Regulatory Waiver And Gas Prices

According to this Los Angeles Times article this morning, the US EPA is considering a temporary waiver of the oxygenate switchover to ethanol in New York and California that took effect this spring. Information that the government is considering this waiver moved oil and gasoline market prices strongly downward.

Responding to comments by Energy Secretary Spencer Abraham, who told Congress that the Bush administration was “seriously” considering the waiver requests, traders sent the price of gasoline for April delivery down 5.2% to $1.076 a gallon on the New York Mercantile Exchange.

Benchmark crude followed suit, falling $1.49, or 4.2%, to $34.27 a barrel on the Nymex, where the price of oil has fallen more than 10% since hitting a 13-year high of $38.18 on March 17.

“Just one statement about granting the waivers brought gasoline prices down,” said Phil Flynn, senior oil analyst at Alaron Trading in Chicago. “When the price of gasoline tanked, not only did it bring down crude, it brought down” all petroleum-related futures.

This article, by Liz Douglas (who knows this industry really well and understands its economics), contains a lot of good background information on California’s five-year battle with the US EPA over the federal fuel oxygenate requirement.

This Boston Globe story adds more detail.

California and New York have asked for temporary waivers of rules to use additives that make gasoline burn more completely. The states, along with Connecticut, have banned MTBE, a blending agent, sparking concern that a change to ethanol, its chief alternative, may create supply disruptions. ”The gasoline supply situation has been a big concern all year,” said John Kilduff, senior vice president at Fimat USA Inc. in New York. ”The administration has the power to wave a wand and relieve some of the pressure. It looks like it has finally decided to consider it.”

This UPI commentary is informative and makes a very important point:

But the idea of waiving oxygenate requirements altogether is something the ethanol industry and its friends in Washington are not about to accept.

The oil industry has stated in recent months that it can produce gasoline that meets Clean Air Act emissions standards without adding any oxygenates. Giving major states a waiver that might help them prove their point could open the door to the unraveling of the pending Energy Bill’s provisions that mandate increasing the amount of ethanol used nationwide to around 5 billion gallons annually.


22 thoughts on “Regulatory Waiver And Gas Prices

  1. Yeah, come on. There is no way that anyone is going to get a waiver, especially New York and California.

    I love the irony, by the way. Where do most of the enviro-weenies live? New York and California, of course. Well, the enviro-weenies made the ethanol bed, now they have to sleep in it.

    I’d like to know more about how the refiners can meet the requirements of the clean air act without either MTBE or ethanol. Is there some other way to add oxygen to the gasoline?

  2. Eric:

    You wrote: “I’d like to know more about how the refiners can meet the requirements of the clean air act without either MTBE or ethanol. Is there some other way to add oxygen to the gasoline?”

    There are other available oxygenates, but the UPI article said that refiners can “meet Clean Air Act emissions standards without adding any oxygenates”.

    The Clean Air Act Amendments of 1990 contain a strange mix of performance and technology standards. Essentially, Phase II RFG has to be formulated to reduce unburned hydrocarbons and toxics (benzene, butadiene, polycyclic aromatics, acetaldehyde and formaldehyde) in the exhaust by about 25% of 1990 levels.

    The CAA (1990) requires refiners to use oxygenates to do this. The refiners say they can meet these performance standards without oxygenates, due to better refining technology and better vehicle combustion technology. Engine control systems on new cars are so sophisticated that the exhaust streams from oxy- and non-oxy gas are virtually identical: new cars don’t need the oxygen to promote complete combustion.

    If you take ethanol and MTBE out of the picture, you end up with 4 winter blends (northern and southern, conventional and RFG) and 4 summer blends. It’s conceivable that southern winter gasoline have the same volatility spec as northern summer gasoline, which could serve to ameliorate switch-over difficulties.

    If California wishes to mandate more expensive gasoline for its citizens, well, that’s a local political matter. But as far as gasoline is concerned, PADD V (the west coast) is a separate country.

    Getting all oxygen mandates out of gas would be great. There would still be some voluntary use of ethanol, but much less than under the proposed mandates.

  3. “I love the irony, by the way. Where do most of the enviro-weenies live? New York and California, of course. Well, the enviro-weenies made the ethanol bed, now they have to sleep in it.’

    Since it was the farm states of the Midwest, and neither California nor New York that mandated Ethanol this statement says rather more about your animus about those who hold differing political beliefs than any meaningful economic or political irony.

  4. The following page lists the political history of the Clean Air Act Amendments of 1990, which is where the original oxygen mandate came from.

    http://www.epa.gov/history/topics/caa90/02.htm

    These amendments got their genesis as a platform plank in Bush 41’s 1988 campaign. The oxyfuels mandate came from corn-belt politicos. They were most annoyed when the refining industry opted for MTBE instead of ethanol. This time around, ADM’s house politicians aren’t leaving anything to chance: in the current proposed energy bill, the oxyfuels mandate explicity names ethanol as the required oxygenate.

  5. >>Since it was the farm states of the Midwest, and neither California nor New York that mandated Ethanol this statement says rather more about your animus about those who hold differing political beliefs than any meaningful economic or political irony.

    Ya think I have A LITTLE animus towards New York and California? You are very perceptive.

    Look, the midwest can hardly be blamed for taking advantage of enviro-weenie stupidity. The enviros are the ones that wrote the CAA and mandated oxygenates. The enviros are the ones that banned MTBE (the company I work for invented MTBE, full disclosure).

    I mean, if it weren’t for the CAA and the mandate for oxygenates, there wouldn’t be any midwest congressional delegation forcing ethanol on everyone. Ethanol would never have been put into fuel in the first place.

    Still doubt me? The diesel equivalent of ethanol is biodiesel. It is made out of soybeans. A coworker’s husband is a soybean farmer. His greatest hope is that biodiesel becomes mandates by the government.

  6. At close today, the cash price of soybeans in Wapella, Illinois is $10.34 per bushel from Tate&Lyle/Staley. This is versus a historical average of around $6 a bushel over the last 10 years.

    One might think that soybean farmers are doing just fine without government mandated soydiesel. Other factors, like Asian consumption, are driving the market upwards.

    JBP

  7. Eric:

    It is not the enviro-weenies who brought us the Clean Air Act Amendments of 1990. As I pointed out above, they were something that Bush 41 campaigned on in 1988. The bill had overwhelming bipartisan support.

    Both parties extolled clean air as a “motherhood and apple pie” issue.

    The oxygenate mandate was pure pork-barrelling, brought to us purely by corn-belt politicians bought and paid for by Archer Daniels Midland (ADM was the biggest donor to both the GOP and Dem. presidential campaigns in 1988 and 1992.) Most of the enviro-weenies, as you call them, wouldn’t know an oxygenate from an alkylate. All they (and Bush) wanted was cleaner air.

    BTW, what company do you work for that claimed to invent MTBE? (Full disclosure: I used to work at a major MTBE production plant.) To the best of my knowledge, MTBE has been used for 100+ years to dissolve gallstones.

    As for who banned it, well, most of the grassroots anti-MTBE groups are funded by the ethanol lobby and the class-action lawyers. Ethanol couldn’t win in the marketplace, so it tried to win in the courts and state legislatures, and succeeded. Those groups used the enviros to further their own interests. The enviros should be happy that a few minor, one-time spills have led to the replacement of thousands of leaking underground tanks, which would still be pouring gasoline into the ground if MTBE had not been mandated 🙂

  8. I think a good article for individuals to read is the following:

    “Rent Seeking Behind the Green Curtain”
    http://www.cato.org/pubs/regulation/reg19n4b.html

    Basically, businesses will lobby for regulations that help the bottom line, including environmental regulations. In fact, a lot of environmental regulations are crafted explicitly to stifle competition.

  9. Chris– there is, however, a lot of resentment towards hypocrites (many of whom live in NY and CA, but are found everywhere) who very eagerly vote for environmental regulations whose costs fall only on other people, but are dead set against anything that would affect their own pocketbook. This by no means describes all environmentalists, but it’s a very human failing. (And as such, happens on other issues as well.)

  10. >>The oxygenate mandate was pure pork-barrelling

    I don’t agree. I think that in 1990, mandating oxygenates made sense.

    The vehicle fleet in the US in 1990 contained many vehicles that still used carburetors and first and second generation fuel injection systems. These vehicles would have benefited greatly from oxygenates.

    Fast forward to 2004. The vehicle fleet in the US is now very different than it was in 1990. There isn’t a new vehicle sold that has a carburetor (hasn’t been for over 10 years), and fuel injection systems have become very sophisticated, thanks to cheap sensors and powerful computers.

    Much more importantly, thanks to all the rebates the automakers have been offering over the last 3 years, the average age of the fleet in down. There are a lot of newer cars out there, and newer cars are less likely to have problems that lead to environmental emissions.

    So having oxygenates in the fuel is just counterproductive at this point. They don’t improve emissions.

    I can see the logic in getting the sulfur out of gasoline. Sulfur ruins the catalytic convertor. Get the sulfur out of the gasoline, and the useful life the the cat will be increased beyond that of the car itself.

    I work for UOP. More than likely the MTBE plant you worked for licensed their process technology from UOP.

  11. >>One might think that soybean farmers are doing just fine without government mandated soydiesel.

    Well, you know how farmers are. They’re never satisfied.

    To be fair, the conversation happened before the recent run-up in prices. And biodiesel would be a firm market, whereas the Chinese are probably going to have their own version of the ’97 Asian crisis in short order.

  12. Hypocrisy is with us on all levels and in all political factions. Name calling (enviro-weenies) has no place in any rational discussion of politics or economics. Using epitaphs to characterize those with whom one does not agree politically merely exposes the weakness of the political opinion.

  13. >>Using epitaphs to characterize those with whom one does not agree politically merely exposes the weakness of the political opinion.

    Come on! “Enviro-weenie” is a cute name.

    Enviros have pretty thin skins. Conservatives are called a lot worse.

    Conservatives think that enviros are just unintelligent. Enviros think that conservatives want to kill people. Big difference.

    Even in New York and California, enviros make up a small part of the electorate. They are very politically active and astute, and they do set policy. However, when their policies backfire and start costing money, the rest of the electorate gets outraged, and guys like Chucky Schumer get whiplash from the policy dime turn that he needs to do.

    I am an ex-New Yorker, so I have particular antipathy towards New Yorkers. But I can’t say that my new state, Illinois, is perfect. I just heard my Senator, Democrat Dicky Durbin, demand that the Bush Administration verbally browbeat OPEC towards lower prices! Yeah, that will work.

    Even the Saudis are pollitically astute enough to blame the high gas prices on US federal regulations.

  14. Hey Eric,

    “And biodiesel would be a firm market” does not strike me as correct. Rather, “biodiesel requirements will create entrenched lobbying organizations buying and selling votes while trying to dismantle the free market” may describe the trading in government mandates that would develop.

    jbp

  15. >>Rather, “biodiesel requirements will create entrenched lobbying organizations buying and selling votes while trying to dismantle the free market” may describe the trading in government mandates that would develop.

    No argument there. It still creates a demand for soybeans though, which is all the soybean farmer cares about.

    Yeah, I mean, if biodiesel is so good, the soybean farmer would fuel his machinery with biodiesel RIGHT NOW! So how good could it be?

    And corn farmers COULD fuel their machinery with pure ethanol. I wonder why they don’t?

  16. Well Eric,

    A) You can get more money selling your corn at market than you get value in fuel for ethanol, although at $3 or so a gallon it gets interesting. If I recall, farmers do not pay the bulk of taxes on fuel, so their price per gallon is greatly reduced.

    B) Farmers use diesel, not gasoline in their tractors, combines etc. Ethanol is typically as gasoline additive/substitute.

    C) I am not sure of the conversion numbers for soydiesel (how man gallons of soydiesel per bushel). I would suspect that it is pretty much the same deal as corn, making it cheaper to buy tax-free fuel than growing your own.

    D) There is such a thing as a corn furnace, similar to a coal-furnace that burns raw corn suspended in a slush. The breakeven point was somewhere around $2 a bushel to heat your home with corn rather than gas (of course dependent on the price of natural gas). These are common in the grain belt, though kind of a pain to maintain.

    jbp

  17. I have no doubt that it is cheaper to buy diesel than biodiesel. But isn’t that the whole point?

    The farmers want to force biodiesel and have forced ethanol on the market for non-price related reasons. Their argument isn’t that biodiesel is cheaper, it is that it is cleaner, doesn’t come from the middle east, etc.

    Those reasons for using biodiesel exist now. The farmers could be using it now.

    Technically, diesels can run on just about anything. They can run on corn oil, if not ethanol.

  18. Eric,

    You assign an alturism to Farmers unmatched since Jefferson.

    Do you realy think that Farmers will make bad economic decisions for themselves, just because their hired men (Harkin/Dubin/ex-Dole) mandate bad decisions for the rest of the country?

    jbp

  19. >>Do you realy think that Farmers will make bad economic decisions for themselves, just because their hired men (Harkin/Dubin/ex-Dole) mandate bad decisions for the rest of the country?

    Of course not. But when dealing with the un-ideological whom might take the self-interested farmers at their word, it is a fine talking-point to ask why, if biodiesel is so good, aren’t the farmers using it right now?

  20. Eric:

    The plant I worked at had UOP technology for everything except MTBE synthesis. We used UOP Butamer, Oleflex and PSA technologies, but the etherification unit was Cat-Tech (ABB-Lummus Crest.)

    I worked at the Alberta Envirofuels plant in Edmonton, which has now been converted to iso-octane manufacture, IIRC.

    Do you know Pat Mullen? Jack Chmielewski? Are those guys still at UOP?

  21. Barry, I am sorry to say that neither of those gentlemen are still at UOP. I work in the PSA area.

    Are you a ChemE?

  22. “Are you a ChemE?”

    Used to be. Got bored with engineering, and I’m now working on (almost finished) my Ph.D. in energy economics.

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