Energy & Entrepreneurs

More Costs of EPA Regulation

by Raymond J. Keating

President Obama's Environmental Protection Agency (EPA) has been a hotbed of regulatory activity. Indeed, the EPA seems bent on hiking energy costs, and thereby making sure that business formation, economic growth and job creation are restrained far into the future, not to mention undermining domestic energy production.

Another study highlights the potential economic woes if the EPA decides to go along with a proposal from the Alliance of Automobile Manufacturers for a new national gasoline standard (excluding California) that "would require significantly lower sulfur limits than current United States gasoline and, for much of the nation, also significantly lower limits on Reid vapor pressure (RVP)."

API engaged the Baker and O'Brien Inc. to examine "the potential costs of EPA's ‘Tier 3' fuel standard for gasoline blends which could be proposed at the end of the year." The firm's findings were worrisome, to say the least.

Baker and O'Brien concluded:

"Four to seven refineries could shut down rather than make the investments required to meet the standards. Supplies of domestically-produced hydrocarbon gasoline are projected to decline by 8 to 19% in the summer, as a result of refinery shutdowns and the removal of NGLs [natural gas liquids] from the gasoline pools. Additional hydrotreating and fractionation in the Study and Sensitivity Cases result in increased CO2 emissions at the refineries that continue to operate.

"If gasoline consumption remains at Base Case levels, gasoline imports would have to double, increasing U.S. vulnerability to supply disruptions. Distillate and NGL production at domestic refineries would increase as gasoline production declines. Additional exports of both would likely result to balance those markets.

"Required compliance investments by refiners are estimated at $9 to 17 billion. On an ongoing annual basis, compliance costs are estimated at $5 to $13 billion. Allocating these costs to gasoline produced yields marginal costs of 12¢ to 25¢/Gal. on an annualized basis."

Bob Greco, API's group director of downstream operations, noted: "The new EPA requirements could be devastating to consumers and communities across the nation. Consumers would be hurt by the increased cost of fuel projected by the study, and the closing of refineries could put local economies at risk, meaning there would be fewer jobs. In addition, we would be forced to rely even more on foreign fuel supplies, and that can only weaken our nation's economy and national security."

What exactly is the point here? Any gains in terms of an improved environmental outlook are highly speculative, at best, while the increase in energy costs will affect consumers, small businesses, the economy, competitiveness and jobs - all to the negative.

Wouldn't it be nice if U.S. regulation were actually rooted in sound economics? Is that really too much to ask? Clearly, lower sulfur and RVP limits would make no real difference in the environment, while doing serious economic damage, and therefore, the EPA needs to reject such increased regulation.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.