Commentary: Why We Need to Simplify Fuel Standards

It looks like the preview for a scary summer movie. With the high season for driving just around the corner, the price of regular unleaded averages $1.62 a gallon, pennies shy of the $1.67 high from last June. In many markets, it tops $2. Although surprisingly strong inventories trimmed wholesale gas prices by a dime, to $1.03, in recent days, consumers are worried. "I drove around forever with my fuel light on, just hoping prices would go down," says Pamela Haber, a 31-year old mental health counselor in Los Angeles. "They just kept going up."

With inventories up, some analysts say prices may be peaking. But that's unlikely to mean the quick return of cheap gas. Inadequate refinery capacity is a major reason behind recurring price hikes--and that problem has been years in the making.

NOTHING TO SPARE. Since 1981, poor returns on investment and increasingly stringent environmental controls have forced more than half of the working refineries in the U.S. to close. Meanwhile, no new ones have been built since 1976. To keep up with demand, the average U.S. refinery is running flat-out: Capacity utilization now stands at 98.8%, up from 84% in 1991. "There is no spare capacity," says William E. Greehey, chairman of Valero Energy Corp., a refiner based in San Antonio.

Vice-President Dick Cheney has made clear that as part of its energy plan, the Administration will propose trimming environmental and other regulations that prevent refinery construction. But that's a long-term solution at best. Even with no local or environmental opposition, refineries take years to build.

Can anything be done in the short term? Cheney is also expected to propose harmonizing the nation's bewildering patchwork of fuel formulations, which many blame for causing bottlenecks in the market and making refining more complex and costly.

The reason: In 1990, the Clean Air Act Amendments included federal requirements for cleaner-burning gas in nine especially smoggy cities. Some states and cities went further and created tougher standards. Add it all up, and the refining industry must manufacture fuel with 16 different formulations in three grades each.

Simplifying the variety will help. With so many unique formulas and few sources of extra supply, prices spike in times of shortages. Indeed, a 1999 investigation by the California Attorney General's office found that prices in the state had been more volatile since it instituted its own blend of cleaner-burning gas in 1996.

Some local officials are already trying to harmonize regulations. In the mid-1990s, for example, Missouri regulators tried to adopt the federal standard for Kansas City. But fearing the imposition of stricter standards in other cities, the oil industry sued and prevented it. "We've tried to promote common formulas whenever we can," says Robert Randolph, an environmental engineer with Missouri's Natural Resources Dept.

UNLIKELY ALLIES. The issue has made allies of some unlikely parties. Last year, the American Petroleum Institute, American Lung Assn., and health-related groups lobbied Congress to do away with the federal requirement to include cleaner-burning oxygen additives in gas. They recommended that oil companies be allowed to choose their method for achieving environmental standards. But that deal lacked support from legislators who favor ethanol, a corn-based oxygen additive used to produce cleaner fuels in the Midwest.

Clearly, getting a national consensus on a more limited number of national standards won't be easy. But considering the lack of alternatives and increasingly angry consumers at the pumps, it's a step in the right direction. Even some environmentalists are in favor. "We'd be interested in a national standard, if it's a clean one," says Daniel Becker, director of the Sierra Club's energy research. It may be one of few energy questions on which he and Cheney agree.

By Christopher Palmeri

With Laura Cohn and Lorraine Woellert in Washington, D.C.

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