OIL REFINING Consumers will pay for cleaner gas transition

Switching to cleaner-burning fuel will reduce gasoline supplies.
ASSOCIATED PRESS
The oil refining industry is keenly aware of how expensive it is to curb air pollution.
Consumers are about to find out.
A nationwide transition to cleaner gasoline that begins in 2004 is expected to cause modest supply constraints that could trigger sporadic price increases at the pump. So while refiners must spend billions to comply with the strict federal low-sulfur standards for gasoline and diesel, executives and analysts believe the upcoming switch -- lauded by environmentalists -- might actually boost industry profits.
"A significant portion of these costs may ultimately be passed along to the end consumers through higher prices," Brian Caviness, a Chicago-based analyst for Fitch Ratings, said in a recent report. Caviness said he expects "U.S. refiners to ultimately benefit from the increasingly stringent regulations as refined product supply is removed from the market."
How will that happen?
UA few small refineries that could not, or would not, pay for expensive upgrades have already shut down, and more closures are anticipated.
UGasoline imports, which have been growing in recent years, are expected to shrink somewhat once the new Environmental Protection Agency rules take effect, since foreign refiners will no longer be able to sell gasoline with high-sulfur content in the United States.
ULastly, just by removing sulfur from gasoline, refiners' production volume will slip by about 1 percent.
Taken together, these changes could disrupt supplies enough to create "spikes in prices, rather than customers not being able to get the product," said Christine Stackpole, an associate director at Cambridge Energy Research Associates in Cambridge, Mass.
Supply deficit
To be sure, there is no expectation of gasoline shortages or a prolonged run-up in prices once the low-sulfur rules go into effect.
Yet coupled with other industry trends, such as the emphasis on minimizing storage levels and the difficulty refiners already are having making summer-grade gasoline, executives and analysts say the shift will exacerbate existing supply tightness and price volatility.
Gene Edwards, senior vice president of supply and trading at San Antonio-based Valero Energy Corp., said the shift to cleaner fuel could result in a supply deficit of "a couple hundred thousand barrels per day next year." While roughly 9 million barrels a day of gasoline are consumed in the United States, Edwards noted "it's the last 100,000 barrels per day that sets the price."
Not everyone is as confident there will be a supply deficit. Some analysts believe regularly occurring refinery expansions will make up for supply lost to desulfurization, refinery shutdowns and reduced imports. Any remaining supply shortfall will be cured by market forces.
Environmental step
Cal Hodge, a former Valero executive who runs a Houston-based consultancy specializing in clean fuel issues, said the new low-sulfur rules are "not that big of a problem."
"If the prices get out of whack in one place, it won't be long until product starts coming in," he said.
Other analysts, meanwhile, are concerned about refiners' balance sheets as spending on new, low-sulfur equipment accelerates in the years ahead.
John Thieroff, a director at New York-based debt-rating agency Standard & amp; Poor's, said cost estimates for low-sulfur equipment have crept higher and that "the whole sector is coming off a very bad year" because high oil prices are squeezing profit margins.