Long-anticipated energy crisis: Has it arrived?

Published October 1, 2000

The last 100 years are often referred to by historians as the “American Century,” due primarily to the country’s rise to world leadership and military dominance. We put men on the moon, won two world wars, and then used our economic juggernaut to rebuild our enemies and virtually all of Europe. Through most of the last half of the century, we maintained a “Pax Americana” that eventually led to victory in the cold war.

Aside from the innate industriousness, inventiveness, and indomitable “Yankee Spirit” of the American people, the American Century was made possible by the country’s wise use of cheap, abundant energy. It powered unprecedented peacetime development as well as the war machine. Without it, none of what America has accomplished would have been possible.

Today, all of that is threatened by an incoherent energy policy and ill-conceived environmental regulations developed without adequate consideration of costs or need. As a result, our petroleum and electricity industries are seriously crippled and will become more so, raising serious questions about American prosperity and leadership in the century to come.

An industry running on empty

“Under today’s regulatory climate, I’d rather try to build an asbestos factory than an oil refinery,” an expert close to the oil industry told Environment & Climate News. Virtually impossible-to-meet environmental regulations, according to Senator James Inhofe (R-Oklahoma), are the reason no new refineries have been built in the U.S. since the 1970s. In fact, Inhofe pointed out at a recent Capitol Hill conference, the number of refineries in this country has fallen from 209 to 156 in just the past 10 years.

Today, the U.S. has less than two days’ supply of gasoline on hand, even though our refineries are operating at near capacity. According to industry experts and analysts in the Department of Energy, any breakdown in the system, such as the failures of the Explorer and Wolverine pipelines in the Midwest this spring, will cause serious shortages and extreme price volatility.

In discussing the petroleum industry’s inability to add refinery capacity, Inhofe said at a field hearing in Cincinnati, Ohio earlier this year, “EPA’s New Source Review regulations have created confusion and debate for almost the last 25 years. Over 4,000 pages of guidance documents have had to be issued in an attempt to explain the original 20 pages of regulations.” He added that even more changes to the New Source Review are in the works at EPA. As a result, the petroleum industry is unsure what standards a new refinery would have to meet and what modifications to existing refineries would be subject to EPA review.

Exacerbating the refinery capacity problem, according to Inhofe, is the fact that some U.S. refiners are forced to export gasoline because they can’t meet EPA requirements for use in this country. Moreover, severe restrictions on drilling in the U.S. mean refiners must import nearly 60 percent of all crude oil used here, giving countries in the Middle East control over both availability and price of gasoline in the U.S.

EPA regs plague the Midwest

After blaming “price gouging” by “big oil” for soaring gasoline prices in the Midwest in June and July, Energy Secretary Bill Richardson, EPA Administrator Carol Browner, Vice President Al Gore, and President Bill Clinton finally acknowledged that over-regulation—particularly the imposition of new Tier II reformulated gasoline standards on June 1—was responsible.

DOE experts had been warning since early March that a gasoline crisis was imminent, and that EPA’s Tier II requirement for the Chicago and Milwaukee areas would make the situation worse.

“We are facing a very tight gasoline market,” DOE’s John Cook told the House Subcommittee on Energy and Power on March 9. “U.S. crude oil and gasoline inventories are at alarmingly low levels not seen for decades . . . creating an environment ripe for price volatility this spring.”

The following month, in its Summer 2000 Motor Gasoline Outlook, DOE expressed concern about reformulated gasoline, noting “While the supply of reformulated gasoline from domestic refiners, blenders and import[ers] should be sufficient, low gasoline inventories raise the risk of localized shortages. The new requirements for reformulated gasoline may slow the response time for delivery of emergency supplies and reduce the availability of imported gasoline.” DOE also pointed out that with refineries running at 95 percent of capacity nationally and 99 percent in the Midwest, any disruption could cause supply shortages.

In spite of these warnings, EPA allowed the Tier II regulations to go into effect on June 1, just as the country entered the heaviest driving season of the year. Refiners were required to drain their tanks of all old-formula gasoline and start delivering the new fuel.

More regulatory pain ahead

Over the next eight years, the petroleum industry faces a series of EPA-created obstacles to making gasoline, diesel fuel, and home heating oil.

Oxygenates. At the heart of the reformulated gasoline problem are chemicals called oxygenates: ethanol and methyl tertiary-butyl ether (MTBE). Each has its own set of problems and, according to the National Research Council, neither has been shown to have a significant positive effect on air quality.

MTBE is such a pervasive and persistent pollutant of groundwater, many states are ordering a phase-out of its use—a move necessary for environmental protection, but one that will add to the woes of refiners by requiring yet another new gasoline blend to meet the oxygenate mandate of the Clean Air Act of 1990. California was the first state to order an MTBE phaseout, when Governor Gray Davis called for its elimination by January 1, 2004. Michigan recently passed and signed into law the earliest phase-out in the nation, calling for MTBE’s elimination by June 1, 2003.

Ethanol-based gasoline is more difficult and expensive to manufacturer and more costly to transport, as it cannot be put through pipelines without picking up moisture. It also increases emissions of oxides of nitrogen and volatile organic compounds, which produce ozone when exposed to sunlight.

“In 1990, Congress made a mistake by mandating oxygenates in gasoline,” Inhofe said in a June 14 Senate hearing on his bill, S. 2723, which would allow states to waive the oxygenate requirement. “We ended up creating a water quality issue because of the use of MTBE. I think it is important to note that three years before Congress acted, scientists at EPA identified the potential problem, although the agency failed to notify Congress during the debate in 1990.”

Others within EPA, speaking only on condition of anonymity, say the agency has known nearly as long that oxygenates were an unnecessary part of reformulated gasoline.

Regional haze. EPA has promulgated a rule calling for the reduction of emissions of very fine particulate matter. The agency claims, with little scientific evidence, that fine particulates cause haze in national parks and wilderness areas. The rule has been successfully challenged in court as an unconstitutional delegation of legislative authority to EPA; the U.S. Supreme Court has agreed to take up the case this fall.

Highway diesel fuel. EPA has proposed that the sulfur content of highway diesel fuel be reduced by 97 percent, from 500 parts per million to just 15 ppm, by 2006. Many within and outside the petroleum industry doubt this can be achieved without enormous expense and reduction of refinery capacity.

Gasoline air toxics. By December, EPA is expected to finalize a new mobile-source air toxics standard.

Refinery MACT II. In November, EPA is expected to set new, tighter standards for emissions from refinery vents.

NOX petitions. Northeastern states have petitioned EPA to reduce emissions from plants, including refineries, in other states. That effort has already led to lawsuits by the federal government against electricity-generating power plants, including the Tennessee Valley Authority. (See “Uncle Same sues Uncle Sam over air pollution,” Environment & Climate News, July 2000.)

New Source Review enforcement initiative. EPA has said it will begin enforcement actions against refineries for noncompliance with this review, even though it has never fully clarified when such reviews are necessary. Bob Slaughter, director of public policy for the National Petrochemical and Refiners Association (NPRA), calls New Source Review “one of the most complicated regulatory programs ever created.” The way EPA has interpreted the Clean Air ACT, NSR requires EPA permitting every time a refinery makes any change in its plant or method of operation.

EPA is also considering new rulemaking with regard to its Residual Risk and Urban Air Toxics Strategy. Finally, looming in the industry’s future is the Kyoto climate change protocol, calling for a reduction in carbon dioxide emissions to 7 percent below 1990 levels.

Warning of future supply shortages and price volatility, the NPRA’s Slaughter told the House Subcommittee on Energy and Power on March 9, “the U.S. either deliberately or inadvertently has followed a national policy which, at times, doesn’t pay sufficient attention to the question of supply. . . . The U.S. frequently pursues overly expensive environmental restrictions without looking for equally effective but less costly alternatives.”