The Clean Air Act’s Contribution to Higher Gas Prices

Background.  For the first time since the 1970s, the high cost of gasoline is a major issue, particularly in the upper Midwest where prices exceeded $2.00 per gallon throughout June and early July.  The gas crunch of 2000 differs from those in the past in one key respect: Clean Air Act regulations have now emerged as a substantial contributor to motor-fuel prices.  Most recently, new EPA requirements for reformulated gasoline (RFG) added 25 to 34 cents per gallon to the record-setting prices in Chicago and Milwaukee, according to a Congressional Research Service report.[1]     

The Midwest price spike has since subsided, but the US Energy Information Administration (EIA) predicts that EPA’s complicated maze of fuel regulations has set the stage for recurrences.[2]  Other pending rules may make matters worse in the years ahead.

Gasoline Prices: Why So High in 2000?  Several factors have combined to raise gas prices throughout the country thus far this year.  The price of oil, which stayed under $15 per barrel for most of 1998 and 1999, has jumped to $30 per barrel, due to tighter OPEC production quotas and increased worldwide demand.  This oil-price rise alone has added approximately 48 cents per gallon to the 1999 price.[3]  In this regard, the recent price runups resemble the oil shocks of the 1970s.  Early-summer outages of two pipelines serving the Midwest added another 25 cents per gallon there.[4]  

But environmental regulations are also affecting gas prices.  Under the 1990 Amendments to the Clean Air Act, the 10 smoggiest metropolitan areas, comprising nearly one-third of the nation’s population, are required to use RFG, designed to reduce ozone.  On June 1, 2000, tough new EPA regulations for RFG took effect. 

Among other requirements, RFG must contain 2 percent oxygen content by weight.  This federal mandate necessitates the addition of so-called oxygenates, either methyl tertiary butyl ether (MTBE) or ethanol.  Most of the nation’s RFG uses MTBE, which is currently under attack for contaminating groundwater supplies.[5]  This type of RFG typically costs two to eight cents more per gallon than conventional gasoline.[6] 

In the Midwestern areas where RFG is required, ethanol is used instead of MTBE.  Initial difficulties in producing and distributing sufficient supplies of this unique type of fuel added greatly to the price spike in Chicago and Milwaukee this year.[7]     

The Growing Regulatory Burden.  Beyond RFG, other EPA rules enacted under the Clean Air Act also impact the price and reliability of gasoline supplies.  For example, gasoline must now meet certain Reid Vapor Pressure (RVP) requirements, which is a measure of how easily fuel evaporates.  These standards, designed to cut down on pollution caused by evaporative emissions, change with the seasons and vary from state to state, and even amongst counties within states, creating both cost and logistical problems.[8]  Further, EPA requires the use of so-called oxygenated fuels in several areas in order to reduce carbon monoxide during the winter months.  Like RFG, oxygenated gasoline typically costs several cents per gallon more than conventional fuel.[9]  In addition to these and other federally-imposed standards, some states have adopted their own measures in order the comply with the Clean Air Act’s National Ambient Air Quality Standards (NAAQS).

Many more fuel rules are in the works.  EPA is in the process of promulgating tough new standards for sulfur in gasoline and diesel fuel.  These standards are likely to raise fuel costs, and increase the potential for supply problems.[10]  A recently proposed rule would set new limits on benzene in gasoline, and EPA stated that it may target any of 21 other trace constituents in the future.[11]  Indeed, the statutory authority granted EPA to regulate the composition of motor fuels is very open-ended, allowing the agency to continue adding new rules while keeping existing ones in place.[12]

Beyond raising the overall price of gasoline, the balkanizing effect of so many state- and region-specific fuel requirements has also created supply problems.  Ten years ago, a localized shortage like that in Chicago and Milwaukee would have quickly ended with an influx of gas from elsewhere.  But today, the rest of the country doesn’t make the kind of gasoline used there, thus the supply-demand imbalance lingered for well over a month.  Similarly, large price runups in California in 1999 were caused by a few refinery outages there, but exacerbated by the uniqueness of California gasoline.  EIA believes that “the proliferation of clean fuel requirements over the last decade has complicated petroleum logistics,” and warns that “additional clean fuels programs could make the system more vulnerable to local shortages and price spikes.”[13]

Other rules have affected gasoline supplies in less direct ways.  For example, EPA’s aggressive implementation of the New Source Review (NSR) program has made it very difficult to build new refineries, or even upgrade existing ones.  In fact, the newest US refinery was built in the 1970s.  According to EIA “the US refinery system has little excess capacity, and continuing growth in the number of distinct gasoline types that must be delivered to different locations increases the potential for temporary supply disruptions and increased volatility.”[14]

Are These Costly Rules Necessary?  Air quality in the US has dramatically improved over the past 30 years, due in substantial part to reductions in motor-vehicle emissions.[15]  But most of the credit goes to improvements in the vehicles themselves, not to federal micromanagement of the makeup of fuels.  For example, a 1999 National Research Council report on the effects of the RFG program acknowledged the national declines in smog, but concluded that “it is not certain that any part of these trends can be significantly attributed to the use of RFG.”[16]  Although EPA continues to aggressively promulgate new fuel rules, it is unclear if the burdens imposed will actually lead to substantially cleaner air.

Where to Go from Here.  The Clean Air Act is overdue for reauthorization, and there is much to review.  Ten years after the sweeping 1990 amendments to the Act, it is clear that the RFG program has been unsuccessful, and that other pending motor-fuel rules have the potential to do more consumer harm than environmental good.  Perhaps it is time for Congress to revamp or eliminate the RFG requirements, and place limits on EPA’s ability to enact further fuel rules, lest $2.00-per-gallon gasoline becomes commonplace.