Bureaucratic Gas

To lower prices at the pump, abolish the boutique fuel regime

By Steven F. Hayward

Quick: How many kinds of gasoline do we use in America? Most people would say three or six: regular unleaded, mid-grade, and premium, along with the ethanol blends of the same that have become nearly universal. The actual number is somewhere above 45, though hard to pin down exactly, according to the Government Accountability Office (GAO). It might even be closer to 70. Thirty-four states use specially blended gasoline, usually during the summer, which is one reason gasoline prices always rise during the “driving season.”

If you want a good idea of why this makes no sense, meet me in St. Louis. St. Louis, Missouri, uses one kind of gasoline; East St. Louis, Illinois, right across the Mississippi River, uses a different blend. Meanwhile, the surrounding suburbs use a third kind. Same metropolitan area, different gasolines, and they can’t be sold across jurisdictional lines, so refiners and distributors must maintain three separate systems for the three parts of the St. Louis metro area. 

Is this a conspiracy of the evil oil companies to fatten their margins? Mostly no: It’s the product of EPA bureaucrats and the Clean Air Act, stubbornly maintained even though boutique fuels now deliver only marginal reductions in air pollution from cars, if any at all. And it’s a regulation President Obama could clear away if he wanted to. It wouldn’t deliver a large reduction in gasoline pump prices, but even 10 to 15 cents a gallon—a plausible figure for California’s market—would help.

The bizarre world of boutique gasoline owes its origin to the usual suspects: California (of course) and the congressional sausage-rolling involved in the writing of the Clean Air Act of 1990. When it comes to air pollution, there’s always been the country as a whole and then California, which because of its unique geography and climate has always had the nation’s worst air pollution levels by a considerable margin. Congress has always given California special leeway in crafting air pollution regulations that go beyond what the EPA requires of the other 49 states. But this frequently wreaks havoc with national industries, especially autos, since any auto mandate passed in California essentially is imposed on the entire country. Carmakers don’t want to make one kind of car for California and another for everywhere else. But oil refiners are a different matter: They could readily make a different kind of gasoline for California—one that would help the auto industry solve some of its compliance problems.

As California was ramping up its plans to fight smog in the late 1980s, there was talk of imposing very stringent tailpipe emissions standards on California cars, and perhaps even higher fuel economy standards to suppress fuel use. That’s when the oil refining industry stepped in with the idea to produce reformulated gasoline (RFG) for the California market that would deliver near-term environmental benefits by reducing emissions of unburned hydrocarbons from the auto fleet. 

A few basics about ozone explain why this made some sense in 1990. Ground-level ozone is the trickiest air pollution problem. Unlike other forms of air pollution, like sulfur dioxide, where there is basically a straightforward relation between what comes out of a smokestack and what’s in the air you breathe, ozone is not directly emitted from cars or factories. It’s a combination of several chemicals that have to “cook” in sunlight. The amount produced depends on temperature, humidity, and geography. Different parts of the country can thus have wildly different ozone levels even with identical emissions, and the same metropolitan area can have wildly different ozone levels from day to day. Ozone tends to be much worse in hot summer weather than in winter, though there are exceptions, such as mile-high Denver and Minnesota. (Some areas of California actually experience higher ozone levels on weekends, when there is much less driving and industrial activity. This counterintuitive “weekend effect” is driving air quality specialists slightly crazy right now.)

A major component chemical for ozone is unburned hydrocarbons—essentially, gasoline that evaporates from car engines, gas pumps, and so forth. That’s one reason we started sealing car gas tanks with intake flaps, and redesigned gas pumps with those annoying sleeves to prevent evaporation of gasoline (called “fugitive emissions” in the trade). Reformulated gasolines aim to lower vapor pressure so there’s less evaporation, and use “oxygenates” to increase combustion in the engine so fewer unburned hydrocarbons go out the tailpipe. Back around 1990 it was calculated that reformulated gasoline could reduce hydrocarbon emissions from autos by as much as 20 percent.

When Congress took up the Clean Air Act of 1990, it decided to take reformulated gasoline national. This is where the mischief starts. The infant ethanol industry saw an opening to juice up the market for its uncompetitive product if oxygenates were mandated for the entire national gasoline market, even though there is strong evidence that ethanol, though an oxygenate, actually increases ozone. No matter: The mania to promote “alternative fuels” was shoehorned into the Clean Air Act as an adjunct, and while environmentalists generally like mandates, one other party really liked this particular one: the refining industry.

There was nowhere near enough ethanol to satisfy the new oxygenate requirement, so most areas decided to use methyl tertiary butyl ether (MTBE). It ended up being one of the great environmental disasters of modern times, and a textbook example of the law of unintended consequences. MTBE is a potent water pollutant, and leakage of MTBE from underground tanks began showing up on a large scale. The resulting uproar—and wave of lawsuits against oil companies—meant a swift end to MTBE, leaving mostly ethanol as the replacement, and sure enough, ethanol use in gasoline has grown almost twenty-fold since 1990.

The other key aspect of the story is a feature that ironically most conservatives favor: state flexibility. Because of the variability of ozone conditions around the country, the Clean Air Act allowed the states flexibility in choosing whether to adopt reformulated gaso-line, and what kind they might use. St. Louis has two kinds of gasoline because Missouri applied to the EPA for one kind of gasoline, while Illinois applied for another, even though they share the same airshed, which would seemingly call for the same blend.

Despite the complications this presents for refiners and the petroleum product supply chain, the industry loves it: Why make just three or four kinds of gasoline when you can make a dozen and charge higher margins? A 2001 EPA review of the issue dryly notes,

A state-specific program generally leads to the secondary effect of limiting competition for the gasoline supplied to the affected market since the market for a state fuel is often small compared to the market for federal RFG. As a result, the number of refiners likely to devote production to this small state fuel market is often limited. This has been perceived as a benefit to the refiners that produce the gasoline for a state fuel market.

Translation: The proliferation of boutique gasoline suppresses competition and drives up prices.

The Government Accountability Office looked into the matter in a 2005 report, noting that the adoption of boutique blends meant that in one East Coast area the number of gasoline suppliers dropped from a dozen to three. Southeast Michigan has just two refineries and one pipeline supplying its boutique blend. After studying gasoline markets in 100 cities, the GAO concluded: “The proliferation of special gasoline blends has made it more complicated to supply gasoline and has raised costs. .  .  . Of the 100 cities we examined, most of the 20 cities with the highest prices used special blends of gasoline.” The Dallas Federal Reserve noted another anticompetitive effect of the mandate: It bars gasoline imports from other countries, which don’t produce any of our special blends.

But hey, it’s all worth it if our children can breathe cleaner air, isn’t it? This is where boutique gasoline becomes a perfect case study in bureaucratic inertia and industry rent-seeking. The case for reformulated gasoline is largely obsolete, delivering only marginal air quality benefits today, if any. The 1990 Clean Air Act also phased in very tight automobile tailpipe standards that have reduced emissions from new cars and trucks by as much as 95 percent from the 1990 models, most of which have long since left the roads. Hydrocarbon emissions from autos have been falling at a sustained rate of about 8 percent a year for the last decade, as the auto and truck fleet turns over to newer models. This trend is going to continue for a decade or more. The EPA still claims reformulated gasoline delivers 20 to 25 percent emissions reductions, but this is based on data from the older car fleet. The EPA hasn’t bothered to update its emission models, as the GAO noted: “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. .  .  . [I]mprovements in automobile technology .  .  . may have negated many of the benefits of adding oxygenates to gasoline.”

Here’s an opportunity for President Obama to “do something” about gasoline prices, even if it’s only by a dime per gallon. (And the difference between $4.95 gas and $5.05 gas might be the difference between reelection and defeat.) The Clean Air Act allows the EPA to waive the boutique gasoline requirements in the event of supply disruptions or shortages. Indeed, the boutique gasoline requirements were waived in the aftermath of Hurricanes Katrina and Rita in 2005, when more than half the Gulf Coast refineries were knocked out of commission for several weeks. During the waiver, we imported gasoline from overseas to fill the gap, and prices were kept stable. There was no noticeable uptick in ozone levels in the EPA data. While high-priced gasoline might not meet the precise definition of a disruption or shortage, it shouldn’t be a problem for the clever lawyers of the Obama administration to come up with a plausible legal rationale for suspending the regulations.

Failing that, the House should pass a quick amendment to the Clean Air Act abolishing the boutique gasoline regime, and then dare the Senate or the president to block a measure that would offer relief at the pump this summer. The ethanol lobby would scream, along with environmentalists who never met a regulation they didn’t like, while refiners would quietly rue the loss of an artificial market-segmenting system that expands their profit margins. Sounds like a win-win all the way around.