EPA Grants Waiver to Ease Midwest Gasoline Shortages and Lower Prices

DATE: August 28, 2001

BACKGROUND: Citgo Petroleum Corporation announced today that a waiver had been granted by the U.S. Environmental Protection Agency (EPA) to sell a reformulated gasoline with relaxed volatile organic compound (VOC) standards in the Chicago and Milwaukee markets. This is to ease the supply shortages in the Midwest due to a mid-August fire at a Citgo refinery in Chicago which had led to increased gasoline prices there and in much of the upper Midwest. Citgo expects the refinery, which produced 163,000 barrels per day, to be closed for up to six months.

TEN SECOND RESPONSE: Our energy problems are not over. This shows just how fragile the system is - when one refinery goes down, the price of gasoline can rise rapidly. President Bush's energy plan addresses just such problems.

THIRTY SECOND RESPONSE: The loss of just one refinery in Chicago can lower the supply of gasoline in the area enough to drive up the price by 30 cents or more per gallon. The Bush Administration's energy plan addresses the need for additional refining capacity and simplifying the restrictions on building new plants -- essential for our families to have affordable supplies of gasoline.

DISCUSSION: Wholesale prices of gasoline in the upper Midwest are now about 35 cents higher than they were August 1. While nationwide gasoline prices average about $1.48 per gallon, according to the Energy Information Administration (EIA), the price in Chicago has risen to between $1.80 and $1.89 per gallon and in Milwaukee to $1.73-$1.79. EIA reports that gasoline inventories continued a seven week decline while demand is up as the Labor Day weekend approaches.

The higher standard for VOC ends on September 15, at which time the winter formula for gasoline goes into effect. This means that the waiver will only apply for approximately two weeks.

According to EIA, half of the refineries in the U.S. have closed since 1981 (down from 324 to 152) and no new ones have been built in the last 20 years. A lengthy environmental permitting process is required under EPA's interpretation of the Clean Air Act to build new refineries or maintain current ones, and the rules guiding such work - called New Source Review (NSR) - have constantly changed. Lack of additional new facilities means refineries are running at about 93 percent capacity, which allows little room for maintenance or accidents. The Bush administration has asked EPA, which enforces NSR, to examine how to make the rules simpler.

"Boutique fuels" also make it more difficult to supply one region with gasoline from another region. EPA mandates reformulated gasoline for summertime use in cities whose air quality is out of compliance with standards. However, state laws dictate which fuel additives are used. That means that the Chicago-Milwaukee area requires a different blend than St. Louis. When shortages occur, as they did recently, gasoline from St. Louis can't be shipped to Chicago to offset reduced supplies. Currently, about 14 different blends of gasoline are required to meet Clean Air Act mandates.

by Gretchen Randall, Director
John P. McGovern, MD Center for Environmental and Regulatory Affairs
The National Center for Public Policy Research

Contact the author at: 773-857-5086 or GRandall@nationalcenter.org
The National Center for Public Policy Research
Chicago office
3712 North Broadway - PMB 279
Chicago, IL 60613