Environmental regulations play a dominant role in the U.S. petroleum refining industry and will continue to do so, a factor that is dampening the remarkable recent surge in domestic crude oil production.  In describing the business outlook for the refining sector, the U.S. Government Accountability Office (GAO) found that five environmental regulations in particular are now decreasing or will decrease domestic consumption once they are in force.  The refining industry is adjusting to changes in demand in a number of ways, including increasing exports. 

Based on its review, the GAO made only one recommendation—that the EPA determine why it has been late in issuing its renewable fuel standards (RFS) since 2009 and take action to ensure that the RFS are promulgated according to the statutory schedule.

Historic production

U.S. crude oil production is in a renaissance period.  According to the Energy Information Administration (EIA), production has increased by over 55 percent through September 2013 compared to 2008.  Increases in 2012 and 2013 were the largest since the beginning of U.S. commercial crude oil production in 1859.  Much of the increase in crude oil production has been from shale and other formations, such as the Bakken in North Dakota and the Eagle Ford in Texas, according to EIA data.  Similarly, production in Canada—the largest foreign supplier of crude oil to the United States—has also increased significantly in recent years.

But the availability of more crude oil is not necessarily improving the lot of refiners.  For example, there are limits on how much of the new crudes the existing pipeline infrastructure can transport to refineries.   Also, some refineries are not equipped to refine the heavy Canadian product. 

Changes in consumption

But more significant is the changing pattern of U.S. consumption.  The GAO reports that domestic consumption of petroleum products declined by 11 percent from 2005 through 2012.  While the EIA recently reported a slight upswing in 2013, future consumption of petroleum products is uncertain, with projections ranging from stable to slightly increasing through 2020, but not returning to consumption levels of the past.  One response by refiners has been to increase exports.  The GAO notes refined oil exports grew from 7 percent of production in 2007 to 17 percent in 2012.

Five regulations

Much of downward pressure on petroleum consumption relates to major environmental regulations, says the GAO.  The following five regs were cited in the report:

• RFS.  Established in light of concerns such as climate change and the nation’s dependence on imported crude oil, the RFS provide that U.S. transportation fuels must contain certain percentages of renewable fuels.  Under federal law, volumes of renewable fuels were to increase over time, though the EPA determines requirements annually and may reduce percentages under certain circumstances.
• Corporate average fuel economy (CAFE) and GHG vehicle emissions standards.  In this coordinated program, the Department of Transportation (DOT) establishes fleetwide gas mileage or fuel economy standards, and the EPA establishes GHG emissions standards for vehicle manufacturers.
• Tier 3 motor vehicle emissions and fuel standards.  This EPA program for vehicles and transportation fuels is intended to reduce emissions of certain air pollutants.
• Stationary source GHG requirements.  EPA’s new requirements address GHG emissions at new refineries and refineries that undertake major modifications.
• Low carbon fuel standard (LCFS).  California’s recently implemented LCFS requires reductions to the amount of carbon in California’s transportation fuels.  California is the nation’s largest consumer of petroleum-based transportation fuels.  It also has the nation’s third largest refining capacity, after Texas and Louisiana.

The regulations are increasing costs to refiners now, but the GAO anticipates that those costs will become more burdensome in the future as the regulations become fully effective. 

EPA will investigate delays

Regarding the RFS, stakeholders informed the GAO that delays in issuing the RFS contribute to investment uncertainty and higher costs for refiners.  The EPA informed the GAO that it did not believe that delays affected market participants, and that the market for RFS credits has provided flexibility to refiners and other obligated parties.  But the GAO was concerned that the EPA has not identified the underlying causes of the delays and has not developed a plan to address them.  The EPA agreed that developing and implementing a plan to address the delays “may help to ensure that the annual RFS volume standards are issued on time.”

GAO report