price fixing. The FTC spends several months investigating and by the time they issue their conclusion, which is always no collusion, prices have dropped and the public loses interest. Unfortunately those members of Congress never point out that many of the reasons for the high gasoline prices start right here in Congress with the laws that we pass, and with the Federal Agencies who implement the regulations.
In the past decades, our laws and regulations have improved the environment. However, we’ve picked the low hanging fruit. Today, it is critical that the American people realize that our environmental regulations are not free, but have very real price.
It should not come as a surprise that gasoline prices are high. In May 2001, President Bush’s National Energy Plan identified the significant fuels related issues that are the subject of so much rhetoric today.
Crude oil costs, controlled by OPEC, represent half the cost of gasoline. We have very little impact on OPEC, and calls to jawbone the cartel amount to little more than lip service.
Historically, two factors lifted us out of the oil crisis of the 1970s. First, we began producing domestic oil from Alaska. Second, President Reagan lifted price controls that the Carter Administration had imposed and allowed the market to better work.
Today, we again have two possibilities. The first, we could look at our domestic sources in Alaska (ANWR and National Petroleum Reserve). The loudest message we could send to OPEC would be to their pocket book which means domestic production. In fact, the International Energy Agency released a study on the impact of high oil prices on the global economy just this month. In analyzing effects of sustained high prices, the IEA concluded that the U.S. would suffer the least because we still produce 40% of our own oil. Second, realizing that increasing domestic production isn’t realistic then we must look to the market, as President Reagan did.
But the market’s supply-demand balance is extremely tight. This chart shows that while demand for gasoline (blue line) continues to grow, our number of refiners (yellow) have dropped significantly. In 1981, we had 369 refineries; today we have only 149.
With demand for gasoline continuing to increase, one would think that the market would move to meet that demand; that companies would be pleased to produce more gasoline. However, the last time a new refinery was built in this country is 1976.
This chart depicts a best case scenario to scope, site, and construct a new 250,000 barrel/day refinery. Again, in a best case, assuming no opposition from special interest environmental groups, and without wrangling with Not-In-My-Backyard issues, it would take five to seven years at cost of $2.5 Billion. However, this best case scenario, as costly and time intensive as it is, is far from reality.
A new project would face a maze of environmental-related permits from hazardous wastes to water to air emissions. I have in my hand a five page single space list of the environmental laws that apply to refineries, which I will submit into the Record.
Since industry is constrained from building new refineries, then it seems reasonable to expand existing ones to meet consumer demand. Unfortunately, special interest led opposition to reforming New Source Review has prevented industry from any meaningful expansion. Many disagree over New Source Review policies, but that disagreement underlies the problem – New Source Review adds uncertainty to the market. And that uncertainty prevents the market from working efficiently.
Uncertainty in a constrained and tight market leads to significant price volatility. Recently, the distinguished ranking member of the Energy & Natural Resources Committee suggested that EPA rollback its Tier II sulfur rules for importers even though our domestic refiners have spent billions of dollars to meet the more stringent specifications.
I applaud the Bush EPA for putting environmental quality first. However, the effect of even the thought of a rollback created more volatility in the market, temporarily sending crude oil futures up one dollar per barrel.
In hopes to appear responsive to constituents, some members of Congress have suggested that we drastically alter the situation with respect to “boutique fuels” or gasoline blends produced to meet a particular need of a particular geographic area. Price volatility is a very real problem when there is a supply disruption – neighboring areas don’t make the special blend so they are unable to meet the supply shortfall.
However, given the experience of the proposed sulfur regulation rollback, sweeping changes to our fuels policies without careful consideration and study can have detrimental price impacts for consumers. That is why I worked to include carefully crafted study in H.R. 6, the House-Senate Conference Report of the Energy Bill, to consider environmental and economic impacts of new fuels policy.
In this constrained market, we must consider the environmental and the economic. More stringent environmental regulations mean that refiners must make environmental upgrades rather than increase capacity to meet consumer demand.
But you don’t just have to take my word for it - the Energy Information Administration concluded that tighter product specifications will result in:
Increased likelihood of outages; diminished yields of prime fuels; and additional investment hurdles for small refiners.
I look forward to our witnesses’ testimony on the subject.
Click here for link: (.pdf)
Click here for chart: (.htm)
Phoenix, Arizona
May 11, 2004
Senator James M. Inhofe
Chairman,
Committee on Environment & Public Works
Room SD-410
Washington, D.C., 20510
Dear Sir;
After learning of the Committee’s upcoming hearing on refining issues, I have prepared the attached brief Situation Analysis to address the issue of why a new oil refinery has not been built in the United States in over twenty years. I have been involved in the oil refining industry for over thirty years. In the late 1990’s I was CEO of Orion Refining Corporation who spent over $1 billion to refurbish and upgrade a refinery near New Orleans that had been idled since the early 1980’s. This was the closest thing to a new refinery project during the 1990’s. I am currently the CEO of Arizona Clean Fuels, a company that has been developing a new oil refinery project for Arizona for over ten years. This project is nearing the completion of the initial permitting stage and is a unique example of the key issues that must be addressed to build a new refinery in this country. I hope the attached paper helps the committee to understand the magnitude of a project such as this and the long lead times that add uncertainty to the overall business decisions involved.
Yours truly,
R.G. McGinnis
CEO, Arizona Clean Fuels, LLC
