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Report to Congressional Requesters:
June 2005:
Gasoline Markets:
Special Gasoline Blends Reduce Emissions and Improve Air Quality, but
Complicate Supply and Contribute to Higher Prices:
GAO-05-421:
GAO Highlights:
Highlights of GAO-05-421, a report to congressional requesters:
Why GAO Did This Study:
The Clean Air Act, as amended, requires some areas with especially poor
air quality to use a “special gasoline blend” designed to reduce
emissions of volatile organic compounds (VOC) and nitrogen oxides (NOx)
and requiring the use of an oxygenate such as ethanol. In less
severely polluted areas, the Act allows states, with EPA approval, to
require the use of other special blends as part of their effort to meet
air quality standards.
GAO agreed to answer the following: (1) To what extent are special
gasoline blends used in the United States and how, if at all, is this
use expected to change in the future? (2) What effect has the use of
these blends had on reducing vehicle emissions and improving overall
air quality? (3) What is the effect of these blends on the gasoline
supply? (4) How do these blends affect gasoline prices?
What GAO Found:
Although there is no consensus on the total number of gasoline blends
used in the United States, GAO found 11 distinct special blends in use
during the summer of 2004. Further, when different octane grades and
other factors are considered, there were at least 45 different kinds of
gasoline produced in the United States during all of 2004. The 11
special blends GAO found are often used in isolated pockets in
metropolitan areas, while surrounding areas use conventional gasoline.
The use of special blends may expand because a new federal standard for
ozone may induce more states to apply to use them. To date, the
Environmental Protection Agency (EPA) has generally approved such
applications and does not have authority to deny an application to use
a specific special blend as long as that blend meets criteria
established in the Clean Air Act. EPA staff told us that there had
been recent congressional debate regarding EPA’s authority with regard
to approving special gasoline blends but that the bills had not
passed.
EPA models show that use of special gasoline blends reduces vehicle
emissions by varying degrees. California’s special blend reduces
emissions the most—VOCs by 25-29 percent, NOx by 6 percent compared
with conventional gasoline, while also reducing emissions of toxic
chemicals. In contrast, the most common special gasoline blend (used
largely in the Gulf Coast region) reduces VOCs by 12-16 percent and NOx
by less than 1 percent compared with conventional gasoline. The extent
of reductions remains uncertain, because they rely, at least in part,
on data regarding how special blends affect emissions from older
vehicles, and these estimates have not been comprehensively validated
for newer vehicles and emissions controls. Regarding air quality, EPA
and others have concluded that improvements are, in part, attributable
to the use of special blends.
The proliferation of special gasoline blends has put stress on the
gasoline supply system and raised costs, affecting operations at
refineries, pipelines, and storage terminals. Once produced, different
blends must be kept separate throughout shipping and delivery, reducing
the capacity of pipelines and storage terminal facilities, which were
originally designed to handle fewer products. This reduces efficiency
and raises costs. In the past, local supply disruptions could be
addressed quickly by bringing fuel from nearby locations; now however,
because the use of these fuels are isolated, additional supplies of
special blends may be hundreds of miles away.
GAO evaluated pretax wholesale gasoline price data for 100 cities and
generally observed that the highest prices tended to be found in cities
that use a special gasoline blend that is not widely available in the
region, or that is significantly more costly to make than other
blends. There is general consensus that increased complexity, and
higher costs associated with supplying special blends, contribute to
higher gasoline prices either because of more frequent or severe supply
disruptions or because higher costs are likely passed on at least in
part to consumers.
What GAO Recommends:
GAO is making four recommendations to EPA, including: (1) that the
agency, with the Department of Energy and others, develop a plan to
balance the environmental benefits of using special fuels with the
impacts of these fuels on the gasoline supply infrastructure and (2) if
warranted, that EPA work with other agencies to identify what statutory
or other changes are required to implement this plan and request those
authorities from Congress. EPA declined to comment on the findings
and recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-05-421.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim Wells, 202-512-3841
or wellsj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Special Gasoline Blends Are Widely Used and Use May Increase in the
Future:
Special Gasoline Blends Reduce Emissions and Contribute to Improved Air
Quality:
Use of Special Gasoline Blends Has Made It More Complicated and Costly
to Supply Gasoline:
Areas That Use Uncommon Special Gasoline Blends Tend to Have Higher and
More Volatile Gasoline Prices:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Projected Emissions Reductions Resulting from Low-RVP, RFG,
and CBG Gasoline Blends:
Figures:
Figure 1: Gasoline Supply and Demand, September 2004:
Figure 2: Map of Key Pipelines and Refineries, 2004:
Figure 3: Special Gasoline Blends--Summer 2004:
Figure 4: Market Shares for the Various Gasoline Blends Used in 2001:
Figure 5: Map of Areas Not Meeting New 8-Hour and Former 1-Hour Ozone
Standard, 2004:
Abbreviations:
AQIRP: Air Quality Improvement Research Program:
CBG: Cleaner Burning Gasoline:
CO: carbon monoxide:
DOE: Department of Energy:
EIA: Energy Information Administration:
EPA: Environmental Protection Agency:
FIP: federal implementation plan:
MTBE: methyl tertiary-butyl ether:
NAAQS: National Ambient Air Quality Standards:
NOx: nitrogen oxides:
OPIS: Oil Price Information Service:
RFG: reformulated gasoline:
RVP: reid vapor pressure:
SIP: state implementation plan:
VOCs: volatile organic compounds:
Abbreviations:
Letter June 17, 2005:
The Honorable James Jeffords:
Ranking Minority Member:
Committee on Environment and Public Works:
United States Senate:
The Honorable Barbara Boxer:
United States Senate:
In 2004, consumers in the United States used approximately 140 billion
gallons of gasoline, an amount equivalent to approximately 10 percent
of the world's total consumption of petroleum products. Despite
significant improvements in vehicle emissions and fuel efficiency
technology, gasoline use remains a major source of harmful pollutants
such as volatile organic compounds (VOC) and nitrogen oxides (NOx),
both of which can contribute to formation of ground-level ozone--a
pollutant linked to a variety of health problems including aggravated
asthma, reduced lung capacity, and increased susceptibility to
respiratory illnesses like pneumonia and bronchitis.[Footnote 1]
Vehicle emissions also contribute to smog and acid rain, which can
reduce visibility and damage property. The Clean Air Act (the Act), as
amended, provides a federal and state framework to address air
pollution and its health consequences. Among other things, the Clean
Air Act has required improvements in emissions controls on automobiles,
power plants, and other significant contributors to pollution. Under
the Act, the federal government establishes air quality standards for
several pollutants, including ozone and carbon monoxide. States that do
not meet these standards must develop plans to improve air quality and
submit those plans to the Environmental Protection Agency (EPA) for
approval.
In 1990, the Clean Air Act was amended to require some areas with poor
air quality to use "special gasoline blends"--blends of gasoline,
designed to be cleaner burning. Specifically, the Act requires areas
with the worst air quality to use "reformulated" gasoline, a special
blend of gasoline designed to reduce emissions of VOCs and NOx.
Reformulated gasoline also includes additives such as ethanol, which
reduce emissions of carbon monoxide in some engines--these additives
are called "oxygenates" because they increase the oxygen content of the
fuel.[Footnote 2] In less severely polluted areas, the Act gives states
the option of using reformulated gasoline or seeking EPA approval to
require the use of other special gasoline blends as part of overall
efforts to meet federal air quality standards. States applying for EPA
approval to require the use of a special gasoline blend must
demonstrate that even with the use of all reasonable and practicable
options, additional emission reductions are needed to achieve federal
air quality standards. States also must demonstrate that no other
measures that would bring about timely attainment exist or that
existing measures, such as state inspection and maintenance programs,
are unreasonable or impracticable. Once EPA has determined that these
criteria are met and has approved a state's application to use a
special gasoline blend in a given location, that fuel becomes a
requirement.
Gasoline is a mixture of multiple components. With the exception of
ethanol and some other additives, these components are produced from
crude oil through a set of processes collectively known as refining.
The types and amounts of components in gasoline can be adjusted for a
number of reasons, such as improving engine performance or reducing
emissions. As a general matter, special gasoline blends differ from
conventional gasoline in at least one of three ways: a reduced tendency
to evaporate, the addition of an oxygenate, or reduced levels of one or
more chemicals--such as sulfur. In this report, "conventional gasoline"
refers to the basic gasoline blend used everywhere that a special
gasoline blend (e.g., reformulated gasoline, state special blends,
etc.) is not.
Whatever the blend, gasoline used in the United States is provided by
some combination of U.S. refineries and/or imports of gasoline or
components. Most gasoline produced in the United States is refined in
one of four major refining areas located along the East Coast, West
Coast, Gulf Coast, and Midwest. From a refining area or coastal
terminal, gasoline is shipped through a network of pipelines, water
barges, or trucks to large storage terminals, which may have tanks
capable of holding hundreds of millions of gallons of gasoline. From
there, it is distributed to retail outlets such as local gasoline
stations by large over-the-road tanker trucks.
Over the past several years, gasoline prices in parts of the United
States have on several occasions experienced sudden, significant price
increases. Some areas with unique gasoline blends, such as California
and parts of the Midwest, have been especially hard hit. Some experts
have attributed these price increases, in part, to special gasoline
blends and have suggested that more uniform national gasoline standards
could lead to lower or more stable gasoline prices while meeting air
quality goals. Others, including some state governments, believe that
special gasoline blends are an important tool that has enabled them to
meet federal air quality standards at lower cost than other
alternatives.
In this context, we agreed to answer the following questions:
1. To what extent are special gasoline blends used in the United States
and how, if at all, is this use expected to change in the future?
2. What have EPA and others determined regarding the role of special
gasoline blends in reducing vehicle emissions and improving overall air
quality?
3. What is the effect of these blends on the gasoline supply in the
United States?
4. How do these blends affect gasoline prices?
In answering these questions, we reviewed federal and state analyses of
gasoline markets and the environmental effects of various special
gasoline blends; examined the literature on gasoline supplies and
prices; and analyzed wholesale gasoline price data for 100 cities and
the national average. We interviewed a wide range of government
officials and industry experts including federal officials at the EPA
and the Department of Energy's Energy Information Administration; staff
at state environmental offices; academic and industry experts;
petroleum industry officials from companies involved in refining,
terminal operations, and pipeline operations, as well as from large oil
companies; and representatives of trade associations. We also conducted
detailed examinations of markets in California, Louisiana, Texas, and
New Jersey--states with large refining sectors and experience with
producing and using special gasoline blends. Because many factors may
affect gasoline prices at various times, only some of which are readily
and consistently observable through available data, we agreed to report
on prices and volatility but not to provide a definitive causal link
between specific gasoline blends and prices. We conducted our work from
June 2004 to May 2005 in accordance with generally accepted government
auditing standards. For a more detailed discussion of the scope and
methodology of our reiew, see appendix I.
Results in Brief:
Although there is no consensus on the total number of special gasoline
blends used in the United States, we found that, in addition to
conventional gasoline, at least 11 fundamentally distinct special
gasoline blends were used during the summer of 2004 in parts of 34
states and covering approximately one-sixth of all the counties in the
United States. In the summer of 2001--the last year for which we had
data--special gasoline blends accounted for slightly more than half of
the total gasoline volume consumed in the United States, with the rest
accounted for by conventional gasoline. When different octane grades
and other factors are considered, there were at least 45 different
blends of gasoline produced and handled by pipelines in the United
States during the entirety of 2004. Special gasoline blends are often
used in isolated pockets because these blends have generally been
adopted in large metropolitan areas in response to severe air quality
problems, while surrounding areas have generally continued to use
conventional gasoline. Further, EPA's approvals of individual states'
applications to adopt special gasoline blends have been made
independently over time without consideration of the other fuels
already in use in the region. For example, East St. Louis, Illinois,
and St. Louis, Missouri (two cities in the same metropolitan area,
which straddles two states and two EPA regions) separately applied to
EPA and received approval for different gasoline blends. The use of
special gasoline blends may continue to expand given that EPA recently
finalized a more stringent federal standard for ozone and, as a result,
another 138 counties across the United States are now out of compliance
with the national air quality standard. To meet the new standard, it is
likely that many more locations will apply to use special gasoline
blends. To date, EPA has generally approved such applications and does
not have authority to deny an application to use a specific special
gasoline blend as long as that blend meets the environmental criteria
established in the 1990 amendments to the Clean Air Act. EPA staff told
us that there had been congressional debate regarding EPA's authority
during consideration of recent energy legislation, but that its
authority had not changed as of May 2005.
Use of these special gasoline blends reduces vehicle emissions by
varying degrees. California's special gasoline blend--the fuel
formulated to reduce emissions the most--offers the greatest
reductions. Specifically, EPA models how different gasoline blends
affect emissions and estimates that California's blend reduces VOCs by
25-29 percent and NOx by about 6 percent compared with conventional
gasoline, while also reducing emissions of toxic chemicals and other
substances. In contrast, the most commonly used special gasoline blend-
-one of the least stringent blends and used primarily in the Gulf Coast
region--is estimated to reduce VOCs by about 12-16 percent and NOx by
less than 1 percent compared with conventional gasoline. The extent of
reductions remains unclear, however, because these estimates are based,
in part, on data regarding how special gasoline blends affect emissions
from older vehicles, and these data have not been comprehensively
validated through testing on current vehicle types with newer emissions
controls. In the case of oxygenates, there appears to be agreement that
the addition of oxygenates reduces emissions from older vehicles.
However, improvements in automobile technology in newer vehicles now
automatically reduce emissions of carbon monoxide and other pollutants
and, for these vehicles, may have negated many of the benefits of
adding oxygenates to gasoline. Some studies have also found that use of
ethanol can increase emissions of pollutants that can increase ozone
levels. Regarding air quality, EPA and other experts have concluded
that improvements in air quality seen in some parts of the country are
at least partly attributable to the use of special gasoline blends.
However, studies on the impact of individual emissions reduction
efforts--such as special gasoline blends--are limited and incomplete,
in part because of difficulty isolating the effect of gasoline blends
from other factors that affect air quality such as weather and
emissions from other sources.
The proliferation of special gasoline blends has made it more
complicated to supply gasoline and has raised costs, significantly
affecting operations at refineries, pipelines, and storage terminals.
At refineries, making these blends can require additional investment
such as installing new processing equipment and the use of larger
amounts of valuable components in the blending process--making it more
costly to produce special gasoline blends. Once produced, different
blends of gasoline must be kept separate throughout the shipping and
delivery process, and the increased number of gasoline blends has
reduced the capacity of pipelines and storage terminal facilities,
which were originally designed to handle fewer products. For example,
several pipeline companies reported that the capacity of their systems
has been reduced because they have had to slow the speed of products
through the pipelines in order to off-load special blends at specific
locations, which raises the average cost of shipping gasoline.
Similarly, storage terminals have not been able to fully utilize the
volume of their storage tanks because the tanks were designed to handle
fewer types of fuel and are often larger in size and fewer in number
than necessary for handling smaller batches of special gasoline blends.
Further, the proliferation of special blends has, according to several
buyers from these wholesale markets, limited the number of suppliers of
some of these fuels, posing challenges when traditional supplies are
disrupted, such as during a refinery outage or pipeline delay. In the
past, local supply disruptions could be addressed relatively quickly by
bringing fuel from nearby locations; now, however, additional supplies
of special gasoline blends may be hundreds of miles away.
We evaluated pretax, wholesale gasoline price data for 100 cities and
generally observed that the highest prices tended to be found in cities
that use a special gasoline blend that is not widely available in the
region or that costs significantly more to make than other blends. We
also found high prices in cities that are far away from major refining
areas or other sources of gasoline. For example, of the 100 cities we
examined, most of the 20 cities with the highest prices used special
blends of gasoline. The other cities with the highest prices used
conventional gasoline year-round, but these are long distances from
major refining centers or are located on or near a single smaller
pipeline. For the period, December 2000 through October 2004, average
prices in the 20 highest-price cities were between 14 and 41 cents per
gallon higher than in the city with the lowest price. Further, 5 of the
10 cities with the highest average prices were in California, which
uses a unique gasoline that only a few refiners outside of the state
make and is expensive to refine. In contrast, the lowest prices were
typically found in cities that are close to major refining centers or
that used gasoline widely available in their region. For example, among
the 20 cities with the lowest prices, 8 used conventional gasoline--the
most widely available gasoline blend--and 9 used 7.8 reid vapor
pressure (RVP) gasoline--the most widely used special blend, largely
used in areas close to the Gulf Coast refining center. The other three
cities with the lowest prices--Houston, Birmingham, and Atlanta--used
less common special blends but are all close to the largest refining
area, the Gulf Coast and, therefore, have many more potential supply
options than more isolated cities do. In addition, we found that prices
tended to be more volatile in cities that used special gasoline blends.
Specifically, 18 of the 20 cities with the most volatile prices used
special blends of gasoline, while 17 of 20 cities with the lowest
volatility used either conventional or 7.8 RVP gasoline.
While prices for special blends tend to be higher than for conventional
gasoline, available data did not allow us to attempt to isolate the
effects of specific special gasoline blends on gasoline prices or to
definitively establish a causal link between specific special blends
and price volatility. Specifically, we did not have sufficient data to
control for all other potential contributing factors--such as the
distance from cities to the sources of gasoline supply, or specific
features of these cities that might influence prices regardless of the
blend of gasoline used. However, there is a general consensus among the
studies we reviewed and the experts we spoke with that the increased
complexity, and higher refining, transportation, and storage costs
associated with supplying special gasoline blends, have contributed to
higher gasoline prices overall and for specific special blends either
because of more frequent or severe supply disruptions or because higher
costs are likely passed on at least in part to consumers. Moreover, our
findings are generally consistent with results of government, academic,
and private studies, which found that the gasoline supply system is
increasingly stressed and also found isolated pockets of higher and/or
more volatile prices in cities that use special gasoline blends that
are not widely used.
To provide better information about the emissions and air quality
impacts of using special gasoline blends, we recommend that the EPA
Administrator direct the agency to comprehensively study how special
gasoline blends affect the emissions from the vehicles that comprise
today's fleet and use the results of this work to make appropriate
modifications to the models that states use to estimate the emissions
and air quality benefits of using them. In order to identify how to
balance the environmental benefits of using special gasoline blends
with the impacts that the use of these fuels have on the supply
infrastructure and prices, we are recommending that EPA work with the
states, the Department of Energy, and other stakeholders to develop a
plan to balance these factors. If warranted by the results of this
study, we are further recommending that EPA work with the Department of
Energy and others to identify what statutory and other changes are
required to achieve this balance and report these to Congress and to
request that Congress provide the needed authority to the appropriate
federal agency or agencies.
We provided a copy of our draft report to EPA for comment. The agency
did not comment on our findings or recommendations but did provide
technical comments that we have adopted, as appropriate.
Background:
The Clean Air Act, as amended, provides the basic statutory framework
for the role of the federal government and the states in managing air
quality in the United States. Among other things, the Act authorizes
EPA to set and enforce standards, referred to as National Ambient Air
Quality Standards (NAAQS), for pollutants. EPA has subsequently set
standards for six pollutants--ozone, particulate matter, carbon
monoxide, nitrogen dioxide, sulfur dioxide, and lead. While carbon
monoxide is directly emitted when various fuels are burned, ground-
level ozone is formed when VOCs and NOx mix in the presence of heat and
sunlight. As a result, emissions of VOCs and NOx are considered by EPA
and the states in their efforts to reduce concentrations of ground-
level ozone. Because heat and sunlight act as catalysts in the
formation of ground-level ozone, high ozone levels are most prevalent
in spring and summer.
EPA sets and enforces the NAAQS to, among other things, reduce the
negative health effects of air pollution. Each of the six pollutants
covered by the NAAQS is known to cause a variety of adverse health and
other consequences. For example, at certain concentrations ground-level
ozone and carbon monoxide can, among other things, cause lung damage,
eye irritation, asthma attacks, chest pain, nausea, headaches, and
premature death. To enforce the standards, EPA evaluates monitoring
data on air quality to determine whether local air quality meets
federal standards--designating areas as in either attainment (if they
meet the federal standards) or nonattainment (if they do not meet the
federal standards) with each of the NAAQS.[Footnote 3]
Under the Act, states that contain areas in nonattainment with the
NAAQS are required to identify how they will reduce emissions and
improve air quality to meet them. For each pollutant, states are
required to prepare a state implementation plan (SIP) and have the plan
approved by EPA.[Footnote 4] States have choices in determining how to
reduce emissions and meet air quality standards, determining, among
other things, how much to reduce emissions from mobile sources such as
automobiles compared with other sources of similar emissions such as
power plants. Because use of gasoline in automobiles emits several
chemicals, including carbon monoxide, nitrogen oxides, and VOCs, and
because emissions from automobiles are often an important contributor
to local air quality problems, the federal government and the states
often focus on reducing automobile emissions. Whatever the planned
reductions, states must identify an inventory of air emissions and
demonstrate in their SIPs how they will achieve attainment in a
specific time frame. States typically demonstrate this through modeling
analysis that estimates how the various efforts in their SIPs will
reduce emissions and improve air quality.
The Act also provides authority to set standards and establish
requirements for some programs specifically designed to reduce vehicle
emissions. For example, using authority provided under the Act, EPA has
required newer cars to meet more stringent emissions standards, and
vehicle manufacturers have incorporated emissions-control devices such
as catalytic converters and oxygen sensors to meet them. Further, the
Act requires cars to have under-the-hood systems and dashboard warning
lights that check whether emissions control devices are working
properly. In addition, the Act requires that some areas--generally
highly populated metropolitan areas--have programs for periodic
inspection and maintenance of vehicles. These programs identify high-
emitting vehicles, which sometimes have malfunctioning emissions
control devices, and require vehicle owners to make repairs before the
vehicles can be registered.
Federal and State Actions Regulate Gasoline:
The Act gives the federal government, through the EPA, primary
authority for regulating the environmental impacts of gasoline
use.[Footnote 5] For example, the Act sets minimum national standards
for conventional gasoline, as well as requiring that certain gasoline
blends formulated to reduce emissions be used in some areas with
especially poor air quality. Specifically, for certain areas with long-
standing and especially poor air quality, the federal government
requires the use of special reformulated gasoline, commonly referred to
as RFG. The amendments also require other areas to use special gasoline
blends designed to reduce summertime ozone pollution and wintertime
carbon monoxide pollution.
The Act allows states or regions not required to use RFG to seek EPA
approval to require use of other special gasoline blends to aid in
improving air quality, provided that they do not violate minimum
federal standards. In 2001, EPA studied the proliferation of gasoline
blends and reported that several states had chosen special blends other
than RFG for one or more of three reasons: (1) the states were not
eligible to require RFG because their air quality was not bad enough,
(2) the states wanted to avoid the RFG requirement to use an oxygenate
and its added cost, (3) fuel suppliers and states believed that the
other special blend would be less costly than RFG while meeting their
need to reduce emissions. States seeking to use a special gasoline
blend must obtain formal approval from EPA, generally the regional
office with authority to review their SIPs. Specifically, under the
Clean Air Act, section 211(c)(4)(C), EPA may approve applications by
states to use special gasoline blends if the states demonstrate that
the fuel is needed to reach attainment with federal air quality
standards.
In guidance issued in August 1997--after several of the special
gasoline blends were approved--EPA clarified that they can approve a
state gasoline requirement only if "no other measures that would bring
about timely attainment exist," or if other measures are "unreasonable
or impracticable." The guidance requires that states do four things in
their application for approval of a new or revised SIP: (1) quantify
the estimated emissions reductions required to reach attainment with
the federal NAAQS for ozone; (2) identify possible control measures
that could be used in place of special gasoline blends and provide
emissions reduction estimates for those measures; (3) explain why those
measures are "unreasonable or impracticable"; and (4) show that, even
with use of all "reasonable and practicable" measures, additional
emissions reductions are needed. As is the case with other new or
revised SIPs, these applications are open for public comment, and EPA
must consider those comments before making a decision. Once approved,
states' special gasoline blends become federally enforceable
requirements.
Under some circumstances, EPA may temporarily waive special gasoline
blend requirements, referred to as granting enforcement discretion, if,
for example, the required special gasoline blend is not available due
to a supply disruption. Over the past several years, EPA has waived the
requirement to use these special gasoline blends on several occasions
when it determined that overall supplies might become tight. We found
that EPA has granted enforcement discretion on at least 23 occasions,
allowing gasoline that did not comply with local requirements to be
sold there. The causes of these supply disruptions included the 2003
blackout in the Northeast, the series of hurricanes in Florida and the
Gulf Coast in 2004, as well as refinery fires, pipeline breaks, and
other infrastructure problems. Although there was one short waiver that
applied nationwide following the terrorist attacks of September 11,
2001, several of the other waivers were provided to local areas with
particularly stringent gasoline formulations including St. Louis,
Chicago/Milwaukee, Atlanta, Las Vegas, and Phoenix when there were
supply shortages in these areas.
All Gasoline Is a Blended Mix of Components Derived Primarily from
Crude Oil:
All gasoline is a blend of different components that are predominantly
produced in refineries. The simplest refineries primarily separate the
components already present in crude oil. More complex refineries also
have the ability to chemically change less valuable components of crude
oil into more valuable ones. Because of their ability to chemically
alter components, complex refineries can increase the amount of
gasoline yielded from a given amount of crude oil and reduce the amount
of less valuable products. Although most refineries can process many
types of crude oil, refineries are generally configured to run most
efficiently when refining a specific type of crude oil into a specific
group of products.
Absent specific regulatory requirements, refiners blend several
components derived from crude oil to produce a gasoline that achieves
acceptable engine performance at the lowest cost. Two key aspects of
gasoline affect engine performance:
* Reid vapor pressure is a measure of gasoline's tendency to evaporate
and also reflects the ease with which it ignites when the spark plug
fires in a cold engine. To maintain engine performance, RVP must vary
by season and region. Higher RVP is required in colder climates and
seasons to allow an engine to start.
* Octane number is a measurement of gasoline's tendency to ignite
without a spark, commonly known as "knocking" in a running engine. Some
high-performance and other vehicles require gasoline with a higher
octane number. To satisfy these requirements and consumer demand,
retailers in the United States typically sell three different octane
grades of gasoline.
Special gasoline blends developed to reduce pollution are generally
adjusted in at least one of the following ways:
* RVP is reduced during the summertime to reduce VOC emissions.
Reducing the RVP of gasoline requires reducing the amount of very light
compounds, such as butanes and pentanes, blended into the gasoline.
* Toxics, their precursors, or other chemicals are limited so they are
not released into the air when the gasoline is burned. Some of these,
such as sulfur, naturally occur in crude oil while others, such as
benzene, result from gasoline refining.
* Oxygenates, chemical compounds containing oxygen to aide in
combustion, are added to gasoline to improve environmental performance
when the gasoline is burned, including reducing carbon monoxide (CO)
emissions. The most commonly used oxygenates are MTBE and ethanol.
Several states have banned MTBE as a result of concerns about
groundwater pollution and have switched to using ethanol as an
oxygenate where required.
Gasoline Is Moved from Refineries to Consumers through a Complex,
Shared Distribution System:
Gasoline is shipped from U.S. refineries to consumers by some
combination of pipelines, water barges, rail, and trucks to retail
gasoline stations. Most of the country's refining capacity is located
in the Gulf Coast, West Coast, East Coast, or Midwest with only a small
amount in the Rocky Mountain states. As shown in figure 1, the Gulf
Coast region supplies gasoline to all the other regions--of these, the
Midwest and the East Coast are the most dependent on gasoline from the
Gulf Coast. The East and West Coast markets have also imported gasoline
from other parts of the world such as Canada, Europe, and the
Caribbean.
Figure 1: Gasoline Supply and Demand, September 2004:
[See PDF for image]
[End of figure]
Several large pipelines travel inland from refineries in the Gulf
Coast, East Coast, and West Coast, connecting these key supply centers
to areas where gasoline is used. In general, these large pipelines
provide the cheapest method for transporting large volumes of gasoline,
and pipelines account for more than half of the gasoline shipments in
the United States. Several of the major U.S. pipeline systems, such as
the ones serving the Midwest and the East Coast, deliver gasoline and
other fuels used in multiple states. Figure 2 shows the pipeline system
and the major refineries in the continental United States. The largest
concentration of pipeline capacity links the Gulf Coast refining region
to the large consumer markets in the Midwest and East Coast, while
fewer and smaller pipelines connect refining regions to the more
sparsely populated states in the Rockies and parts of the West Coast
region.
Figure 2: Map of Key Pipelines and Refineries, 2004:
[See PDF for image]
[End of figure]
At various points between refining and final retail consumption,
gasoline is stored in large tanks, some holding hundreds of millions of
gallons of fuel. In many cases, gasoline is stored in tanks at the
refinery itself while awaiting shipping. In other cases, fuel is stored
at terminal stations located along the pipeline that generally include
multiple large tanks. A terminal station serves as a storage facility
for gasoline and other petroleum products at places throughout the
petroleum refining and transportation process. Some terminals are
affiliated with pipelines and used as part of pipeline operations, such
as for withdrawals or when pipelines converge. Other terminals are used
to allow gasoline and other products to be loaded or off-loaded from
barges or tankers. Still other terminals are used to hold gasoline
before it is distributed, generally by trucks, to retail gasoline
stations. In all of these locations, different gasoline blends must be
stored separately, with only one fuel per tank at any given time.
Ethanol that is added to gasoline cannot be shipped in pipelines with
other petroleum products because of ethanol's tendency to absorb water.
Instead, ethanol is shipped primarily by rail or trucks to terminal
stations where it is "splash" blended--mixed in specific proportions as
the fuel is added to the storage tank or tanker truck. The federal
government and some states have considered requiring or expanding the
use of ethanol to reduce consumption of oil and increase demand for
agricultural products used to produce it, such as corn.
Special Gasoline Blends Are Widely Used and Use May Increase in the
Future:
There were 12 distinct gasoline blends in use in the United States
during the summer of 2004: 11 special gasoline blends and the
conventional gasoline used everywhere a special blend is not used. When
different grades of gasoline, special blends used in winter, and other
factors are considered, the number of gasoline blends rises to at least
45. New ozone standards and other factors may further increase the
number or the use of special gasoline blends in the future, in part
because EPA must approve any state's application to require use of a
special gasoline blend as long as the proposed fuel meets EPA's
environmental standards.
Eleven Special Summer Gasoline Blends Were Used Mostly in Large Cities
Creating Isolated Markets:
Eleven special gasoline blends were used in the United States during
the summer of 2004 in addition to conventional gasoline. The use of
special gasoline blends is most prominent during the summer because
special fuels are used predominantly to reduce summer ozone levels, and
gasoline use is generally the highest during the summer. The
requirement to use these fuels requires that all the fuel sold at
terminals meet certain specifications at a certain date, which
generally requires terminal operators to draw down their inventory of
non-summer fuels in advance of filling their tanks with summer fuels.
Special gasoline blends are primarily used in highly populated urban
areas, and 34 states use a special gasoline blend in one or more areas.
The 11 special gasoline blends in use during the summer of 2004 fell
into the following categories:
* Three different types of RFG used year-round, the federally required
fuel used in areas with the worst air quality. RFG has very low RVP;
reduced levels of benzene and other toxics; and contains an oxygenate.
The type of RFG blend depends on the area of the country where the
gasoline is used and the oxygenate selected. These blends are
identified in figure 3 as "RFG North," "RFG North with ethanol," and
"RFG South."
* Two types of California Cleaner Burning Gasoline (CBG) used year-
round, also referred to as CARB. California CBG is formulated to meet
the most stringent gasoline standard in the United States, including
very low RVP and reduced levels of sulfur, benzene, and other
chemicals. In general, the state of California does not require the
addition of an oxygenate in areas not subject to federal RFG standards-
-identified in figure 3 as "CA CBG." Gasoline sold in areas also
subject to the federal RFG standard must contain an oxygenate,
identified as "RFG/CA CBG."
* In the summer, Arizona allows the use of either a gasoline blend very
similar to RFG or a blend similar to CBG. The blend required in Arizona
is identified as "AZ CBG."
* Three summer blends with various reductions in RVP. The federal
government requires some areas to use 7.8 RVP gasoline[Footnote 6] and,
in other areas, states have mandated the use of this blend. The other
two low-RVP blends are state requirements. These blends are identified
in figure 3 as "7.8 RVP," "7.2 RVP," and "7.0 RVP."
* One blend with reduced RVP and reduced sulfur content. The state of
Georgia requires this blend for use in the Atlanta area, and it is
identified in figure 3 as "7.0 RVP, 30 ppm sulfur."
* One blend of conventional gasoline with a minimum of 10 percent
ethanol by volume, used year-round. The state of Minnesota requires
this blend, which is identified in figure 3 as "Ethanol Mandate."
As figure 3 shows, many areas using special gasoline blends are
surrounded by regions that use conventional gasoline. In some cases,
these areas are relatively large, as is the case for the state of
California, where nearly all of the state uses the same fuel--RFG/CA
CBG. In other cases, "islands" of special gasoline use can divide
otherwise regional gasoline markets. For example, the St. Louis
metropolitan area, which includes parts of two states[Footnote 7]--
Missouri and Illinois--uses three different fuels: one special gasoline
blend required on the Missouri side, a different special gasoline blend
required on the Illinois side, and conventional gasoline is allowed in
the surrounding area. In some cases, special gasoline blends are used
in only one area of the country. For example, California CBG, Arizona
CBG, and the special blend used in Atlanta, Georgia, are not used
anywhere else in the United States. Even relatively common special
gasoline blends can create isolated markets if they are not used in
nearby areas. For example, although 7.8 RVP is a relatively widely used
blend, Pittsburgh, Pennsylvania, is the only city in its region that
uses it. Similarly, the Chicago/Milwaukee area uses RFG North with
ethanol, a gasoline blend used in the Northeast but not used elsewhere
in the Midwest.
Figure 3: Special Gasoline Blends--Summer 2004:
[See PDF for image]
Note: Unshaded areas (shown in white) are areas where conventional
gasoline is used.
[End of figure]
Special gasoline blends accounted for more than half the gasoline
consumed in the United States during the summer of 2001--the last year
for which we had complete data. Figure 4 shows the relative consumption
of the different gasoline blends then in use. Of the special fuel
blends, RFG and 7.8 RVP blends together accounted for about 33 percent
of the national gasoline market. California CBG and Arizona gasoline
blends accounted for roughly 13 percent of total U.S. gasoline
consumption. The remaining 6 percent of gasoline use was divided among
four separate blends.
Figure 4: Market Shares for the Various Gasoline Blends Used in 2001:
[See PDF for image] --graphic text:
Pie chart with eight items.
Conventional: 48%;
7.8 RVP: 13%;
RFG Blends: 21%:
* RFG North w/ ethanol: (3%);
* RFG North (8%);
* RFG South (10%);
California gasoline: 13%:
* AZ CBG (3%);
* CA CBG (3%);
* RFG/CA CBG (7%);
7.0 RVP, 30 ppm sulfur: 2%;
Ethanol mandate: 2%;
7.2 RVP: 1%;
7.0 RVP: 1%.
Source: GAO analysis of EPA data.
[End of figure]
Other Factors Raise the Number of Gasoline Blends Carried by Pipelines
and Other Means to at Least 45:
While we have reported that there are 11 special blends used or handled
during the summer of 2004, additional factors increase the total number
of gasoline blends sold in the United States throughout the year to at
least 45. First, although this report focuses on summer gasoline
blends, at least 3 special winter-only gasoline blends are required to
be used in areas of eight states. Use of these fuels requires that fuel
terminals in these areas transition from the fuel that they use in the
non-winter season to the required winter fuel. These blends contain an
oxygenate to address winter carbon monoxide pollution. Second, because
of consumer demand, many gasoline stations sell gasoline in three
octane grades--both premium and regular grades are refined and shipped
to terminals, where they are blended together to make a midgrade
gasoline. Therefore, each gasoline blend is effectively two fuels from
the perspective of pipelines and terminals. As a result, pipelines,
fuel terminals, and retail gasoline stations carry multiple variations
of the gasoline blends previously discussed. Third, gasoline blends
differ regionally and seasonally because differences in outside
temperatures require different blends to maintain vehicle performance.
The primary difference among these blends is RVP. Refiners produce
gasoline with higher RVP in cold conditions to allow cars to start and
gasoline with lower RVP during warm conditions to improve vehicle
operation, even in areas that use conventional gasoline. As a result of
these differences, refiners routinely ship different fuels to different
regions and also ship different gasoline blends seasonally, but special
blends tend to compound these variations. One official with a major
petroleum company reported that there were at least 45 different grades
of gasoline used in the United States.
New Ozone Standard and Other Factors May Further Increase the Number
and/or Use of Special Gasoline Blends:
A new ozone standard and deteriorating air quality may lead to an
increased number of special gasoline blends and/or more use of these
blends in the future. In 2004, EPA issued a final rule implementing a
new, more stringent federal air quality standard for ozone that led to
the identification of 138 additional counties in nonattainment or
maintenance as seen in figure 5.[Footnote 8] EPA officials that we
spoke with did not have any indications that states were planning to
submit applications to use special blends in these areas but
acknowledged that gasoline is viewed as an effective emissions control
strategy and said that they expect some states to consider doing so.
Oil company officials told us that officials from some states had
approached them to discuss using special gasoline blends. Because
states must begin preparing SIPs for the recently designated
nonattainment areas, and because several of those states already have
chosen to use special gasoline blends, it appears likely that states
may seek approval to use such blends in more areas.
Figure 5: Map of Areas Not Meeting New 8-Hour and Former 1-Hour Ozone
Standard, 2004:
[See PDF for image]
[End of figure]
Several other factors could also affect the number or use of special
gasoline blends. State MTBE bans could force more areas of the country
to shift from their current blend to an ethanol blend. In June 2004,
EPA identified 19 states that had bans on the use of MTBE either in
place or scheduled to phase in, though some of these states did not use
MTBE.[Footnote 9] Worsening air quality in areas such as Atlanta and
Baton Rouge may require the gasoline used in these cities to shift from
a special blend to RFG, reducing the number of fuels.[Footnote 10] In
addition, a new federal standard for all gasoline--including special
blends--that mandates reduced sulfur, promises to improve the
effectiveness of catalytic converters already present in most vehicles
and could aid some areas in meeting federal air quality standards,
potentially reducing the need for these fuels in some areas.
EPA Lacks Authority to Deny Requests to Use Special Gasoline Blends Due
to Effects on Supply:
During the course of our work, staff from EPA's Office of the General
Counsel stated that EPA could not deny an application to require the
use of a special gasoline blend that addressed the four elements
outlined in EPA's 1997 guidance. They explained that EPA's
determinations often deferred to states' evaluations in their
applications that, under the Clean Air Act, section 211 (c)(4)(C), no
other measures that would bring about timely attainment exist, or that
existing measures, such as vehicle inspection and maintenance programs,
are unreasonable or impracticable. Further, staff with EPA's Office of
the General Counsel staff told us EPA could not reject an application
on the basis of the potential impacts on gasoline supply or other
regional effects on the gasoline market because such a rejection would
be outside of EPA's current authority. Several of the special fuels in
use during 2004 were approved prior to the issuance of the 1997
guidance, and EPA officials reported that a variety of standards were
used to evaluate applications.
EPA's most recent effort to examine special gasoline blends is
consistent with EPA's view that the agency does not have authority to
reject a state's application based on regional supply impacts or costs.
In 2001, EPA released a staff white paper, in response to a
presidential directive, examining whether there were options to
maintain or improve environmental benefits while also improving the
supply of fuels, such as gasoline.[Footnote 11] In that report, EPA
examined a number of options to reduce the number of fuels available
for states to choose from--similar to a gasoline menu. That report
concluded that these options were beyond EPA's statutory authority and
would require legislative action to implement.[Footnote 12] The white
paper also noted that it represented a first step in EPA's response to
the directive, but that significant additional analysis and study were
required. EPA staff told us that there had been congressional debate
regarding EPA's authority during consideration of recent energy
legislation, but that its authority had not changed as of May
2005.[Footnote 13] In the study, EPA identified a number of changes
that it would make to ease the seasonal transition between gasoline
blends used during different parts of the year. Staff also said that
little, if any, additional work had been done since the 2001 study, in
part because of EPA's lack of authority to implement some of the
actions outlined in the study.
Special Gasoline Blends Reduce Emissions and Contribute to Improved Air
Quality:
Special gasoline blends reduce emissions--particularly those involved
in the formation of harmful ground-level ozone--by varying degrees,
depending on the blend. The extent of reductions remains unclear,
however, because the estimates have not been comprehensively validated
through testing on current vehicles and emissions controls. According
to EPA and others, these special gasoline blends have contributed to
improvements in air quality seen in some parts of the country. The
extent of their contribution to improvements relative to that of other
contributing factors, such as reductions in power plant emissions, is
somewhat uncertain because of the difficulties in isolating the effects
of individual emissions reduction efforts, such as special gasoline
blends, from other factors that may affect air quality.
Special Gasoline Blends Reduce Emissions, but the Extent of Reduction
Remains Uncertain:
Over the past 15 years, a wide range of studies by EPA and others have
concluded that changes to the properties of gasoline can substantially
reduce emissions from automobiles. For example, in 1996, EPA concluded
that RFG and low-RVP blends can both significantly reduce VOCs but that
RFG offers greater promise in reducing NOx, CO, and toxics. The Air
Quality Improvement Research Program (AQIRP), funded by the auto and
oil industries, analyzed gasoline properties in detail and
comprehensively tested a variety of gasoline blends in a range of
vehicles between 1989 and 1992. This effort produced data regarding how
the use of various gasoline blends affect emissions from then-current
vehicles and concluded that changing certain properties of gasoline, in
particular reducing RVP and sulfur, was effective in reducing emissions
of pollutants such as NOx, CO, and also hydrocarbons such as unburned
fuel. According to EPA officials, using special gasoline blends is
attractive to states because the blends can offer immediate emissions
reductions from vehicles already on the road.
EPA and others have used the results of these studies to develop models
that provide detailed emissions estimates for several of the special
gasoline blends currently in use. These models have been used by states
in their SIPs to estimate the expected emissions from requiring the use
of special gasoline blends instead of conventional gasoline.[Footnote
14] As shown in table 1, the models estimate that special gasoline
blends reduce emissions by varying degrees. California's gasoline--the
blend formulated to reduce emissions the most--is estimated to provide
the greatest level of emissions reductions, about 25-29 percent for
VOCs and about 5.7 percent for NOx. RFG is estimated to provide about
the same level of VOC reduction, a lower NOx reduction of about 0.7
percent, but also a 10-20 percent reduction in CO. The special gasoline
blend most commonly used in areas not using conventional gasoline--
gasoline with an RVP of 7.8--is estimated to reduce VOC emissions by 12-
16 percent and NOx by about 0.7 percent. In addition to the pollutants
listed in table 1, RFG and California's cleaner burning gasoline also
reduces emissions of some toxics such as benzene.
Table 1: Projected Emissions Reductions Resulting from Low-RVP, RFG,
and CBG Gasoline Blends:
Gasoline blend: Low RVP: 7.8;
Estimated emissions reductions[A]: VOC: 12 to 16%;
Estimated emissions reductions[A]: NOx: 0.7%;
Estimated emissions reductions[A]: CO: No effect.
Gasoline blend: Low RVP: 7.2;
Estimated emissions reductions[A]: VOC: 19 to 23%;
Estimated emissions reductions[A]: NOx: 0.7%;
Estimated emissions reductions[A]: CO: No effect.
Gasoline blend: Low RVP: 7.0;
Estimated emissions reductions[A]: VOC: 21 to 25%;
Estimated emissions reductions[A]: NOx: 0.7%;
Estimated emissions reductions[A]: CO: No effect.
Gasoline blend: RFG: Federal RFG;
Estimated emissions reductions[A]: VOC: 25 to 29%;
Estimated emissions reductions[A]: NOx: 0.7%;
Estimated emissions reductions[A]: CO: 10 to 20%.
Gasoline blend: RFG: California CBG[B];
Estimated emissions reductions[A]: VOC: 25 to 29%;
Estimated emissions reductions[A]: NOx: 5.7%;
Estimated emissions reductions[A]: CO: Not estimated.
Source: GAO analysis of EPA data.
[A] Emissions reductions are based on reductions from conventional 9.0
RVP gasoline projected to be in use in calendar year 2006.
[B] EPA estimated VOC and NOx emissions reductions for California CBG
and RFG CA/CBG (which includes an oxygenate) were the same for these
pollutants; however, RFG CA/CBG would likely provide some reduction of
CO, in addition.
[End of table]
However, the extent of emissions reductions associated with various
gasoline blends remains somewhat uncertain. GAO,[Footnote 15] the
National Research Council, and others have identified concerns about
the overall accuracy of emissions estimates. EPA has addressed some of
the concerns about emissions estimates. In one effort to address
concerns about the validity of emissions estimates, EPA sponsored a
study that compared emissions estimates to measured emission data
obtained between 1992 and 2001. The study looked at pollutant
concentration data from tunnels and vehicle exhaust data collected from
vehicles on roadways using special remote sensing devices at a limited
number of sites using a limited range of gasoline blends. As a result,
EPA found that the observed emissions data conflicted with emissions
estimates; in some cases the testing data were higher than predicted,
while in other cases it was lower.
Despite this effort, EPA has not comprehensively studied how various
gasoline blends affect vehicle emissions since the early 1990s--when
the AQIRP comprehensively tested a variety of gasoline blends in a
range of vehicles. Since then, there have been advances in emissions
control technology. Consequently, to the extent that emissions from
vehicles with newer emissions control technology differ from those of
older vehicles, emission estimates may become less certain, especially
as vehicles with the newer technology compose a growing portion of the
U.S. fleet. EPA officials acknowledge that their efforts since the
early 1990s to validate emissions estimates have not allowed them to
fully validate how special fuel blends operate in a full range of
vehicles of varying vintages and designs over their operating
lifetimes. EPA officials told us that they believe such a detailed
analysis would improve their understanding of how special gasoline
blends affect emissions, but said that they have not had sufficient
budgetary resources to collect the needed data to support such an
analysis.
In addition to these broad concerns, there is also controversy over the
emissions benefits associated with special blends containing
oxygenates, which were initially added to gasoline to reduce the
emissions of carbon monoxide and other pollutants. However, although
there appears to be agreement that oxygenated fuels help reduce
emissions of CO from older vehicles, recent studies indicate that the
emissions benefits for newer vehicles are questionable. For example,
AQIRP, the National Science and Technology Council, and others have
reported that improvements in emissions controls on newer vehicles,
such as oxygen sensors and computer-controlled emissions systems, may
now automatically reduce emissions of CO and other pollutants and may
negate many benefits of adding oxygenates. Further, some experts have
concluded that adding oxygenates to gasoline may increase emissions of
NOx and VOCs and may contribute to increased levels of ozone. As a
result, some states, including California, New York, and Georgia have
requested waivers from EPA to allow them to use fuel that does not
contain an oxygenate. The state of California stipulated in its waiver
application that its fuel reduces emissions to a greater extent than
federal RFG and that the oxygenate requirement has impeded its efforts
to reduce ozone. To date, EPA has not granted any of these waivers.
Recently, Congress and others have considered expanding the use of
ethanol in gasoline for other reasons, including to benefit U.S.
farmers and to reduce the country's reliance on foreign oil.
Reduced Vehicle Emissions Have Led to Air Quality Improvements, but the
Extent of Benefits Attributable to Special Gasoline Blends Is
Uncertain:
EPA and other experts have concluded that improvements in air quality
in some parts of the country are at least partly attributable to the
use of special gasoline blends. In 2004, EPA reported that ground-level
ozone has decreased over the past 10 to 25 years and that these
reductions resulted, at least in part, from emissions control programs
that include requirements to use special gasoline blends. Further, EPA
and other experts concluded that special gasoline blends, such as RFG
and low-RVP blends, are effective strategies for states to use to
reduce ozone pollution. In addition, a research effort funded by AQIRP
found that reducing RVP decreased peak ozone in several cities and
would continue to provide benefits for years to come. In addition, the
National Research Council reviewed EPA data and found that average
ozone levels dropped by about 1 percent coincident with reduced
emissions of VOCs, NOx, and CO from on-road vehicles, which fell by 31
percent, 2 percent, and 20 percent, respectively. Based on these and
other data, the National Research Council concluded that improvement in
air quality is likely attributable, at least in part, to recent
improvements in gasoline properties.[Footnote 16]
Despite the conclusions that special gasoline blends have contributed
to improved air quality, findings specifically linking air quality
improvement to the use of special gasoline blends are limited and
incomplete because of the inherent difficulties in isolating the
effects of special gasoline blends from other efforts to improve air
quality. Studies examining the effect of special gasoline blends on air
quality noted that attributing a change in ozone levels to the use of a
special gasoline blend would be difficult.[Footnote 17] In particular,
experts from EPA, the National Science and Technology Council,[Footnote
18] and the National Research Council have determined that relating
trends in the levels of ground-level ozone to trends in emissions and
to emissions-control policies can be challenging because of the
confounding effects of other variables, including the effects of other
control efforts and meteorological fluctuations. For example, the
National Research Council noted that since the 1990s--when special
gasoline blends became widely used--several other efforts to reduce
emissions from vehicles have been made that could also explain changes
in air quality, such as the addition of enhanced emissions-control
systems and improvements in inspection and maintenance programs in some
areas. During this time, EPA and the states have also undertaken
efforts to reduce emissions from electric utilities, chemical
manufacturing, and other stationary sources that could have contributed
to the improvements. Further, because ozone is more readily created
when VOCs, NOx, and CO react in sunny and hot weather, meteorological
fluctuations affect the relationship between emissions and ozone
levels. For example, EPA has identified cases where air quality
improved, but the improvement was largely due to better weather (more
air circulation, lower amounts of heat and sunlight, and other
factors). According to the National Research Council and others,
determining how much air quality improvement is specifically
attributable to any specific emissions control program, including
special gasoline blends, would require the collection of high-quality,
long-term data on air pollution, on other control measures, and on
weather.
Use of Special Gasoline Blends Has Made It More Complicated and Costly
to Supply Gasoline:
The increasing numbers of special gasoline blends have made it more
complicated and costly to supply gasoline, elevating the risk of
localized supply disruptions. Producing special gasoline blends can
require changes at refineries, making it more complicated and costly to
produce gasoline. Special blends also add to the number of fuels
shipped through pipelines, reducing the efficiency of the pipelines and
raising costs. In addition, because the tanks at the fuel terminals
were often built before the proliferation of blends, they are often too
large and too few to efficiently handle the increased number and
smaller size batches of special gasoline blends and, as a result, total
storage capacity has fallen. Further, in some cases, the proliferation
of blends has reduced the supply options available to some retailers,
making them more susceptible to supply disruptions.
Making Special Gasoline Blends Has Added Complexity and Costs at
Refineries:
Producing some special gasoline blends sometimes requires refineries to
invest in additional refinery units, making their refineries more
complex, or reducing their capacity to make gasoline. For example,
producing cleaner-burning fuel with lower levels of toxic and other
emissions, such as RFG or CBG, has required some refiners to install
specialized units that remove sulfur and benzene during the refining
process. Similarly, production of low-RVP gasoline requires that
refiners leave out the lightest components typically included in
conventional gasoline. Separating these components or converting them
to ones that can be used in these blends may require additional
refinery units. If the components are not immediately used in gasoline
at that refinery, they may be stored, may be used in less valuable
fuels such as diesel or jet fuel, or shipped to other refineries that
can use these components. The removal and additional processing of
these components can decrease the amount of gasoline a refinery can
produce. For example, officials from one California refinery told us
that their refinery could produce 12 percent more volume if it produced
conventional gasoline rather than California gasoline because
conventional gasoline uses more of the components that are typically
generated in the refining process.[Footnote 19]
Adding refinery units and losing refinery capacity can increase the
overall costs of refining gasoline. Manufacturing low-RVP fuel
generally involved reducing the use of some components and, as a
result, was less costly than the more significant changes needed to
make the cleanest burning blends. Specifically, in 1996, EPA estimated
that low-RVP blends cost 1-2 cents per gallon more to make than the
conventional gasoline at the time. In contrast, in 2003, the Energy
Information Administration (EIA), within the Department of Energy,
estimated that blends formulated to meet the most stringent standards,
such as oxygenated California gasoline, cost 5-15 cents more per gallon
to make than the conventional gasoline required at the time and that
RFG generally costs 2.5-4 cents more per gallon to make.
In addition, the use of oxygenates in blends such as RFG further
increases the complexity and cost of the refining process because
refiners must either invest in equipment to produce oxygenates from
crude oil (in the case of MTBE) or they must purchase these components
from other sources. MTBE is generally less expensive than ethanol as an
oxygenate but has raised water quality concerns. As described earlier,
ethanol is generally shipped by truck or rail, stored separately from
other gasoline components, and blended just before gasoline is sent to
retail stations. The higher cost of purchasing ethanol during the
period of our analysis, together with these separate handling
procedures, adds to the total cost of making ethanol-blended gasoline.
Additionally, because ethanol has a high RVP, more components must be
removed from ethanol-blended gasoline than from MTBE-blended gasoline
to meet specifications for RVP. Removing these components and
reprocessing them or diverting them to other products increases the
cost of making ethanol-blended gasoline.
Shipping More Special Gasoline Blends Reduces Pipeline Capacity and
Raises Costs:
Shipping gasoline on a pipeline requires a great deal of coordination
between refineries, pipelines, and terminal stations to maintain
pipeline flows while fuels are being added and withdrawn. Pipeline
operators told us that they develop schedules of when individual
shipments (called batches) will occur at least 1 month in advance;
however, some changes to this schedule may occur up to the date when a
product is placed on the pipeline to adjust for, among other things,
the need for more of a specific gasoline blend in some locations. On
the day of shipment, pipeline operators precisely coordinate when
refineries or other shippers add or "inject" fuel to the pipeline and
when fuel is taken off of the pipeline along with other aspects of
operating the system. Companies shipping fuel on the pipeline, may
request to keep their products isolated from others (a segregated
batch) or may choose to combine their product on the pipeline with
other blends meeting similar or identical product specifications (a
fungible batch). Because of the large number of gasoline blends and,
because some shippers require segregated batches, the number of fuels
shipped in pipelines has increased dramatically in recent years. For
example, one pipeline company noted that in 1970 they shipped 10
different products on their system over the entire year, whereas in
2004 they shipped 128 (including distinct blends and segregated
products).[Footnote 20]
The increased number of special gasoline blends has reduced the
effective capacity of the nation's petroleum products pipeline
infrastructure because the pipelines are generally operated at slower
speeds to accommodate more and smaller batches of gasoline while
keeping the different blends separate. The speed at which centrally
controlled pumps move product along pipelines--typically between 3 and
8 miles per hour--can be affected by a number of factors, including the
volume of product relative to the pipeline capacity being shipped, the
size of batches, and the availability of terminal storage along the
pipeline route. Several pipeline operators told us that, prior to the
introduction of special gasoline blends, they shipped many fewer
products and much larger batches than they do now. Further, they said
that shipping smaller volumes can require them to slow or stop the
pipeline to allow shippers to inject or withdraw individual fuels at
fuel terminals or other locations. Lost opportunities associated with
reductions in the amount of fuel that the pipeline can transport serve
to raise the average cost of moving gasoline.
The increased number of fuels and fuel types shipped on pipelines has
also increased losses and costs associated with mixing of fuels. Two
types of fuel mixtures occur at the interface between batches on
pipelines: downgrading and transmix. Downgrading occurs when two
similar fuels mix, but the resulting mix no longer meets the more
valuable product specification. For example, if a high-and regular-
octane gasoline are mixed, then the downgraded gasoline may be sold
only as lower-priced, regular gasoline. Transmix results when two
dissimilar fuels mix and the fuel cannot be used without reprocessing.
For example, if diesel fuel and gasoline mix, the transmix must be
processed to separate the fuels into usable products. Similarly,
because MTBE is banned in some areas, if gasoline blends containing
MTBE come in contact with other fuels, the mixed fuel is considered
transmix and must be reprocessed to remove the MTBE before it can be
used. To minimize losses associated with downgrades and transmix and
still maintain efficiency, pipelines generally set a minimum batch
size. Several pipeline operators reported that they have witnessed
increased losses and costs due to downgrades and because more fuel
requires reprocessing as the number of special gasoline blends has
increased.
In addition, according to some pipeline company officials, because some
gasoline blends are only used in one city or only in some areas served
by a pipeline, shippers incur additional costs if these gasoline blends
are not taken off the pipeline at the right location. For example, one
pipeline operator told us that RFG with MTBE shipped in Midwest
pipelines cannot be used without costly reprocessing if it is shipped
past certain points on these pipelines because no regions beyond these
points allow the use of RFG with MTBE. In some instances, the pipeline
may need to be slowed, or even stopped, to allow a special gasoline
blend to be taken out of the pipeline.
Increased Numbers of Gasoline Blends Reduce Terminal Storage:
The increased number of petroleum products generally, including special
gasoline blends, and the need to keep them separated, has reduced the
storage capacity of some gasoline terminals which can create
difficulties during periods when gasoline supplies are disrupted. To
ensure product quality, special gasoline blends must be stored in
separate tanks. Several terminal operators told us that their terminals
were built before the proliferation of special gasoline blends and were
designed to handle fewer, but larger, batches of gasoline. Terminal
operators told us that, because many of the special gasoline blends are
shipped in smaller batches, the tanks used for these blends are often
not filled to capacity. One terminal operator told us that some new
storage tanks had been built in recent years. This operator went on to
say that adding new storage capacity at existing terminals is often
either prohibitively expensive or extremely difficult because of space
limitations and the need to obtain federal, state, and local regulatory
approvals. One terminal operator told us that the company has chosen
not to carry one or more gasoline blends used in its area because the
company's existing tanks were insufficient and building additional tank
capacity was too costly. For these same reasons, it is often difficult
to build new terminals. In addition to the complexity of these factors,
terminal operators told us that the proliferation of special gasoline
blends also raised their costs by reducing their ability to fully
utilize their existing tanks, which cost them the opportunity to store
additional fuels, or by forcing them to make additional investment to
build more tanks, or both.
In addition, terminal operators told us that reduced storage capacity
at their facilities, combined with the increased number of fuels in the
pipeline system, has made it more difficult to maintain adequate
stockpiles of some gasoline blends. Several pipeline operators said
that the interval between when a fuel is available from the pipeline
may be 10 days or longer if capacity is not available on the pipeline-
-requiring that many days' worth of fuel to be stored at the terminal.
Increasing demand for gasoline combined with this longer period between
shipments, and limited terminal storage, increases the likelihood that
some areas will run out of gasoline while waiting for a shipment. One
pipeline operator said that the terminals that they served did not run
out of gasoline from 1995-1996, but that now one terminal per month
runs out of fuel. One terminal operator explained that running out of
gasoline can be very harmful to their business because terminal
operators rely on retailers and independent gasoline tanker trucks to
regularly visit their stations--visits that may not occur if their
supplies are inconsistent. In addition, the operator told us that, when
tanks are pumped dry and later refilled, they can release up to 1 ton
of VOCs, which contributes to pollution. While the terminal operators
we spoke with said they are generally able to maintain sufficient
gasoline storage, they can run short of some fuels when demand is high
or pipeline deliveries are delayed or interrupted. One operator noted
that they increase their wholesale gasoline prices as their available
supplies fall in an effort to reduce their sales and retain some
gasoline for sale and avoid running out. The terminal operators we
interviewed did not provide us data on the number of instances when
they ran out of gasoline, but they said that the number has
significantly increased in recent years.
Special Blends Limit Supply Options in Wholesale Markets When Local
Supply Disruptions Occur:
According to operators of independent retail gasoline stations that buy
from the wholesale markets, they have more limited supply options as a
result of the presence of special gasoline blends. According to an
industry representative, some gasoline retailers affiliated with, or
owned by, large oil companies (so-called "integrated" oil companies,
such as ExxonMobil and ChevronTexaco) receive their gasoline--referred
to as branded gasoline--only from these companies, generally paying
slightly more for it. However, other companies that are not affiliated
with these integrated oil companies, referred to as independent
retailers, typically purchase gasoline from a variety of suppliers
including, but not limited to, integrated oil companies and typically
purchase gasoline at the lowest price available from nearby fuel
terminals. As a result of this and other factors, independent retailers
said that they generally sell gasoline at a lower price than branded
gasoline stations. According to some, the introduction of special
gasoline blends may increase the market power of some refiners. In its
2001 white paper, EPA noted that the development of special blends
limits competition in the refining sector because some blends are
small, and only a few refiners may choose to make some blends.
Consistent with this view, independent retailers told us that they have
had fewer choices in some markets near where special gasoline blends
are required because some refineries and fuel terminals no longer sell
gasoline for those markets, and that they have tended to pay higher
prices in those areas. For example, one large independent retailer
operating retail gas stations on the East Coast told us that the number
of refineries producing gasoline for the market they serve fell from 12
to 3 after the introduction of special gasoline blends--leaving the
retailer with fewer options to identify the lowest cost supplies.
Special gasoline blends have also complicated the ability of some large
entities to enter local gasoline markets. Officials with a large
company that has entered several local gasoline markets across the
country as an independent retailer told us that obtaining sufficient
supplies at reasonable prices is more difficult in markets where
special gasoline blends are used and that limited supply options have
reduced the company's ability to enter and compete in some of these
markets.
The plight of independent retailers is particularly pressing when
traditional supplies are disrupted. The independent retailers that we
spoke with said that their prices generally increase first and that
they may not have access to fuel supplies provided to branded retailers
if supplies are disrupted. Before special gasoline blends, these
independent retailers were able to truck fuel in from nearby cities or
neighboring states, however, because some gasoline blends may not be
used anywhere else, or they may only be used hundreds of miles away,
this is a more difficult and costly option today. For example, several
industry officials noted that, if supplies of California gasoline are
disrupted, they would expect prices to rise and that it could take
weeks for additional supplies to arrive. They said that nearby
suppliers capable of blending California's gasoline blend are generally
operating close to their full capacity. In the event that these
supplies are disrupted, additional supplies generally come from Western
Canada, the Gulf Coast, the Caribbean, or farther away, because there
are only a few refineries capable of making this special gasoline blend
and, as a result, supplies could take 3 weeks or more to arrive.
Areas That Use Uncommon Special Gasoline Blends Tend to Have Higher and
More Volatile Gasoline Prices:
Among the 100 cities we examined, the highest wholesale gasoline prices
tended to be found in cities that used a special gasoline blend not
widely available in the region or that is more costly to make than
other blends. Cities that are far away from major refining centers or
other sources of gasoline also tended to have high prices. Prices also
tended to be more volatile in cities having one or more of these
characteristics. Other studies have also found higher and/or more
volatile prices in some cities that use special gasoline blends.
Greater complexity and higher refining, transportation, and storage
costs associated with supplying special gasoline blends have likely
contributed to increased gasoline prices overall, and for specific
special blends, but it is not possible to conclusively determine the
extent to which special gasoline blends have caused the higher prices
and greater volatility found in specific cities.
We Found Higher and More Volatile Gasoline Prices in Cities That Use
Special Blends:
We examined data from 100 selected cities to determine how prices
varied across areas that use special gasoline blends versus
conventional gasoline and found that, with some exceptions, the highest
and most volatile gasoline prices tended to be found in cities that
used special gasoline blends that are uncommon or particularly
expensive to make, or in cities that are long distances from major
refining areas. Each of these factors tends to isolate a city from the
overall gasoline market by limiting the available supplies of gasoline
from other areas in the event there is a supply shortfall in that city.
With regard to special gasoline blends, the data show that most of the
20 cities with the highest average prices over about the past 4 years
(December 2000 through October 2004) used special gasoline blends, most
of them formulated to meet stringent emissions standards. In many
cases, these cities used a fuel that is not widely used outside their
area, or in some cases is unique to that city or state. For example,
the five California cities in the data set are all in the top 20 cities
with respect to gasoline prices. California's gasoline is the cleanest-
burning gasoline and, in order to make it, California's refineries have
invested substantial capital in new refining processes. Further, only a
few refineries outside of California routinely make California
gasoline, the closest of which is in Northern Washington. The
uniqueness of California's gasoline has been noted by many sources as
likely contributing to California's high gasoline prices relative to
the rest of the country. For the period we examined, the five cities we
looked at in California had average prices ranging from about 24 to 26
cents per gallon more than the city with the lowest price (Meridian,
Mississippi), which uses conventional gasoline and is located near the
large refining center in the Gulf Coast. The table in appendix II shows
the price data and gasoline blend types for each of the 100 cities we
evaluated. Some of the cities with the highest prices used conventional
gasoline year-round, but most of these are far from major refining
areas or are located on or near a single smaller pipeline. Average
prices in these top 20 cities were between 14 and 41 cents per gallon
more than in the city with the lowest price.
Using ethanol as an additive to gasoline is associated with higher
wholesale gasoline prices. To evaluate this, we examined national
average prices for gasoline blends containing ethanol. For example, for
the nation as a whole, average prices for conventional gasoline with
ethanol were about 4 cents per gallon higher than conventional without
ethanol over the time period we analyzed. The switch to using ethanol,
as opposed to MTBE, was also associated with higher gasoline
prices.[Footnote 21] For example, in the years 2001-2003, during which
California phased out MTBE and phased in ethanol, the average summer
price of gasoline with ethanol was between about 4 and 8 cents per
gallon more than the price of gasoline with MTBE. Similarly, over the
period 2001-2004, the average summer price for federal reformulated
gasoline with ethanol was between about 6 and 13 cents per gallon more
than for federal reformulated gasoline with MTBE.
In contrast to the highest-priced cities, the 20 cities with the lowest
average wholesale gasoline prices over the period typically used common
gasoline blends and/or were located near a major refining center--most
often near the Gulf Coast, the largest refining center in the country
in terms of both numbers of refineries and total refining capacity. For
example, among the 20 cities with the lowest prices, 8 used
conventional gasoline--the most widely available gasoline blend.
Conventional gasoline is used extensively across the United States, and
most cities that use it are surrounded by areas using the same
gasoline. Another 9 cities with the lowest prices used 7.8 RVP
gasoline--the most widely used of the special blends and the one
formulated according to the least stringent emissions standards. Most
of the 7.8 RVP gasoline is used in areas close to the Gulf Coast
refining center. In addition, refiners told us that making 7.8 RVP
gasoline is simpler and less costly than some of the other blends, so
it may be more available from refineries in the event of a local supply
shortfall. The other 3 cities with the lowest prices used less common
special blends but are all close to the largest refining center, the
Gulf Coast and, therefore, have many more potential supply options than
more isolated cities do.
We found similar results with regard to the volatility of gasoline
prices.[Footnote 22] For example, 18 of the 20 cities with the most
volatile prices used special blends of gasoline, and many of these
cities were also among the highest-price cities. In contrast to the
cities with relatively high price volatility, 17 of 20 cities with the
lowest volatility use either conventional or 7.8 RVP gasoline. However,
while prices for special blends tend to be higher and more volatile
than prices for conventional gasoline, available data did not allow us
to attempt to isolate the effects of specific special gasoline blends
on gasoline prices or to definitively establish a causal link between
specific special blends and price volatility. Specifically, we did not
have sufficient data to control for all other potential contributing
factors--such as the distance from cities to the sources of gasoline
supply, or other specific features of these cities that might influence
prices regardless of the blend of gasoline used.
Other Studies Have Found Similar Results:
We reviewed the literature associated with special gasoline blends and
gasoline prices and found a number of studies done by government,
academic, and private entities. The results and conclusions of these
studies were largely consistent with our findings. For example, a
recent EPA study found that high prices and price volatility are most
acute in isolated markets, particularly those using special gasoline
blends.[Footnote 23] The study also pointed out that some states had
adopted specific gasoline blends in an attempt to use a blend that had
a lower refining cost than federal reformulated gasoline. EIA also
studied these blends and concluded, among other things, that the
increasing number of distinct gasoline blends has reduced the
flexibility of the supply and distribution system to respond to
unexpected changes in supply and demand for gasoline. EIA further
pointed out that, in some cases, states have chosen low RVP gasoline
blends in an attempt to achieve lower gasoline prices than if they had
used federal reformulated gasoline, and they inadvertently may have
added strain to the distribution system, leading to greater potential
for price volatility. A number of other academic and private studies
found similar results.
Special Gasoline Blends Contribute to Higher and More Volatile Prices,
but Available Data Are Insufficient to Control for all Other Factors:
There is a broad consensus among the experts and others we spoke with
that the proliferation of special gasoline blends have contributed to
increased and more volatile gasoline prices. The studies we reviewed
also came to similar conclusions. Further, the greater complexity and
higher refining, transportation, and storage costs associated with
supplying special gasoline blends have almost certainly resulted in
increased prices or volatility, either because of more frequent or
severe supply disruptions, or because higher costs are likely passed
on, at least in part, to consumers. For example, depending on the
pipeline company, costs associated with downgrades or transmix are
recovered from customers. At least part of these costs are, in turn,
likely to be passed down the supply chain and eventually to consumers
of gasoline. Similarly, the costs incurred to install new processes to
make special gasoline blends are likely passed on, at least in part, to
consumers because refining companies would not make these investments
without a reasonable expectation of a return on their money.
While it is, therefore, almost certain that special gasoline blends
have been a contributing factor to higher gasoline prices, it is not
possible with the data available to us to conclusively determine the
extent to which these blends have caused the higher prices and greater
volatility found in specific cities or to rule out other potentially
contributing factors. Such other factors may include specific supply
infrastructure problems in or around these cities that would impact
gasoline prices regardless of the blend. For example, state and
industry officials in California told us that marine terminals for off-
loading gasoline and other petroleum products are in short supply in
California, which constrains the ability of suppliers in the state to
receive these products from outside the state in the event of a local
supply shortfall. These constraints would potentially contribute to
higher gasoline prices regardless of which blend is used. Another
potential factor that might influence gasoline prices independently of
gasoline blends is the level of competition in the petroleum products
industry. For example, in a recent GAO report, we found that oil
company mergers had contributed to a 1 to 2 cent per gallon increase in
conventional gasoline prices in the 1990s and as high an increase as 7
cents per gallon for California's special gasoline blend. In addition,
there may be other such factors at play that we do not observe, so we
cannot definitively determine the precise extent to which observed
prices are the result of the proliferation of special gasoline blends.
Conclusions:
Special gasoline blends have reduced emissions and helped contribute to
improved air quality in some parts of the country. Using special
gasoline blends to achieve air quality standards is attractive to
states; the blends offer immediate reductions in emissions from all
vehicles already on the road by varying degrees. Unfortunately, EPA's
knowledge about the emissions generated when special gasoline blends
are burned is outdated. Much has changed regarding vehicle and
emissions control technologies since special gasoline blends, including
those with ethanol, were last comprehensively tested in automobile
engines. However, EPA and the states continue to rely on models built
largely around these dated findings when evaluating whether to allow
states to use special blends as a component in their efforts to improve
air quality. Given the significant changes in vehicles and fuels, EPA
should have better information about how the current fuels affect the
vehicles currently on the road. In addition, Congress should have
better information regarding the effectiveness of these blends,
particularly those containing oxygenates such as ethanol, to aid in
setting policy on fuel blends and the use of oxygenates.
Although special blends have helped reduce emissions and improve air
quality, the introduction of these blends appears also to have divided
the gasoline market, converting what had been closer to a single
national commodity market, into islands of smaller and more local
markets for blends of gasoline that are typically not interchangeable.
Because of octane, seasonal, and other differences, each additional
special blend that is added can require pipelines and fuel terminals to
handle several additional blends. Overall, this transformation of the
gasoline market has complicated the supply infrastructure, increased
production and delivery costs, and reduced the availability of
gasoline, in some cases. The impacts of the proliferation of special
gasoline blends are most evident when there is a disruption in the
supply chain, such as when a refinery or pipeline is shut down. In
these instances, localities using a blend different from the gasoline
used in nearby areas must seek replacement supplies from farther away,
leading to delays that likely cause higher and longer price spikes
until these supplies arrive. Overall, it is likely that gasoline prices
are higher now than they would be if gasoline were closer to a single
commodity.
In light of the opposing effects of environmental benefits and negative
market implications, an ideal policy for approving the use of special
gasoline blends would balance these effects. However, each decision
involves trade-offs that all stakeholders may not value equally.
Specifically, different stakeholders may attach varying degrees of
importance to the environmental benefits or the impacts on gasoline
supply infrastructure. Further, individual state actions that impact
the entire regional supply infrastructure may not fully take those
impacts into account or, in some cases, even accurately predict the
impact on their own gasoline supply. With the 8-hour ozone rule and
other regulatory changes likely to lead to more applications to use
special gasoline blends, balancing the emissions effects of specific
gasoline blends against the implications for supply and price will be
even more important in the coming years. While EPA is currently
authorized to approve state applications to use special gasoline
blends, the agency cannot effectively weigh environmental and supply
considerations because it does not have authority to deny state
requests to use these blends on the basis of regional supply or price
considerations and because its information on the environmental
benefits is dated.
Recommendation for Executive Action:
To provide a better understanding of the emissions impacts of using
special gasoline blends and these blends' impacts on the gasoline
supply infrastructure, we recommend that the EPA Administrator direct
the agency to take the following four actions: (1) work with states and
other stakeholders to comprehensively analyze how various gasoline
blends affect the emissions of vehicles that comprise today's fleet,
including how overall emissions are affected by the use of ethanol and
other oxygenates; (2) use this updated information to revise the
emissions models that states use to estimate the emissions and air
quality benefits of these fuels and provide this information to
Congress; (3) work with states, the Department of Energy, and other
stakeholders to develop a plan to balance the environmental benefits of
using special gasoline blends with the impacts on gasoline supply
infrastructure and prices, and report the results of this effort to
Congress; and (4) work with the states, the Department of Energy, and
any other appropriate federal agencies to identify what statutory or
other changes are needed to achieve this balance and report these
findings to Congress and request that Congress provide these
authorities to the appropriate federal agency or agencies.
Agency Comments and Our Evaluation:
We provided a copy of our draft report to EPA for comment. The agency
did not comment on our findings or recommendations but did provide
technical comments that we have adopted, as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to other
appropriate congressional committees and the Administrator of EPA. We
also will make copies available to others upon request. In addition,
the report will be available at no charge on the GAO Web site at
[Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or [Hyperlink, wellsj@gao.gov]. Contact
points for our Office of Congressional Relations and Public Affairs may
be found on the last page of this report. GAO staff who contributed to
this report are listed in appendix II.
Signed by:
Jim Wells:
Director, Natural Resources and Environment:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine the extent to which special gasoline blends are used in
the United States and how, if at all, this use is expected to change in
the future, we reviewed related literature, reviewed data on the use of
these fuels, and interviewed government and other officials.
Specifically, we reviewed reports on the presence and use of special
gasoline blends by the Environmental Protection Agency (EPA), the
Energy Information Administration (EIA), and others. We also examined
data on the use of special gasoline blends provided by EPA, ExxonMobil
(a commonly mentioned source of information on use of special gasoline
blends), the Oil Pipeline Information Service, state environmental
agencies and others. In addition, we interviewed federal and state
government officials, academic and industry experts, and industry
officials. Specifically, we interviewed officials with the EIA and EPA
in Washington, D.C., as well as officials with EPA's Office of
Transportation and Air Quality in Ann Arbor, Michigan, and officials in
each of the 10 EPA regional offices. We also interviewed
representatives from industry trade associations including the American
Petroleum Institute, the Renewable Fuels Association, the National
Petrochemical Refiners Association, the Association of Oil Pipelines,
the National Association of Convenience Stores, the Alliance of
Automobile Manufacturers, and the Society of Independent Gasoline
Marketers and with representatives from the National Governors
Association. In addition, we interviewed academic and industry experts,
and industry officials from companies involved in refining, terminal
operations, and pipeline operations, as well as from large oil
companies. We also conducted site visits in California, Louisiana, New
Jersey, Pennsylvania, and Texas--states with large refining sectors
and/or organizations with experience with producing and using special
gasoline blends.
To document what EPA and others have determined regarding the role of
special gasoline blends in reducing vehicle emissions and improving
overall air quality we reviewed related literature, interviewed
federal, state, and other officials, and examined emissions estimates
provided by EPA. Specifically, we examined reports on the emissions
impacts of special gasoline blends done by EPA, the Auto/Oil Air
Quality Improvement Research Program (AQIRP), National Research
Council, state environmental agencies, and others. In addition, we
interviewed federal and state government officials, academic and
industry experts, and industry officials. Specifically, we interviewed
federal officials at EPA and EIA, staff at state environmental offices,
researchers associated with the National Academies of Science and the
National Research Council, representatives from industry trade and
health advocacy associations, including the American Petroleum
Institute, the Renewable Fuels Association, the National Petrochemical
Refiners Association, the Association of Oil Pipelines, the National
Association of Convenience Stores, the Alliance of Automobile
Manufacturers, the Society of Independent Gasoline Marketers, and the
American Lung Association. In addition, we interviewed academic and
industry experts, and industry officials from companies involved in
refining, terminal operations, and pipeline operations, as well as from
large oil companies. To assess the reliability of emissions analyses,
we reviewed the analyses' overall design and methodologies, including
assumptions and inputs to modeling. Automobiles emit a number of
harmful pollutants; however, some have been identified as potentially
more significant than others. The Clean Air Act authorizes EPA to
mitigate potentially harmful concentrations of major criteria
pollutants, including carbon monoxide (CO), nitrogen dioxide (NO2),
sulfur dioxide (SO2), ozone (O3), particulate matter (PM) and lead
(Pb). GAO focused its analysis on VOC, NOX--important precursors to
ozone--and CO emissions because the transportation sector is
responsible for a large fraction of VOC, NOx, and CO emissions in the
United States and, as a result, the Clean Air Act and EPA have
specified the reduction of these pollutants through fuel control
programs.
To identify what effects, if any, special gasoline blends have on
gasoline supply in the United States, we examined literature reporting
on the effects of special gasoline blends on gasoline supply,
interviewed government officials and a wide cross section of industry
participants. Specifically, we interviewed agency officials with EPA,
EIA, the Federal Trade Commission, and state regulatory agencies. In
addition, we interviewed representatives from industry trade
associations, including the American Petroleum Institute, the Renewable
Fuels Association, the National Petrochemical Refiners Association, the
Association of Oil Pipelines, the National Association of Convenience
Stores, the Alliance of Automobile Manufacturers, and the Society of
Independent Gasoline Marketers. We also interviewed petroleum industry
officials from companies involved in refining, terminal and pipeline
operations, and marketing, including interviews with senior industry
officials from several integrated oil companies such as ExxonMobil,
ChevronTexaco, five operators of large pipeline systems that carry
multiple gasoline blends, several operators of terminals, and three
large independent marketers of gasoline that buy wholesale gasoline and
sell it to retail customers. We also conducted site visits in
California, Louisiana, New Jersey, Pennsylvania, and Texas--states with
large refining sectors and/or organizations with experience with
producing and using special gasoline blends.
To determine how these blends affect gasoline prices, we examined the
literature on gasoline prices, interviewed industry officials and
experts, and analyzed wholesale gasoline price data. We reviewed
reports on the use of specials gasoline blends and gasoline prices done
by EPA, EIA, and others. We also interviewed government officials and
industry experts including federal officials at EPA and EIA; staff at
state environmental offices; academic and industry experts; petroleum
industry officials from companies involved in refining, terminal
operations, and pipeline operations, as well as from large oil
companies; and representatives of trade associations.
In addition, we evaluated data on wholesale gasoline prices in 100
cities provided by the Oil Price Information Service (OPIS), as well as
data on national average prices[Footnote 24] from the same source--
these national data covered all the terminals in the country for which
OPIS collects data. The data were weekly average prices from terminals
selling gasoline at wholesale and covered the period from December 2000
through October 2004. In choosing which cities to evaluate, we first
selected all cities on major pipelines. Then we selected the largest
cities in each state and in each contiguous area that used a special
gasoline blend. In so doing, we chose at least one such city from each
contiguous area in the United States that we determined used a special
blend of gasoline. Then, we chose cities in areas that use conventional
gasoline, using similar criteria--every conventional-gasoline city
chosen was the largest city in its respective state that was on a major
pipeline. We did not estimate an econometric model to try to isolate
the effects of specific special blends because we felt we lacked
sufficient data to control for all other potential contributing
factors--such as specific features of these cities that might influence
prices regardless of the blend of gasoline used or the degree of
competitiveness in the gasoline supply industry. Instead, we ranked the
100 cities according to the mean of their gasoline prices to determine
if there were consistent patterns with respect to areas that use
special gasoline blends versus areas that use conventional gasoline. To
calculate the mean, we first created price differentials between each
week's price in each city and the price per gallon of West Texas
Intermediate crude oil--a commonly used benchmark for world crude oil
prices. These crude oil prices came from Platts, a common source for
crude oil and petroleum product prices. For each city, we performed a
statistical test comparing the average prices between each city and two
comparison cities in Texas[Footnote 25].:
We also ranked the cities according to the standard deviations of their
prices over time and looked for similar patterns. To calculate the
standard deviations, we again created price differentials between each
week's price in each city and the price per gallon of West Texas
Intermediate crude oil. Creating a differential between gasoline and
crude oil prices controls for some volatility in gasoline prices that
is caused by changes in the price of crude oil, the fundamental raw
material input in gasoline. Then, we calculated the standard deviation
over time for each city for these price differentials. The standard
deviation is a common measure of the variability of data and, in this
case, is a measure of how much the prices in each of the cities varied
over time, controlling for crude oil prices. For each city, we
performed a standard test for statistical significance of the
difference of the variability between that city and the city with the
lowest standard deviation.[Footnote 26]
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jim Wells (202) 512-3841:
Staff Acknowledgments:
In addition to the individual named above, Mark Bondo, Jon Ludwigson,
Kristen Massey, John Mingus, Cynthia Norris, Frank Rusco, Barbara
Timmerman, and Kim Wheeler-Raheb made key contributions to this report.
In addition, important contributions were made by Diane Lund, Dawn
Shorey, and Mary Welch.
(360504):
FOOTNOTES
[1] Research by EPA and others has shown that high levels of air
pollution are correlated with these and other health effects. However,
there is insufficient research linking health effects to the use of
specific special gasoline blends and, as a result, this report does not
address the health effects of special gasoline blends.
[2] There are two oxygenates commonly in use. Methyl tertiary-butyl
ether (MTBE) is derived from crude oil and was the most common
oxygenate additive until recent years, when it was found to contaminate
ground water supplies, and has since been banned in a number of states.
In its place, ethanol has increasingly been used as an oxygenate.
[3] In some cases, such as when air quality data are insufficient, EPA
may not be able to designate an area as being in attainment or
nonattainment. In these cases, EPA designates the area as
"unclassifiable."
[4] In the event that a state does not develop an EPA-approved SIP, EPA
may develop a federal implementation plan (FIP).
[5] Before 1990, fuel requirements were much simpler, with only limits
on volatility in the summer months to control ozone formation. The
state of California chose to more stringently regulate gasoline
formulations before the federal government. Because California
regulated gasoline formulations prior to the specific authority
provided to the EPA, California may continue to require more stringent
fuel formulation requirements without EPA approval, but must at least
meet (or exceed) the other federal requirements.
[6] RVP values throughout this report are measured in pounds per square
inch at 100ºF, the standard industry measure.
[7] Each state is overseen by a separate EPA regional office; Missouri
is overseen by EPA region 7 and Illinois is overseen by EPA region 5.
[8] The new standard measures ozone levels averaged over 8 hours, while
the prior standard measures these levels over 1 hour.
[9] These states are, with phase-in year in parentheses, California
(2003), Colorado (2002), Connecticut (2000), Illinois (2004), Indiana
(2004), Iowa (2000), Kansas (2004), Kentucky (2006), Maine (2007),
Michigan (2003), Minnesota (2000), Missouri (2005), Nebraska (2000),
New Hampshire (2007), New York (2004), Ohio (2005), South Dakota
(2001), Washington (2004), and Wisconsin (2004).
[10] EPA determined that these cities are required to use RFG; however,
the states sued, and the lawsuit was in the courts as of April 2005.
[11] The directive was issued as part of the President's National
Energy Policy Report issued on May 17, 2001.
[12] According to EPA staff, Congress considered providing additional
authority in legislation after the release of this report; however,
those bills did not pass. As of April 2005, new legislation passed by
the House of Representatives, but not yet passed by the Senate, would
limit the number of gasoline blends, but this bill has not yet become
law.
[13] In April 2005, the U.S. House of Representatives passed a bill,
H.R. 6, which, among other things, limited the expansion of special
gasoline blends and requires EPA and DOE to examine the issue and
present options to Congress. As of May 2005, no comparable bill had
passed the Senate.
[14] Excluding California, which uses the Motor Vehicle Emissions
Inventory.
[15] GAO, Air Pollution: Limitations of EPA's Motor Vehicle Emissions
Model and Plans to Address Them, GAO/RCED-97-210 (Washington, D.C.:
Sept. 15, 1997).
[16] Other possible reasons for the improvements include the advent of
more stringent standards for vehicles that gradually replace old
vehicles built to more lenient standards than current models; and
maturation of new-vehicle emissions-control hardware and software as
field experience accumulated.
[17] David Stikkers, "A Retrospective Study of Reformulated Gasoline
Use in Chicago," Environmental Informatics Archives. 1 (2003): 282-294.
[18] The National Science and Technology Council is composed of
representatives from several federal agencies charged with coordinating
science and technology policies across the federal government.
[19] While the switch from conventional gasoline to a special gasoline
blend has led to reductions in refining capacity, all other things
equal, refiners, in investing in new processes to make the special
blends, have also typically increased the capability of their
refineries to convert less valuable components to more valuable ones,
thereby increasing their capacity.
[20] Many of the pipelines that transport gasoline also ship other
petroleum products such as diesel fuel, jet fuel, and propane--some of
which also require multiple, although fewer, formulations. Recent
regulations that will require lower levels of sulfur in some diesel
fuels will further increase the number of fuels moving through the
pipeline infrastructure and may cause other complications in
maintaining fuel quality and are expected to have similar effects as
special gasoline blends.
[21] As discussed in this report, the switch to ethanol from MTBE has
largely been the result of MTBE's tendency to contaminate ground water
sources.
[22] We measured volatility for each city as the standard deviation
across time of the city price minus the price of West Texas
Intermediate crude oil--a widely used benchmark for crude oil, the
principle physical input into gasoline. A more detailed description of
our methodology can be found in appendix I.
[23] EPA Staff White Paper, Study of Unique Gasoline Fuel Blends
("Boutique Fuels"), Effects on Fuel Supply and Distribution and
Potential Improvements, EPA420-P-01-004, Office of Transportation and
Air Quality, U.S. Environmental Protection Agency: October 2001.
[24] Wholesale prices are the prices reported by fuel terminals and did
not include any relevant taxes. According to OPIS, in some cases fuel
terminals may have reported tax credits available for ethanol fuels in
the prices that they reported, but they acknowledge that past reporting
may be inconsistent in this regard.
[25] Specifically, we performed a sign test. See, for example, R.V.
Hogg and A. T. Craig, Introduction to Mathematical Statistics. 4th ed.
(New York: Macmillan, 1978): 312-314. We use the sign test because it
tests the equality of matched pairs of observations without imposing
further assumptions on the underlying distributions. The results of
this test showed that all the highest 20 city prices were statistically
significantly greater than in the low price comparison city.
[26] H. Levene, "Robust tests for equality of variances," ed. I. Olkin,
Contributions to Probability and Statistics (Palo Alto: Stanford
University Press, 1960): 278-292. We use the Levene test because the
conventional F test is very sensitive to the assumption that the data
are drawn from a Normal distribution, an assumption that does not
necessarily hold for the gasoline price data. This test indicated
statistical significance for the difference between the variances of
most of the highest volatility cities compared to the lowest volatility
city.
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