Direct Government Actions
Barriers To Efficient Transportation Fuels Markets Charles T. Drevna Executive Vice President National Petrochemical & Refiners Association Center for Strategic & International Studies Briefing on Transportation Technologies Washington DC May 17, 2007
Barriers To Efficient Transportation Fuels Markets Direct Government Actions • • • •
Marketplace Interference Inconsistent/Punitive Tax Policy Price Gouging Legislation Scope & Timing of Regulatory Requirements
Government Inaction • Failure to Enact Comprehensive Energy Legislation
The business of government is to keep government out of business—that is unless business needs government aid --Will Rodgers
Direct Government Actions
• Marketplace Interference – Renewable Fuels Mandates • Ethanol/Biofuels will play vital role in fuel supply • System falters when expediency and politics trump prudent policy • Talk of energy independence through a massive increase in renewable fuels is more than a myth—at best it’s political hyperbole; at worst, it’s…
Marketplace Interference • State Ethanol/Biofuel Mandates: – Are not covered by EPA/DOE review process – Will have negative impacts on motor fuel supply – Will interfere with RFS implementation (credit trading, averaging, banking credits, identifying liable parties)
Marketplace Interference • Ethanol has: – A bright future and a permanent place in fuel markets without EPACT or increased mandate. – Some attractive properties for refiners • • • •
increases octane dilution benefits to meet RFG specs CO benefits extends fuel supply
Marketplace Interference • Ethanol has: – Tradeoffs • • • •
lower energy content than gasoline higher RVP can exacerbate ozone non-attainment transportation and logistical limitations
– E-10 nationwide mandate?
Marketplace Interference E-85—A Paper Tiger? • Requires additional, substantial investment beyond those costs incurred for E-10 • Accounts for less than 1 percent of all ethanol consumption • Motorist achieve very poor fuel economy – 20 to 30 percent less than gasoline
Marketplace Interference E-85—A Paper Tiger?
• Infrastructure has not been built to store, transport and retail E-85 • No study of the impact of E-85 use • Automakers claim fuel economy credits for FFVs, even if gasoline used • For all of these reasons, refiners should not be mandated to use E-85 or pay for its infrastructure
Marketplace Interference • Latest From the Administration: – National Security concerns have “forced” the Bush administration to rethink its free-market philosophies on energy issues --From Grenwire Report
– “The president concluded that there are other factors that require us to intrude in this marketplace…” --Al Hubbard, Chair National Economic Council & White House Energy Policy Coord.
Marketplace Interference President’s Proposal Alternative Fuel Standard No “Fix” for the Nation's "Addiction to Oil”
• On January 23, President Bush announced energy goals in his State of the Union address – Reduce gasoline demand by 20 percent in 10 years and – Set a mandatory renewable and alternative fuels standard (AFS) of 35 billion gallons in 2017 – Formal Package sent to Congress
• The proposed AFS is the RFS plus hydrogen, coal-to-liquids, and other alternatives
Marketplace Interference An Overdose of Heavily Subsidized Products Before collectively abandoning hydrocarbons and stocking up on carbohydrates, let’s make sure we fully understand the proper role for biofuels as part of the nation’s transportation fuel mix.
Marketplace Interference • Biofuels are not a panacea to America’s energy supply problems • Biofuels cannot deliver on the much-touted promise of energy independence. • While some politicians may be intoxicated by the political allure of ethanol, American could wake up with the economic hangover
Marketplace Interference • Ethanol Politics Is the Nation in “Overdrive”? • Answer is obvious – State and federal politicians see ethanol as a panacea for all energy issues, regardless of the facts – The 2008 presidential primaries, the Iowa caucuses, and the bills under consideration by Congress will create added pressure to further increase mandates, subsidies and incentives for ethanol
• With all due respect to the President, we are not addicted to oil. We are addicted to the “politics of ethanol.”
Marketplace Interference • Biofuels Will Impact Refinery Capacity Expansion Projects – Rapid increase in biofuels could supplant need/desire for refining capacity expansion – President’s proposal calls for a 20% reduction in use of gasoline by 2017 • This would drop gasoline use below today’s U.S. production levels and transform U.S. from a net gasoline importer to a net gasoline exporter. • If U.S. refineries expand to meet rising demand for petroleum products other than gasoline, they will naturally produce more excess gasoline for export.
– before the Energy and Air Quality Subcommittee of the House Energy and Commerce Committee last week and at the Senate Energy and Natural Resources Committee’s Transportation Biofuels Conference on February 1.
Marketplace Interference • NPRA has communicated this year with Congress on biofuels – Senate Energy and Natural Resources Committee’s Transportation Biofuels Conference on Feb. 1 – Subcommittee on Energy and Air Quality of the House Energy and Commerce Committee hearing on May 8 before the Energy and Air Quality Subcommittee of the House Energy and Commerce Committee last week and at the Senate Energy and Natural Resources Committee’s Transportation
In general, the art of government consists in taking as much money as possible from one class of citizens to give to the other. --Voltaire
Direct Government Actions • Implementation of Current RFS – EPA promulgated final RFS regulations on May 1 – NPRA set up logistics and registration for a conference open to the public on May 10 with EPA and industry speakers to explain the new regulations and answer questions. – The new RFS program will begin on September 1, 2007. It has not started yet and still we are talking about expanding it to an AFS.
Direct Government Actions • Inconsistent/Punitive Tax Policy – Speaker Pelosi’s 100-hour blitz • Repeals Sec. 199 Manufacturing Credit for refiners
– House and Senate* considering other “Revenue Raisers” • • • •
Repeal of LIFO for Oil, Gas & Refining Elimination of the refining expensing provision of EPACT 05 Re-imposition of Superfund Tax Windfall Profits Tax
– Much of these “windfall” funds would be redirected to renewable fuels programs *Passage of any more problematic in Senate
Direct Government Actions • Price Gouging Legislation – The reality is that fluctuations in fuel prices serve as basic signals to producers to either increase or decrease supplies. This holds true in times of crisis and normal operations. – Markets can be extremely efficient when prices are allowed to move freely and signal supply and demand balances in particular regions.
Direct Government Actions • Price Gouging Legislation – “Price gouging” legislation will effectively cap prices in markets that need re-supply from other regions. – History and basic economics teach us that these price caps will result in shortages in the market and hardships for consumers.
Direct Government Actions • Price Gouging Legislation – “Price-gouging” legislation could lead to more permanent price controls; a tried and failed policy witnessed throughout the 1970s. – “Price-gouging” is difficult to define and highly subjective. In emergency situations, where process and clarity matter most, vague policies such as those being discussed will add additional layers of confusion for suppliers, consumers, retailers and governments.
Cumulative Regulatory Impacts on Refineries, 2002 - 2010 2002
2003
2004
2005
2006
2007
2008
2009
2010
Tier II Gasoline Sulfur 1 Renewable Fuels Mandate 2 On-Road Diesel Sulfur 3 Off-Road Diesel Sulfur State RFG Waivers and MTBE Bans
4
Phase II Gasoline Toxics Control 5 New Source Review 6 Refinery MACT II 7
Concurrently, 5-Year Review Underway
Ext. NOx SIP Calls/Section 126 8 8 Hour Ozone NAAQS 9
KEY Actual time frame known or based on 36-48 month compliance schedule after final rule issued. Compliance Requirements unknown and time frame estimated.
PM 2.5 NAAQS 10 Regional Haze 11 Urban Air Toxics (Area Sources) 12 Residual Risk 13
Concurrently, 5-Year Review Underway Prepared by the National Petrochemical & Refiners Association April 2004
Direct Government Actions • Revision of National Ambient Air Quality Standards (NAAQS) for Ozone – 1997 Standards (0.08) just being implemented – EPA was sued on the Phase 1 ozone NAAQS implementation rule, lost last December, and has appealed to the full Court of Appeals for the D.C. Circuit. Therefore, implementation is still being held up by litigation.
Direct Government Actions • Revision of National Ambient Air Quality Standards (NAAQS) for Ozone – EPA is under a court order to propose to retain or revise the 1997 ozone NAAQS by 6/20/07 and promulgate a decision by 3/12/08 because EPA is required by the Clean Air Act to review each NAAQS every five years. – CASAC & EPA want to lower to 0.07 0r 0.06 – The result being…
Government Inaction Failure To Enact Real National Energy Policy • NPRA urges Congress to reintroduce a supply ethic into our nation’s energy policy – Address “Energy” Policy in • • • • •
Farm Bills Environmental Bills Transportation Bills Appropriation Bills Tax Bills
• Congress should perhaps address Energy in an Energy Bill.
The great enemy of the truth is very often not the lie—deliberate, contrived, and dishonest—but the myth— persistent, persuasive, and unrealistic --John F. Kennedy
Energy Policy & Public Opinion Six Myths That Influence Public Policy Decisions:
1. Supply is always available at low prices 2. Environmental improvements are free 3. Alternate fuels are cheap and abundant, and unlike fossil fuels, require no environmental trade offs 4. Consumers are always willing to pay higher prices for better environmental performance 5. Little or no progress has been made in reducing air and water emissions and general improvements in the environment 6. Oil and petrochemical industries pay little attention to environmental, health and safety improvements These perceptions are wrong. But they often drive public policy.
Barriers To Efficient Transportation Fuels Markets Conclusions: • Continued U.S. reliance on petroleum products through this decade and well into the next. • Main Questions: – Can industry and policymakers resolve the challenge of complying with more stringent environmental requirements while meeting increased demand for petroleum products? – Will policymakers accept the fact that domestic hydrocarbon energy supply must increase to fuel continued U.S. economic growth?
– Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.
– Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies. ---Groucho Marx
Barriers To Efficient Transportation Fuels Markets Direct Government Actions • • • •
Marketplace Interference Inconsistent/Punitive Tax Policy Price Gouging Legislation Scope & Timing of Regulatory Requirements
Government Inaction • Failure to Enact Comprehensive Energy Legislation
The business of government is to keep government out of business—that is unless business needs government aid --Will Rodgers
Direct Government Actions
• Marketplace Interference – Renewable Fuels Mandates • Ethanol/Biofuels will play vital role in fuel supply • System falters when expediency and politics trump prudent policy • Talk of energy independence through a massive increase in renewable fuels is more than a myth—at best it’s political hyperbole; at worst, it’s…
Marketplace Interference • State Ethanol/Biofuel Mandates: – Are not covered by EPA/DOE review process – Will have negative impacts on motor fuel supply – Will interfere with RFS implementation (credit trading, averaging, banking credits, identifying liable parties)
Marketplace Interference • Ethanol has: – A bright future and a permanent place in fuel markets without EPACT or increased mandate. – Some attractive properties for refiners • • • •
increases octane dilution benefits to meet RFG specs CO benefits extends fuel supply
Marketplace Interference • Ethanol has: – Tradeoffs • • • •
lower energy content than gasoline higher RVP can exacerbate ozone non-attainment transportation and logistical limitations
– E-10 nationwide mandate?
Marketplace Interference E-85—A Paper Tiger? • Requires additional, substantial investment beyond those costs incurred for E-10 • Accounts for less than 1 percent of all ethanol consumption • Motorist achieve very poor fuel economy – 20 to 30 percent less than gasoline
Marketplace Interference E-85—A Paper Tiger?
• Infrastructure has not been built to store, transport and retail E-85 • No study of the impact of E-85 use • Automakers claim fuel economy credits for FFVs, even if gasoline used • For all of these reasons, refiners should not be mandated to use E-85 or pay for its infrastructure
Marketplace Interference • Latest From the Administration: – National Security concerns have “forced” the Bush administration to rethink its free-market philosophies on energy issues --From Grenwire Report
– “The president concluded that there are other factors that require us to intrude in this marketplace…” --Al Hubbard, Chair National Economic Council & White House Energy Policy Coord.
Marketplace Interference President’s Proposal Alternative Fuel Standard No “Fix” for the Nation's "Addiction to Oil”
• On January 23, President Bush announced energy goals in his State of the Union address – Reduce gasoline demand by 20 percent in 10 years and – Set a mandatory renewable and alternative fuels standard (AFS) of 35 billion gallons in 2017 – Formal Package sent to Congress
• The proposed AFS is the RFS plus hydrogen, coal-to-liquids, and other alternatives
Marketplace Interference An Overdose of Heavily Subsidized Products Before collectively abandoning hydrocarbons and stocking up on carbohydrates, let’s make sure we fully understand the proper role for biofuels as part of the nation’s transportation fuel mix.
Marketplace Interference • Biofuels are not a panacea to America’s energy supply problems • Biofuels cannot deliver on the much-touted promise of energy independence. • While some politicians may be intoxicated by the political allure of ethanol, American could wake up with the economic hangover
Marketplace Interference • Ethanol Politics Is the Nation in “Overdrive”? • Answer is obvious – State and federal politicians see ethanol as a panacea for all energy issues, regardless of the facts – The 2008 presidential primaries, the Iowa caucuses, and the bills under consideration by Congress will create added pressure to further increase mandates, subsidies and incentives for ethanol
• With all due respect to the President, we are not addicted to oil. We are addicted to the “politics of ethanol.”
Marketplace Interference • Biofuels Will Impact Refinery Capacity Expansion Projects – Rapid increase in biofuels could supplant need/desire for refining capacity expansion – President’s proposal calls for a 20% reduction in use of gasoline by 2017 • This would drop gasoline use below today’s U.S. production levels and transform U.S. from a net gasoline importer to a net gasoline exporter. • If U.S. refineries expand to meet rising demand for petroleum products other than gasoline, they will naturally produce more excess gasoline for export.
– before the Energy and Air Quality Subcommittee of the House Energy and Commerce Committee last week and at the Senate Energy and Natural Resources Committee’s Transportation Biofuels Conference on February 1.
Marketplace Interference • NPRA has communicated this year with Congress on biofuels – Senate Energy and Natural Resources Committee’s Transportation Biofuels Conference on Feb. 1 – Subcommittee on Energy and Air Quality of the House Energy and Commerce Committee hearing on May 8 before the Energy and Air Quality Subcommittee of the House Energy and Commerce Committee last week and at the Senate Energy and Natural Resources Committee’s Transportation
In general, the art of government consists in taking as much money as possible from one class of citizens to give to the other. --Voltaire
Direct Government Actions • Implementation of Current RFS – EPA promulgated final RFS regulations on May 1 – NPRA set up logistics and registration for a conference open to the public on May 10 with EPA and industry speakers to explain the new regulations and answer questions. – The new RFS program will begin on September 1, 2007. It has not started yet and still we are talking about expanding it to an AFS.
Direct Government Actions • Inconsistent/Punitive Tax Policy – Speaker Pelosi’s 100-hour blitz • Repeals Sec. 199 Manufacturing Credit for refiners
– House and Senate* considering other “Revenue Raisers” • • • •
Repeal of LIFO for Oil, Gas & Refining Elimination of the refining expensing provision of EPACT 05 Re-imposition of Superfund Tax Windfall Profits Tax
– Much of these “windfall” funds would be redirected to renewable fuels programs *Passage of any more problematic in Senate
Direct Government Actions • Price Gouging Legislation – The reality is that fluctuations in fuel prices serve as basic signals to producers to either increase or decrease supplies. This holds true in times of crisis and normal operations. – Markets can be extremely efficient when prices are allowed to move freely and signal supply and demand balances in particular regions.
Direct Government Actions • Price Gouging Legislation – “Price gouging” legislation will effectively cap prices in markets that need re-supply from other regions. – History and basic economics teach us that these price caps will result in shortages in the market and hardships for consumers.
Direct Government Actions • Price Gouging Legislation – “Price-gouging” legislation could lead to more permanent price controls; a tried and failed policy witnessed throughout the 1970s. – “Price-gouging” is difficult to define and highly subjective. In emergency situations, where process and clarity matter most, vague policies such as those being discussed will add additional layers of confusion for suppliers, consumers, retailers and governments.
Cumulative Regulatory Impacts on Refineries, 2002 - 2010 2002
2003
2004
2005
2006
2007
2008
2009
2010
Tier II Gasoline Sulfur 1 Renewable Fuels Mandate 2 On-Road Diesel Sulfur 3 Off-Road Diesel Sulfur State RFG Waivers and MTBE Bans
4
Phase II Gasoline Toxics Control 5 New Source Review 6 Refinery MACT II 7
Concurrently, 5-Year Review Underway
Ext. NOx SIP Calls/Section 126 8 8 Hour Ozone NAAQS 9
KEY Actual time frame known or based on 36-48 month compliance schedule after final rule issued. Compliance Requirements unknown and time frame estimated.
PM 2.5 NAAQS 10 Regional Haze 11 Urban Air Toxics (Area Sources) 12 Residual Risk 13
Concurrently, 5-Year Review Underway Prepared by the National Petrochemical & Refiners Association April 2004
Direct Government Actions • Revision of National Ambient Air Quality Standards (NAAQS) for Ozone – 1997 Standards (0.08) just being implemented – EPA was sued on the Phase 1 ozone NAAQS implementation rule, lost last December, and has appealed to the full Court of Appeals for the D.C. Circuit. Therefore, implementation is still being held up by litigation.
Direct Government Actions • Revision of National Ambient Air Quality Standards (NAAQS) for Ozone – EPA is under a court order to propose to retain or revise the 1997 ozone NAAQS by 6/20/07 and promulgate a decision by 3/12/08 because EPA is required by the Clean Air Act to review each NAAQS every five years. – CASAC & EPA want to lower to 0.07 0r 0.06 – The result being…
Government Inaction Failure To Enact Real National Energy Policy • NPRA urges Congress to reintroduce a supply ethic into our nation’s energy policy – Address “Energy” Policy in • • • • •
Farm Bills Environmental Bills Transportation Bills Appropriation Bills Tax Bills
• Congress should perhaps address Energy in an Energy Bill.
The great enemy of the truth is very often not the lie—deliberate, contrived, and dishonest—but the myth— persistent, persuasive, and unrealistic --John F. Kennedy
Energy Policy & Public Opinion Six Myths That Influence Public Policy Decisions:
1. Supply is always available at low prices 2. Environmental improvements are free 3. Alternate fuels are cheap and abundant, and unlike fossil fuels, require no environmental trade offs 4. Consumers are always willing to pay higher prices for better environmental performance 5. Little or no progress has been made in reducing air and water emissions and general improvements in the environment 6. Oil and petrochemical industries pay little attention to environmental, health and safety improvements These perceptions are wrong. But they often drive public policy.
Barriers To Efficient Transportation Fuels Markets Conclusions: • Continued U.S. reliance on petroleum products through this decade and well into the next. • Main Questions: – Can industry and policymakers resolve the challenge of complying with more stringent environmental requirements while meeting increased demand for petroleum products? – Will policymakers accept the fact that domestic hydrocarbon energy supply must increase to fuel continued U.S. economic growth?
– Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.
– Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies. ---Groucho Marx
