New Diesel and Gasoline Requirements

The following is from this weeks edition of the EIA's This Week in Petroleum and is more relevant than their usual entries. These are even more reasons why the price of gasoline and diesel will remain at lofty levels this year.

Regulatory and industry changes to the composition of both gasoline and diesel fuel will be key issues affecting these markets in 2006. How markets behave during the transition to these new transportation fuel specifications will go a long way in determining how high retail prices may reach for these two fuels.

Specifically, five fuel specification changes, some due to mandates for cleaner-burning fuels pursuant to the Clean Air Act Amendments of 1990, others resulting from the Energy Policy Act of 2005 (EPAct 2005) and industry responses to it, will stress the fuel supply system in 2006. Two of these changes, the ultra-low sulfur diesel (ULSD) program, and the removal of methyl tertiary butyl ether (MTBE) from reformulated gasoline by many suppliers, are likely to be the most challenging to the market.

Three additional fuel specification changes in 2006 are expected, individually, to have only minor impacts on gasoline prices and price volatility, but in total, to exacerbate an already tight market. They are: (1) establishment of a renewable fuels standard in EPAct 2005 that requires an increasing volume of renewable transportation fuel to be used each year starting in 2006; (2) implementation of an EPAct 2005 requirement that reformulated gasoline meet the same volatile organic compound (VOCs) emission standard in northern and southern regions, in an attempt to begin consolidating fuel types to increase fuel fungibility; and (3) implementation of the full Tier 2 low-sulfur gasoline requirements, resulting in average gasoline sulfur content of 30 parts per million (ppm), one-tenth the average sulfur content only three years ago.

As the ULSD program and the removal of MTBE from reformulated gasoline (RFG) have the potential to cause the most volatility in prices during the transitions this year, it is worth focusing on these two changes a little more closely. In both cases, following the operational changes and new equipment installation required by refineries and distributors, supply problems may arise from:

Loss of production capability

Loss of import supply sources

Increased difficulty in delivering the new products (including the need for extra tankage)

A one-time inventory pinch when inventories of old product must be drawn down and tanks prepared for the cleaner new product – both at wholesale and retail levels.

The ULSD program begins in 2006 with the requirement that at least 80 percent of on-highway diesel fuel being supplied must have no more than 15 ppm sulfur content at retail. Refineries are scheduled to comply by June 1. (The sulfur content of non-road, locomotive, and marine diesel fuel will be ratcheted down in subsequent years.)

The removal of MTBE from gasoline will increase the potential for higher gasoline prices and price volatility. Companies’ decisions to eliminate MTBE have been driven by State bans due to water contamination concerns and the potential for increased liability exposure due to the elimination of the oxygen content requirement for reformulated gasoline (RFG) included in the Energy Policy Act of 2005.

Currently, the largest use of MTBE is in RFG consumed on the East Coast and in Texas. Most companies eliminating MTBE in the short run will blend ethanol into the gasoline to help replace the octane and clean-burning properties of MTBE. As companies move to ethanol-blended RFG, they experience some loss in production capability in the summer months (about 5 to 6% outside of California), due to changes necessary to accommodate ethanol’s higher evaporative properties (RVP) and provide additional reduction in toxic components required for ethanol blendstocks. When New York and Connecticut moved away from MTBE last year, the affected volumes were small enough that refiners had some flexibility to keep from experiencing much volume loss. But when a refiner producing mainly RFG-type gasoline eliminates all MTBE-blended RFG, volume loss is unavoidable.

These new regulations should be of considerable help in our efforts to reduce pollution from transportation fuels.  While the cost of implementing these requirements will add a little to the cost of the products, the bigger impact is the shortages of these products that is likely to occur while industry, both in the U.S. and by those from whom we import these products, modifies their production facilities to meet these requirements.

Technorati tags: fossil fuels, gasoline, diesel, energy, technology

Comments

[JesseJenkins]

While I am very happy that these new environmental standards are being implemented - they will be a boon for everyone in the long term - they will - in the short term - mean higher gas prices/price volatility as the article says. We are already expriencing a refinery shortage (although perhaps not for too much longer) and these new measures are likely to exacerbate the problem for a while anyway.

Personally, I don't see this as much of a problem as I think the U.S. consumer could do well with a bit of shock from high gas prices as they did this summer.

The memory of a typical U.S. consumer is apparently only about 30 days long as we saw tons of articles about flagging SUV sales and higher small car sales at the end of the post-Katrina summer when gas prices soared but now that they are down below pre-Katrina levels, SUV sales are already rebounding. A few more price shocks to jog their memories might not be so bad ... barring the political willpower to actually implement a gas tax to keep gas prices steadily high enough to prompt some conservation...

[peliportti.com]

diesel engines and gasoline engines are quite similar

[Chemical Search Engine]

Thanks for this interesting article.

[Dustcarts]

Usually, when one sets out to look for a home power generator, he ends up confused and perplexed. There are just too many home power generators nowadays that come in various shapes, sizes, models and prices coming from different manufacturers and retailers.