"Boutique Fuels" and Reformulated Gasoline: Harmonization of Fuel Standards

Order Code RL31361

CRS Report for Congress

Received through the CRS Web

“Boutique Fuels” and Reformulated Gasoline:

Harmonization of Fuel Standards

Updated May 10, 2006

Brent D. Yacobucci

Specialist in Energy Policy

Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

“Boutique Fuels” and Reformulated Gasoline:

Harmonization of Fuel Standards

Summary

The current system of gasoline standards in the United States is complex.

Because of federal and state programs to improve air quality, and local refining and

marketing decisions, suppliers of gasoline face many different standards for fuel

quality. As a result, fuels are formulated to meet varying standards. State and local

decisions overlap with federal requirements, leading to situations where adjacent or

nearby areas may have significantly different standards. These various fuel

formulations are often referred to as “boutique fuels.” In this system, supply

disruptions can result if fuel from one area cannot be used to supply another area.

Because of potential supply concerns, there is interest in simplifying

(harmonizing) the system so that regional or national standards are consistent.

However, the competing goals of air quality, supply stability, and costs make

harmonizing the system a complex process.

Adding to these complications are concerns over methyl tertiary butyl ether

(MTBE), a common gasoline additive that has been detected in groundwater in

numerous states. At least 25 states have passed legislation to ban or limit the use of

MTBE.

On August 8, 2005, President Bush signed the Energy Policy Act of 2005 (P.L.

109-58). Among other provisions, P.L. 109-58 addressed several boutique fuels

issues. As a result of P.L. 109-58, a key component of the federal reformulated

gasoline (RFG) program was eliminated May 6, 2006. This requirement, which

gasoline suppliers asserted was a de facto MTBE requirement, was used by gasoline

suppliers as a defense against liability for MTBE contamination. Therefore, while

P.L. 109-58 actually gives the industry more flexibility, the industry moved quickly

to eliminate MTBE from the gasoline supply in spring 2006. This increased pressure

on already tight refining capacity. The loss in volume and energy from eliminating

MTBE increased demand for gasoline, as well as ethanol. Exacerbating the supply

problem was the fact that the industry was making the transition from winter gasoline

to more stringent summertime air quality specifications, which adds competition for

the highest-quality gasoline components. These pressures, along with historically

high crude oil prices, led to historically high gasoline prices. Further, some localized

areas faced short-term supply disruptions as refineries made the transition.

This report discusses how gasoline composition is regulated and explains the

various federal and state gasoline standards. Next, the report presents some of the

key issues with the federal RFG program. Some of the problems associated with

boutique fuels are discussed, as well as some of the potential effects of

harmonization. Finally, congressional actions in the 109th Congress related to

boutique fuels, RFG, and harmonization, including the passage of P.L. 109-58, are

discussed.

This report will be updated as events warrant.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

What Are “Boutique Fuels”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

What Is the Concern over Boutique Fuels? . . . . . . . . . . . . . . . . . . . . . . 1

Why Not Simply Require One Fuel Across the Country? . . . . . . . . . . . 2

Harmonizing Standards Would Be a Complex Process . . . . . . . . . . . . . 2

Organization of Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Gasoline Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Changing Gasoline Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

General Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Nitrogen Oxides (NOx) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Heavy Metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Toxic Compounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Sulfur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Oxygen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Federal Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Conventional Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Reformulated Gasoline (RFG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Low Volatility Conventional Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . 5

Oxygenated Fuel (Oxyfuel) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

State Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

California Cleaner-Burning Gasoline (CBG) . . . . . . . . . . . . . . . . . . . . 6

Elimination of the Federal RFG Oxygenate Standard Under P.L. 109-58 . . 6

The Debate Over the RFG Oxygen Standard . . . . . . . . . . . . . . . . . . . . . 7

Issues in the Spring of 2006: MTBE Phase-Out and Ethanol Supply . . 8

Renewable Fuels Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Harmonizing Gasoline Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Production Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Production Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Supply Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Air Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

State Fuel Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

The Energy Policy Act of 2005 and Harmonization . . . . . . . . . . . . . . . . . . 12

Administration Action on Harmonization . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Congressional Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

“Boutique Fuels” and Reformulated

Gasoline: Harmonization of Fuel Standards

Introduction

Because of federal and state programs to improve air quality, and local refining

and marketing decisions, suppliers of gasoline must supply fuel that meets a number

of different standards. According to ExxonMobil, as of 2002 there were 18 different

gasoline formulations required across the country.1 Depending on how various

overlapping standards are counted, this number can increase or decrease.2

The two key federal programs are the reformulated gasoline program (RFG),

which aims to reduce emissions of toxic air pollutants and ozone-forming

compounds, and the oxygenated fuels (Oxyfuel) program which aims to reduce

carbon monoxide emissions. These programs are required by the Clean Air Act. In

places where federal RFG is not required, states may “opt-in” to the program, or they

may impose other fuel requirements as part of a plan to meet air quality standards.

This mix of state and federal standards, along with local marketing and refinery

decisions, has resulted in adjacent or nearby areas that may require gasoline with

significantly different properties.

What Are “Boutique Fuels”? The term “boutique fuels” refers to the

various specialized gasoline formulations made to meet air quality standards or local

preferences. Besides conventional fuel,3 refiners and marketers in a state may also

have to meet requirements in different areas for one, two, or even three different

formulations.

What Is the Concern over Boutique Fuels? Because requirements can

vary from state to state, and within a state, if there is a disruption in fuel supply, it

may be difficult for refiners to supply fuel meeting local specifications to the affected

area. If this happens, prices can rise sharply, as occurred with particular severity in

the Midwest in the summer of 20004 and in the wake of Hurricanes Katrina and Rita.

1

ExxonMobil, U.S. Gasoline Requirements. February, 2002.

2

Drastically higher numbers generally imply that the number of standards has been

multiplied by three, to indicate that each type of gasoline is sold at three octane levels, or

“grades”. Suppliers are not required by law to sell three grades of gasoline.

3

4

Conventional gasoline is sold across most of the country.

Major pipeline problems, along with other complicating factors, led to short supplies of

gasoline in the area. Conventional gasoline supplies were low, as were supplies of the

blendstock used to create RFG for the Chicago-Milwaukee area.

CRS-2

The ability to move product from one area of the country to another is called

“fungibility.”

Why Not Simply Require One Fuel Across the Country? The existing

system has evolved in response to various federal air quality standards, and resulting

state standards, local refiner decisions and consumer choices. Further, many of the

state formulations were designed to mitigate moderate air quality problems without

requiring more stringent and, presumably, more expensive measures. An attempt to

group states under one regional or national standard, referred to as “harmonization,”

might lead to higher pump prices for areas with less severe ozone problems, or higher

emissions in areas with more severe problems. Further, refiners may have made

considerable investments in tooling facilities to meet specific local requirements.

Harmonizing Standards Would Be a Complex Process. Competing

goals will make harmonizing standards a complex process. Gasoline distribution

would likely be more uniform under regional or national standards. But refining

costs and consumer price could increase under new standards.5 Further, air quality

could be improved or diminished depending on how standards are combined. Any

changes in the U.S. gasoline system will need to take all of these factors into account.

Organization of Report. This report outlines the current situation with

boutique fuels. It discusses the various state and federal requirements, their purposes,

and how they interact. Next, it discusses in detail one of the key components of the

federal RFG program, a component eliminated by the Energy Policy Act of 2005

(P.L. 109-58). Then, the report describes some of the supply problems caused by the

current system, followed by a discussion of the trade-offs associated with

harmonization. Finally, the report discusses congressional actions, as well as actions

taken by the Bush Administration, that will likely affect the fuel system. This report

will be updated as events warrant.

Gasoline Standards

Changing Gasoline Standards

As was stated above, the current fuel system has resulted from a mix of federal

and state requirements mandated or motivated by the passage of the Clean Air Act

Amendments of 1990.6 Before 1990, fuel requirements were much simpler, with

only limits on volatility in the summer months to control ozone formation. Because

temperature plays a key role in ozone formation, a two-tier system was established,

with tighter summer volatility standards in the South.

5

It is difficult, however, to distinguish the effects of any one change on the costs of refining

and distribution, or on consumer prices. Both the costs to supply gasoline, and pump prices,

respond to a wide range of variables.

6

P.L. 101-549.

CRS-3

The 1990 Clean Air Act amendments added additional requirements, producing

a more complex multi-layer system. These requirements include the use of various

fuel formulations targeted at specific air quality problems. In addition to federal

requirements, states with less severe pollution problems may establish their own

standards. These various federal and state standards lead to a patchwork of areas

with, in some cases, very different standards. Gasoline supply and distribution is

further complicated by local refining and marketing decisions to promote or limit the

use of certain additives. This multi-layer system of various standards and

formulations can lead to supply instability if fuel from one market cannot be used in

another market to meet changes in supply and demand.

General Standards

Some gasoline standards apply to all fuel, while others only apply to particular

formulations. Currently, fuel may be regulated for volatility, nitrogen oxide

emissions, heavy metal content, content and emissions of toxic compounds, sulfur

content, and/or oxygen content. Each of these factors plays a role in pollutant

emissions, and overall air quality.

Volatility. Volatility is a chemical’s propensity to evaporate. Evaporative

emissions of hydrocarbons such as motor fuel contribute to the formation of groundlevel ozone, which leads to “smog.”7 Reid Vapor Pressure (RVP) is a measure of a

fuel’s volatility; lower numbers indicate lower volatility. The RVP for conventional

gasoline can range from about 8 to 15 pounds per square inch (psi),8 but is limited to

9.0 psi in the summer months. In areas where ozone is a problem, lower RVP is

required.

Nitrogen Oxides (NOx). Nitrogen Oxides (NOx) include nitrous oxide, nitric

oxide, and nitrogen dioxide. NOx contributes to the formation of ozone. Therefore,

fuel may be formulated to limit NOx emissions.

Heavy Metals. Lead was commonly used as an octane enhancer until it was

phased-out through the mid-1980s (it was completely banned in 1995), due to the fact

that lead can disable emissions control devices, and because it is toxic to humans.

In some areas, the use of other heavy metals (e.g., manganese) in gasoline may also

be restricted.

Toxic Compounds. Some gasoline components and additives are toxic to

humans. Further, fuel combustion can lead to the formation of other toxic

compounds. Such compounds include benzene, acetaldehyde, formaldehyde, 1,3

butadiene, and polycyclic organic matter. Benzene is a known human carcinogen,

while the other compounds can cause irritation and exacerbate asthma; some might

7

Ground-level ozone is an air pollutant that causes smog, adversely affects health, and

injures plants. It should not be confused with stratospheric ozone, which is a natural layer

some 6 to 20 miles above the earth and provides a degree of protection from harmful

radiation.

8

U.S. Department of Energy, Alternative Fuels Data Center, Properties of Fuels.

[http://www.afdc.doe.gov/pdfs/fueltable.pdf].

CRS-4

be human carcinogens.9 In some fuels, benzene content is limited. The overall

emissions of toxic compounds may be limited, as well.

Sulfur. Sulfur in gasoline can interfere with on-board emissions control

devices. Catalytic converters are especially vulnerable.10 To improve the

performance of emissions controls, the sulfur content of gasoline may also be limited

by state or federal regulations. Currently, Alabama, California, Georgia, and Nevada

require lower-sulfur gasoline. Starting January 1, 2004, EPA began phasing in new

national limits for sulfur in gasoline. Effective January 1, 2006, most gasoline is

limited to a sulfur level of 30 parts per million (ppm).11 Before the new standards,

gasoline sulfur content averaged around 300 ppm.

Oxygen. Because oxygen can improve combustion (and thus limit the

emissions of certain compounds), a minimum oxygen content may be required.

Because pure oxygen cannot be added directly to gasoline (it would simply escape

from the fuel), an oxygen-bearing compound called an “oxygenate” is added.

Typically ethers, such as methyl tertiary butyl ether (MTBE), or alcohols, such as

ethanol, are used to enhance the oxygen content of gasoline. These oxygenates are

also high-octane compounds, and reduce the need for other octane enhancers that

may be more toxic (such as benzene). As discussed below, a key oxygen standard

for federal reformulated gasoline was eliminated by P.L. 109-58.

Federal Fuels

The Clean Air Act requires the use of special fuels in areas that are in

nonattainment of the National Ambient Air Quality Standards (NAAQS) for ozone

or carbon monoxide. Federal reformulated gasoline (RFG) must be used in severe

or extreme nonattainment areas for ground-level ozone. Other areas with less serious

ozone problems may opt-in to the RFG program to help them attain or maintain

compliance with the NAAQS. In carbon monoxide nonattainment areas, federal

oxygenated fuel (oxyfuel) is required in winter months.

Conventional Gasoline. As was stated above, conventional gasoline is the

fuel sold across most of the country. It is the least stringently regulated fuel, with a

summertime limit on RVP of 9.0 psi, a prohibition on the use of lead, and a limit on

the level of manganese (a heavy metal). Because gasoline blended with 10% ethanol

(“gasohol”) has a higher volatility, the RVP limit is raised by 1 psi, to 10.0 psi (the

9

Agency for Toxic Substances

[http://www.atsdr.cdc.gov/toxfaq.html].

and

Disease

Registry,

ToxFAQs.

10

For more information on issues relating to sulfur in gasoline, see CRS Report RS20163,

Sulfur in Gasoline, by Stephen Thompson and James E. McCarthy.

11

This sulfur restriction is part of a larger whole-system approach by EPA to limit vehicle

emissions. Starting in model year 2004, automobile manufacturers are facing more stringent

emissions standards for their vehicles. To enable the use of more advanced emissions

control devices, the sulfur content of gasoline must be limited, as well.

CRS-5

“one pound waiver”).12 In summer months, conventional gasoline accounts for

approximately 49% of U.S. gasoline consumption.13

Reformulated Gasoline (RFG). In areas with major ozone pollution

problems, federal RFG is required. Other areas with less severe problems may also

opt-in to the program. Currently, major metropolitan areas in 17 states and the

District of Columbia use RFG. The program has several requirements, including a

benzene cap of 1.0% by volume, limits on NOx and toxic emissions, and a cap on

RVP. In the summer months, the RVP limits are more stringent than in the winter

months.14 Before P.L. 109-58, summertime RVP limits were also more stringent for

southern areas than for northern areas; that law set a single standard at the more

stringent (southern) level. Federal RFG accounts for about 28% of summertime

gasoline consumption.15 Prior to May 6, 2006, RFG was also required to contain 2%

oxygen by weight, a requirement that was eliminated by P.L. 109-58.

Low Volatility Conventional Gasoline. The Environmental Protection

Agency (EPA) requires that certain ozone non-attainment areas (that are not required

to use RFG) use a lower volatility fuel in the summer months. Instead of the 9.0

RVP conventional fuel required across most of the country, RVP is capped at 7.8 for

these areas, which include parts of states in the South and West. The “one pound

waiver” for gasohol still applies. Low-volatility gasoline accounts for about 7% of

summertime gasoline consumption.16

Oxygenated Fuel (Oxyfuel). In carbon monoxide nonattainment areas, the

Clean Air Act requires the use of oxygenated fuel in the winter months. As of

November, 2005, 12 areas were implementing the program.17 The Oxyfuel program

requires a minimum oxygen content of 2.7% by weight. Because of the nature of

carbon monoxide pollution, most carbon monoxide nonattainment areas are not

ozone nonattainment areas.18 The only exception is the Los Angeles area, which is

in nonattainment for both pollutants. The program has been largely successful, with

12

There are other benefits to using ethanol in gasoline that counterbalance its higher

volatility.

13

U.S. Environmental Protection Agency (EPA), Office of Transportation and Air Quality

(OTAQ), Staff White Paper: Study of Unique Gasoline Fuel Blends (“Boutique Fuels”),

Effects on Fuel Supply and Distribution and Potential Improvements. October, 2001.

14

Heat is a catalyst for the reactions that produce ozone. That is why ozone tends to be

more serious in the summer months. Therefore, in warmer areas, and during warmer times,

ozone-forming emissions are more tightly controlled.

15

EPA, OTAQ, op. cit.

16

EPA, OTAQ, op. cit. 7.8 RVP gasoline actually accounts for about 13% of gasoline

consumption, but 6% of this is a result of state, not federal requirements. See the section

below on “State Fuels.”

17

EPA, OTAQ, State Winter Oxygenate Fuel Program Requirements for Attainment and

Maintenance of CO NAAQS, November 2005.

18

Carbon monoxide emissions tend to increase at colder temperatures, and carbon monoxide

pollution tends to be worse at higher elevations.

CRS-6

fewer than half of the original participants in the program still required to use the

fuel.19 As the number of participating areas has dropped, so has Oxyfuel

consumption as a share of winter gasoline consumption. The Oxyfuel program

should not be confused with the oxygen standard in RFG (see above), which was

eliminated by P.L. 109-58.

State Fuels

In areas that have less serious ozone problems (in contrast to severe or extreme

nonattainment areas), states may establish their own fuel standards as a strategy for

mitigating emissions, if they do not to opt-in to the RFG program. The Clean Air Act

gives the EPA the authority to permit reductions in the allowable RVP of fuel in the

summertime. Most states require only a lower RVP (at 7.0, 7.2, 7.8, or 8.5 RVP);

in all other ways these state fuel requirements are identical to conventional gasoline.

However, some states go further and require a lower sulfur content (e.g.,

Georgia), or limit the use of certain additives (e.g. Texas). Further, Minnesota

requires a minimum of 10% ethanol in all gasoline sold in the state. These various

fuels account for about 12% of summer gasoline consumption.20

California Cleaner-Burning Gasoline (CBG). In addition to giving states

leeway on setting fuel standards, the Clean Air Act allows California to set its own

standards, as long as those standards are more stringent than the federal standards.

California requires the use of “Cleaner-Burning Gasoline” (CBG), with generally

stricter requirements than those for federal RFG. Sulfur is restricted to 30 ppm,

benzene is limited to 0.8% by volume, and performance standards are tighter for

VOC, NOx, and toxic emissions. In areas of the state where federal RFG is required,

gasoline must meet all the standards for RFG as well as CBG.21 Arizona and Nevada

have state programs that mimic the California standards. California CBG accounts

for approximately 4.5% of summertime gasoline consumption.22

Elimination of the Federal RFG Oxygenate Standard Under

P.L. 109-58

Before amendment by the Energy Policy Act of 2005, the Clean Air Act

required that RFG contain at least 2% oxygen by weight. Refiners met this

requirement by adding a number of ethers or alcohols, any of which contain oxygen

and other elements. Until recently, the most commonly used oxygenate was MTBE.

In 1999, 87% of RFG contained MTBE, a number reduced to about 46% in 2004,

according to EPA. MTBE has also been used since the late 1970s in conventional

19

Of the 12 areas implementing the program, 5 are for attainment purposes and 7 for

maintenance purposes. In 1992, 36 areas were implementing the program. EPA, OTAQ,

op. cit.

20

EPA, OTAQ, Staff White Paper.

21

For example, while federal RFG requires a minimum oxygen content, California CBG

does not.

22

EPA, OTAQ, op. cit.

CRS-7

gasoline as an octane enhancer. As a result, gasoline with MTBE has been used

throughout the United States and elsewhere in the world, whether or not an area has

been subject to RFG requirements.

MTBE leaks, generally from underground gasoline storage tanks, have been

implicated in numerous incidents of groundwater contamination. The substance

creates a perceptible taste and odor in water at very low concentrations, and some

animal studies indicate that it may pose a potential cancer risk to humans. For these

reasons, 25 states have taken steps to ban or limit its use, according to the Renewable

Fuels Association.23 The most significant of the bans (in terms of the amount of fuel

affected) took effect at the end of 2003 (California and New York), leading many to

suggest that Congress revisit the issue to modify the oxygenate requirement and set

more uniform national requirements regarding MTBE and its potential replacements,

principally ethanol.

The Debate Over the RFG Oxygen Standard. Support for eliminating

the oxygenate requirement on a nationwide basis was widespread among

environmental groups, the petroleum industry, and states. In general, these

stakeholders concluded that gasoline can meet the same low emission performance

standards as RFG without the use of oxygenates. But agricultural interests presented

a potential obstacle to enacting legislation to remove the oxygen requirement.

According to the U.S. Department of Agriculture, roughly 13% of the nation’s corn

crop is used to produce the competing oxygenate, ethanol. Supporters of ethanol

argued that as MTBE use was phased out, with the oxygen requirement still in effect,

ethanol use would soar, increasing demand for corn. (In fact, according to EPA,

ethanol demand has grown substantially as MTBE has been be phased out as a result

of state bans and refinery decisions.) Conversely, if the oxygen requirement were

waived by EPA or through legislation, not only would MTBE use decline, but so,

likely, would demand for ethanol. Thus, some Members of Congress and governors

from corn-growing states took keen interest in MTBE legislation and related

oxygenate requirements.

One concern voiced by ethanol supporters over the elimination of the RFG

oxygen standard is that it had provided a major impetus for ethanol demand. To fill

a potential void in ethanol demand left by an elimination of the oxygen requirement,

there were legislative proposals to develop a renewable fuels standard (RFS). A

renewable fuel is one that can be produced from renewable resources, such as solar

energy, agriculture products, or waste material. In general, renewable fuels are those

produced from animal or vegetable matter. Ethanol is the most common renewable

fuel; approximately 3.9 billion gallons were produced in the United States in 2005.24

The next most common renewable fuel is biodiesel, a synthetic diesel fuel made from

23

Renewable Fuels Association, New Jersey Becomes 25th State to Ban MTBE, August 19,

2005.

24

Renewable Fuels Association, From Niche to Nation: Annual Industry Outlook 2006,

February 2006.

CRS-8

vegetable oils (mainly soy) or recycled grease; approximately 75 million gallons of

biodiesel were produced in 2005.25

As enacted, the Energy Policy Act of 2005 (P.L. 109-58) contains numerous

provisions relevant to MTBE and ethanol.26 Most notably, P.L. 109-58 repeals the

Clean Air Act requirement to use MTBE or other oxygenates. In place of this

requirement, the bill establishes an RFS. To prevent “backsliding” on air quality, the

bill requires that reductions in emissions of toxic substances achieved by RFG be

maintained; it also authorizes funds for MTBE cleanup.27

P.L. 109-58 established an RFS of 4.0 billion gallons in 2006, increasing yearly

to 7.5 billion gallons in 2012. Supporters argue that a renewable fuels standard will

foster agricultural production, promote domestic energy sources, and lead to cleaner

air. Critics argue that it will raise gasoline prices, artificially inflate demand for

ethanol, and add one more layer of requirements to an already complex gasoline

supply system. Further, some critics argue that a renewable mandate will result in

“corporate welfare” for a few large ethanol producers. Some critics question the net

energy saving from fuel ethanol, because the production of corn and ethanol requires

significant fossil fuel inputs.28

Issues in the Spring of 2006: MTBE Phase-Out and Ethanol Supply.

As a result of P.L. 109-58, the oxygen requirement for RFG was eliminated as of

May 6, 2006. The elimination of the oxygen standard was supported by various

states with MTBE contamination and by the refining industry as a way to simplify

gasoline supply. However, the oxygen requirement, which gasoline suppliers

asserted was a de facto MTBE requirement, has been used by gasoline suppliers as

a defense against liability for MTBE contamination.29 P.L. 109-58 did not ban

MTBE use; rather, it actually gives the industry more flexibility in making RFG with

or without oxygenates. But because of liability concerns, the industry moved quickly

to eliminate MTBE from the gasoline supply in spring 2006. This increased pressure

on already tight refining capacity, because higher grades of gasoline blendstock were

25

National Biodiesel Board, Estimated U.S. Biodiesel Production, May 2006.

26

For a more detailed discussion of MTBE and ethanol provisions in P.L. 109-58, see CRS

Report RL32865, Renewable Fuels and MTBE: A Comparison of Selected Provisions in the

Energy Policy Act of 2005 (H.R. 6), by Brent D. Yacobucci, Mary Tiemann, James E.

McCarthy, and Aaron M. Flynn.

27

Not included in the final version was a particularly controversial provision in an earlier

version of the bill, a “safe harbor” from product liability lawsuits for producers of MTBE,

ethanol, and other renewable fuels (product liability lawsuits have been used to force

petroleum and chemical companies to pay for cleanup of ground and surface water

contaminated by releases of fuels containing MTBE). A disagreement over the safe harbor

provision for MTBE is seen as one of the issues that led to the failure an energy bill in the

108th Congress.

28

For a more detailed discussion of the energy balance of corn ethanol, see CRS Report

RL33290, Fuel Ethanol: Background and Public Policy Issues, by Brent D. Yacobucci.

29

Petroleum Industry Research Foundation, Inc., Rising Gasoline Prices: Made in the USA,

May 2006.

CRS-9

required to make the transition away from MTBE-blended fuel. In 2005, U.S. MTBE

production was approximately 2 billion gallons, representing roughly 1.5% of U.S.

gasoline demand. The loss in volume and energy due to eliminating MTBE increased

demand for gasoline (refined from petroleum), crude oil for the production of

feedstocks, and ethanol.

In response to P.L. 109-58, in spring 2006, many refiners began producing

gasoline blendstock for ethanol-blended RFG.30 For use in RFG areas, ethanol

cannot be blended with conventional gasoline but requires a specific, low-volatility

gasoline blendstock. This blendstock, called Reformulated Blendstock for

Oxygenate Blending (RBOB), tends to be more difficult and costly to produce, and

it requires the use of more high-quality gasoline blending components. Further, a

sharp increase in demand for ethanol for gasoline blending strained ethanol supplies.

Also, during the transition from MTBE- to ethanol-blended gasoline, in many cases

refiners, terminals, and retailers had to halt operations to purge their tanks of the old

fuel.

A potential issue with the transition between RFG with and without the oxygen

requirement is one of timing. During the transition, some refiners had eliminated

MTBE-blended RFG before the May 6 transition to non-oxygenated RFG. However,

between the time they eliminated MTBE and May 6, RFG was still subject to the

oxygen standard. Therefore, some gasoline suppliers, who may in the future make

the transition to non-oxygenated RFG, needed to supply ethanol-blended RFG during

the transition. The ultimate demand for ethanol in RFG will depend on gasoline

refiners’ and suppliers’ decisions about whether to market ethanol-blended or nonoxygenated RFG.

Exacerbating the supply problem was the fact that the industry was making the

transition from winter gasoline to more stringent low-volatility summertime

specifications, which adds competition for the highest-quality gasoline components.

These pressures, along with historically high crude oil prices, have led to historically

high (nominal) gasoline prices. Further, some localized areas faced short-term

supply disruptions as refineries made the transition.

Renewable Fuels Standard. Some detractors of the RFS have claimed that

high gasoline prices in spring 2006 are partly due to the enactment of the RFS.

However, while the short-term increase in ethanol demand from the elimination of

the oxygenate standard has certainly played a role in the spring 2006 gasoline

situation (see above), the effects of the RFS on high gasoline prices are less evident.

For 2006, the RFS requires the use of 4.0 billion gallons in gasoline, roughly

equivalent to U.S. ethanol use in 2005. Therefore, while the increasing RFS could

put pressure on ethanol supplies and gasoline prices in coming years, it seems less

likely that the RFS has played a role in the current situation.31

30

Statement of A. Blakeman Early, American Lung Association, before the Senate

Committee on Environment and Public Works, March 29, 2006.

31

It should be noted that when gasoline prices are relatively high, ethanol prices tend to

track with gasoline prices (when taxes are factored in). Ethanol blended into gasoline is

(continued...)

CRS-10

Harmonizing Gasoline Standards

The multiple gasoline standards, along with the use of various fuel additives,

have led to supply incompatibility. Before 1990, the U.S. gasoline system was

relatively fungible. Product could be moved from one market to meet diminished

supply in another. Currently, gasoline used in one area may not necessarily meet the

standard of another. For example, in the summer, fuel produced for the Charlotte,

NC area cannot be used in Norfolk, VA (RFG), or Atlanta, GA (lower RVP and

sulfur cap). However, fuel from either Norfolk or Atlanta could be shipped to

Charlotte. In many cases, the system is essentially one-way, giving suppliers the

ability to move product from more stringent areas to less stringent areas, but not viceversa.

Adding to this problem is the fact that U.S. refiners and fuel pipelines are

currently operating at or near capacity, reducing the flexibility to produce and ship

a multiplicity of formulations, or respond to a change in local market needs. Any

supply disruption (caused by a refinery fire, pipeline rupture, or other incident) can

lead to price volatility, even with more fungible conventional gasoline. Adding

localized requirements creates an even more complex situation where excess supply

in one area may not be moved to the affected area because of emissions standards.

Because of the complex nature of various gasoline standards, there is interest

in harmonizing the standards. This would entail requiring one set of standards across

a region (or even across the country). Potential scenarios include requiring that

within an area, only one low RVP fuel could be used in addition to conventional

gasoline and RFG. In the above scenario with Norfolk, Charlotte, and Atlanta, while

Norfolk would still use RFG, the standards for Charlotte and Atlanta would be

identical. Another, more drastic, scenario would require that all fuel be conventional

gasoline or RFG. Some of the key issues involved in harmonization would be

production costs, consumer prices, production capacity, supply stability, and air

quality.

Production Cost. Depending on the way standards are harmonized,

production costs could increase.32 While fewer standards across the country would

seem to benefit refiners, it could create a need for expensive refinery modifications

to meet the harmonized standards. Because refiners made investments in tooling

their plants to meet the local requirements, changes could be costly. However, a less

drastic harmonization, where some of the low-RVP fuels are harmonized, but not

eliminated, could mitigate some of these difficulties.

31

(...continued)

subject to a 51-cent-per-gallon tax credit. Therefore, ethanol tends to sell for roughly 50

cents higher per gallon than conventional gasoline. For example, on March 30, regular

unleaded gasoline sold for approximately $2.00 per gallon wholesale, while ethanol spot

prices were $2.47 to $2.51, a difference of between 47 and 51 cents. Oil Intelligence Link,

“Key Spot Product Prices,” The Ethanol Monitor, April 3, 2006.

32

It should be noted that refinery production costs are only one factor among many that play

a role in determining pump prices.

CRS-11

Production Capacity. Most U.S. refiners are operating at or near capacity;

U.S. refiners have operated at or above 90% nominal capacity for over a decade.33

Limited production capacity can lead to higher prices, especially if there is a

disruption in production on in the flow of gasoline and gasoline inputs. It is possible

that harmonization could exacerbate this problem, depending on how it is

implemented. New standards could lead to higher or lower supply levels. For

example, very stringent volatility standards could require refiners to limit the use of

some gasoline components. The loss of volume from cutting back on these

components would require increased supply in the form of petroleum, ethanol, or

other blending components, some of which are imported.

Supply Stability. Presumably, a main goal of harmonization would be to

improve the fungibility of the system, reducing the possibility of supply and

distribution problems. Fewer standards make it more likely that product could be

moved from one area of the country to another to meet local needs. However, it must

be noted that supply disruptions can never be completely eliminated because there

are so many factors outside of fuel standards that play a role in supply. These include

levels of crude oil supply, petroleum imports, refining capacity, seasonal fluctuations

in demand, and weather patterns (which may influence demand for fuel).

Air Quality. A key concern in any discussion of harmonization is the effect on

air quality. Many of these “boutique fuels” standards were created specifically to

mitigate the unique air quality problems in a specific metropolitan area. The

standards were devised as part of a State Implementation Plan (SIP) for ozone. SIPs

are based on models showing that particular fuels requirements will lead to projected

reductions in pollutant emissions. More stringent requirements, while more costly,

lead to greater emissions reductions. Therefore, an effort has been made in the SIPs

to balance air quality goals with producer and consumer concerns about cost.

Any harmonization would necessitate that certain state fuels be chosen over

others. What must be resolved is the question of which standards should apply to all

states in a region. The most stringent? The least stringent? Some compromise

standard? Any standard less stringent than an SIP’s current standard would require

the state to identify other emissions reductions. Any standard more stringent than a

state’s current standard would likely lead to higher consumer prices.

State Fuel Requirements. In addition to the above concerns about

harmonization, other issues remain. One of these has to do with local marketing

decisions and state requirements unrelated to air quality. If these factors are not

addressed, the system could still remain quite complex. For example, Minnesota

requires the use of ethanol in gasoline across the state. Under harmonization, would

states be allowed to set such a standard, or would they be precluded?

33

U.S. Department of Energy, Energy Information Administration, Oil Market Basics.

Chart: U.S. Refining Capacity, Crude Runs, and Utilization Rate, 1973-2004.

[http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/

Ref_image_Crude_runs.htm]

CRS-12

The Energy Policy Act of 2005 and Harmonization

The Energy Policy Act of 2005 (P.L. 109-58) contained four key provisions

aimed at addressing boutique fuels issues.

!

First, as was stated above, Section 1504(a) eliminated the oxygen

standard for federal RFG. This standard was a key motivation for

the use of MTBE in gasoline.

!

Second, Section 1504(c) eliminated the distinction between

summertime RFG in northern and southern areas. Starting in May

2006, all RFG areas will use the more stringent southern RFG in

summer months.

!

Third, Section 1541(b) capped the number of state boutique fuels at

the number as of September 1, 2004. EPA must publish a list of

these fuels and may not approve a State Implementation Plan that

establishes a new state fuel, if that would increase the number of

fuels on EPA’s list. If a listed fuel is no longer used, it may be

delisted; EPA may then approve a new fuel to take its place on the

list.

!

Fourth, Section 1509 requires EPA to study the potential effects of

comprehensive harmonization of fuel standards across the country.

On May 4, 2006, EPA Administrator Stephen L. Johnson launched

a task force to study potential harmonization. EPA plans to submit

the report to the President in July 2006.34

In addition to the above provisions, Section 1501 established a renewable fuels

standard (RFS) that requires the use of 7.5 billion gallons of renewable fuel in

gasoline by 2012.

Administration Action on Harmonization

As part of the Bush Administration’s action on its National Energy Policy,35

EPA is currently studying the potential effects of harmonization. In a preliminary

report, EPA studied various scenarios and attempted to analyze the effects of those

scenarios. Recognizing that its study is the first step in a much longer process, EPA

found that depending on the scenario, standards could be harmonized without major

cost increases, increases in emissions, or reductions in gasoline supply. The study

states that even though some of the harmonized areas have not faced supply

disruptions in the past, harmonization could reduce the potential for future

34

EPA, EPA Administrator, Governors to Review Boutique Fuels, May 4, 2006.

[http://yosemite.epa.gov/opa/admpress.nsf/68b5f2d54f3eefd28525701500517fbf/8f5536

a5e3ba331f852571640071d496!OpenDocument]

35

National Energy Policy Development Group, National Energy Policy. May 2001. For a

detailed discussion of the National Energy Policy, see CRS Report RL31096, Bush Energy

Policy: Overview of Major Proposals and Legislative Action.

CRS-13

disruptions.36 More drastic measures, the study finds, would lead to a simplified

supply system, but might lead to higher prices and major reductions in gasoline

production capacity.

As was stated above, on May 4, 2006, EPA Administrator Stephen L. Johnson

announced a task force to study potential harmonization, and report to the President

in July 2006.

Congressional Action

The most notable congressional action on boutique fuels in the 109th Congress

was the passage of the Energy Policy Act of 2005 (P.L. 109-58). As stated above,

P.L. 109-58 eliminated the oxygen standard for RFG, eliminated the distinction

between northern and southern summertime RFG, limited the number of state

boutique fuels, required the study of fuel system harmonization, and established a

renewable fuels standard.

Other bills have been introduced in the 109th Congress addressing boutique fuels

from various angles. H.R. 3807 (Ney) would eliminate all boutique fuels, including

federal RFG and Oxyfuel, requiring the use of conventional gasoline across the

country. S. 1859 (Burr) would make some boutique fuels provisions of P.L. 109-58

more stringent. For example, the bill would not allow new fuels to be added to

EPA’s list of allowable state boutique fuels after a fuel is delisted. Language similar

to H.R. 1459 (Blunt) and H.R. 1493 (Blunt) on limiting state fuels and studying

comprehensive harmonization was included in P.L. 109-58. All of these bills have

been referred to committee.

Among other provisions, H.R. 3893 (Barton), the Gasoline for America’s

Security Act of 2005, would significantly limit the number of boutique fuels across

the country. Other than California, all states would be limited either to conventional

gasoline, federal RFG, or one of two low-RVP gasolines, in addition to two blends

of diesel fuel. H.R. 3893 passed the House October 7, 2005, on a 212-210 vote. It

has been referred to the Senate Committee on Energy and Natural Resources.

Conclusion

The current system of gasoline standards in the United States is complex. State

and local decisions overlap with federal requirements, leading to adjacent or nearby

areas that may have significantly different requirements. These various fuel

formulations can lead to shortages and price spikes if an area facing supply

disruptions cannot import fuel from another area. Adding to these complications is

the fact that MTBE use has largely been phased-out by states and refiners, and the

demand for blending components to replace MTBE has increased.

36

EPA, OTAQ, Staff White Paper. p. 47.

CRS-14

The competing goals of air quality, supply stability, and costs will make

harmonization a complex process. Even with regional or national standards, factors

such as local marketing decisions and the use of ethanol will complicate the system.

For these reasons, whether or not Congress passes additional fuels legislation, fuel

standards will continue to be a major issue.