Embargoed Until 10 AM June 14, 2012

Economic Analysis of the Implications of 

Implementing EPA’s Tier 3 Rules

Prepared for the

Emissions Control Technology Association (ECTA)

by

George R. Schink, Ph.D.

Hal J. Singer, Ph.D.1

Navigant Economics

1200 19th Street, N.W., Suite 850

Washington, D.C. 20036

June 14, 2012

 

1 The authors are Managing Directors at Navigant Economics. The views expressed here are those of the authors 

only, and do not represent the views of their employers.
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TABLE OF CONTENTS

Section Page

Executive Summary.......................................................................................................................ii

I. Introduction and Overview........................................................................................................... 1

II. Summary of Conclusions............................................................................................................... 2

III. Cost to the U.S. Refining Industry of Implementing Tier 3 Rules ............................................ 5

A. Background and Overview .................................................................................................5

B. Evaluation of the MathPro and Baker & O’Brien Studies..................................................7

1. The Differences in the Baker & O’Brien and MathPro Modeling 

Approaches................................................................................................................ 7

2. The Differences in the Baker & O’Brien and MathPro Assumptions....................... 9

3. The Potential Effect on Retail Gasoline Prices if U.S. Refiners Can 

Pass on the Cost of Compliance to Consumers....................................................... 12

4. Other Estimates of Tier 3 Compliance Costs.......................................................... 13

5. Conclusions Regarding the U.S. Refiners’ Compliance Cost to 

Accomplish the Tier 3 Gasoline Sulfur Content Reduction.................................... 14

C. API and Baker & O’Brien Have A History of Overstating the Costs and Impacts of EPA 

Motor Fuel Sulfur Content Regulations............................................................................14

IV. Analysis of the Potential Effects of EPA Gasoline Sulfur Content Regulations on 

U.S. Retail Gasoline Prices.......................................................................................................... 17

A. The Factors that Determine the Retail Price of Gasoline..................................................17

B. The Recent Increase in Crude Oil Prices Explains Current High U.S. Retail Gasoline 

Prices.................................................................................................................................17

C. Using Multiple Regression Analysis to Determine Whether the EPA’s Proposed Gasoline 

Sulfur Reduction Program Compliance Costs Are Likely to Be Passed on to Consumers

..........................................................................................................................................19

V. Benefits of Implementing the EPA’s Planned Tier 3 Gasoline Sulfur Reduction 

Program ........................................................................................................................................ 23

A. Health Benefits Are Substantial........................................................................................23

B. Economic Benefits Are Substantial ..................................................................................25

VI. Conclusions................................................................................................................................... 27
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Executive Summary: Economic Analysis of the

Implications of Implementing the EPA’s Tier 3 Rules

We performed an economic analysis of the implications of the EPA’s proposed Tier 3 regulation, 

which would require oil refiners to reduce the average sulfur content in gasoline from 30 parts per million 

(ppm) to 10 ppm. Naturally, the oil refineries are resistant to any regulation that increases their private 

costs, but as we demonstrate, the societal economic benefits associated with Tier 3 are much larger than 

the private costs. 

Our study is not the first to examine the costs of Tier 3: The others we evaluated are a Baker and 

O’Brien (“B&O”) study, sponsored by the American Petroleum Institute (“API”), and a MathPro study, 

sponsored by the International Council on Clean Transportation. Our study reaches four major 

conclusions.

 The B&O study exaggerates the costs of Tier 3 to the refining industry by a factor of 2 to 1.

B&O estimates that the sulfur reduction requirement of Tier 3 will increase the marginal cost of 

refining by 6 to 9 cents per gallon. This estimated increase in marginal costs corresponds to an average 

cost increase of about two cents per gallon. By comparison, the MathPro study estimates that the sulfur 

reduction requirement of Tier 3 could increase the average cost of refining by about one cent per gallon.

B&O’s cost estimate is substantially higher than MathPro’s because of B&O’s assumptions 

regarding the annualized capital and operating costs refiners would incur to satisfy the Tier 3 sulfur 

standards. In particular, B&O estimates that refiners would incur $2.4 billion per year whereas MathPro 

estimates costs of $1.5 billion per year. We find that the difference in B&O’s and MathPro’s estimates is 

primarily due to different capital cost assumptions. B&O’s capital cost assumptions are higher than the 

range of cost estimates obtained in interviews of experts at companies who sell and install desulfurization 

equipment to refiners. For example, B&O’s cost assumption for naptha desulfurization (direct 

desulfurization of the gasoline) is 257 percent higher than the experts’ estimates. Differences in the 

refinery model methodologies used in the two studies does not account for the difference in their cost 

estimates.

B&O has a history of exaggerating the negative effects of EPA’s sulfur reduction requirements on 

the refining industry. As part of the 2007 on-road heavy-duty diesel rule (“2007 HDD Rule”), EPA 

adopted a requirement to reduce the sulfur content of diesel fuel from an average of 500 ppm to 15 ppm. 

B&O prepared an analysis for API concluding that the 2007 HDD Rule would force refinery closures, 

substantially reduce the supply of diesel fuel, and make the United States a net importer of diesel fuel. 

B&O’s predictions were wrong, as diesel fuel production increased sharply and exports surged after the 
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rule was adopted. For example, 2010 production was one million barrels per day higher than B&O 

projected, and in 2010, the United States generated net exports of 458,000 barrels per day compared to a 

deficit projected by B&O.

Given B&O’s inflated capital cost assumptions for Tier 3, and given B&O’s history of 

exaggerating the negative impact of EPA’s regulations, the impact of Tier 3 on the average cost of 

refining is likely closer to about one-cent-per-gallon estimates by MathPro and EPA, rather than to the 

about two-cents-per-gallon estimate by B&O.

 It is very unlikely that Tier 3 will increase the retail price of gasoline.

B&O estimates that Tier 3 will increase the marginal cost of refining by 6 to 9 cents per gallon, 

implying that retail gas prices will rise by the same amount. If gas prices increase by 6 to 9 cents per 

gallon, and if the average cost of refining increases by 1.9 cents per gallon as implied by the B&O study, 

then the refining industry would actually make a profit on Tier 3. Because refiners would not oppose 

regulation that increased their profits, it follows that their cost estimates are likely wrong.

According to the Energy Department, refining costs account for 16 percent of the retail price of 

gasoline and the cost of crude accounts for 67 percent. Regression analysis shows that Tier 2 regulations, 

which required a reduction in the average sulfur content of gasoline from 300 ppm to 30 ppm, had no 

material impact on the retail price of gasoline. The regression analysis took into account several factors 

identified in an FTC study that were expected to influence the retail price of gasoline. These factors 

include the cost of crude oil, refinery margins, the 2005 hurricanes, the 2006-07 transition to ethanol, and 

the 2008 global recession. Our model explains more than 99 percent of the variation in retail gasoline 

prices. The price of crude oil was the most significant determinant of the retail price of gasoline, and 

refining margin was a distant second in importance. Importantly, Tier 2 had no statistically significant 

impact on the retail price of gasoline.

The EPA estimated that Tier 2 would increase the average cost of refining gasoline by about two 

cents per gallon, and that Tier 3 will increase the average cost of refining gasoline by one cent per gallon. 

Because Tier 2 had no material impact on the retail price of gasoline, it is unlikely Tier 3—projected to 

generate private costs half the size of those generated by Tier 2—will have any impact either.

 Tier 3 will likely generate substantial health benefits.

Nitrogen oxide (NOx) emissions increase ozone concentrations, which cause respiratory illness 

such as asthma, pulmonary disease, and other illnesses. Tier 3 will reduce NOx emissions by 25 percent, 

thereby generating substantial health benefits. By 2020, Tier 3 is expected to generate $5.2 to $5.9 billion 

per year in health benefits (valued in 2006 dollars). By 2030, Tier 3 is expected to generate health benefits 
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of $10.1 to $10.8 billion annually (valued in 2006 dollars). These health benefits alone are much larger 

than the estimated increase in annual refining costs of about $1.5 billion.

 Tier 3 will likely generate substantial economic value added and jobs.

Tier 3 will require the installation of refinery upgrades that will cost nearly $4 billion over three 

years, with recurring annual operating costs of $0.5 billion. Using an input-output model, we calculate 

that the nationwide value added, employee compensation, and employment effects of installing and 

operating the refinery upgrades needed to comply with the Tier 3 gasoline sulfur content standards. 

According to our estimates, installation of the refinery modifications produces almost 24,500 jobs for 

full-time equivalent employees with total associated employee compensation of $1.2 billion for each of 

the three years of installation. The continuing annual operation of the refinery modifications produces 

almost 5,300 jobs for full time equivalent employees with total associated employee compensation of 

$0.3 billion.
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Economic Analysis of the Implications of 

Implementing the EPA’s Tier 3 Rules

I. Introduction and Overview

Navigant Economics has analyzed the estimated costs to U.S. refiners of complying with the 

planned EPA Tier 3 gasoline sulfur content reduction from 30 parts per million (ppm) to 10 ppm which is 

slated to occur, at the earliest, in 2017. We also have analyzed the likely effects of these sulfur content 

reductions on U.S. refiners’ costs and on U.S. retail gasoline prices. Finally, we have estimated the likely 

health and economic benefits that would be generated as a consequence of reducing the sulfur content of 

gasoline from 30 ppm to 10 ppm.

Two recent studies have estimated the cost to the U.S. refining industry of implementing the 

planned EPA Tier 3 gasoline sulfur content reductions. First, the International Council on Clean 

Transportation has sponsored a study by MathPro Inc. that estimated the potential costs of reducing the 

sulfur content of motor gasoline to 10 ppm.1 MathPro calculated that the average cost of reducing the 

sulfur content of gasoline to 10 ppm would be 0.8 cents to 1.4 cents per gallon.2 Second, the American 

Petroleum Institute (“API”) has sponsored a study by Baker & O’Brien, Inc. that estimated the potential 

supply and cost impacts of producing lower sulfur gasoline.3 Baker & O’Brien stated that reducing the 

sulfur content of gasoline to 10 parts per million (“ppm”) would impose a marginal cost to the U.S. 

refining industry of six to nine cent per gallon.4 This result implies that the U.S. refinery with the highest 

cost of compliance with Tier 3 would experience a gasoline production cost increase of six to nine cents 

per gallon. While Baker & O’Brien do not report an estimate of the average U.S. refiner cost of reducing 

the sulfur content of gasoline to 10 ppm, it can be calculated from the information Baker & O’Brien 

provide and is 1.9 cents per gallon.5 Further, Baker & O’Brien do not anticipate any refinery shutdowns 

 

1

See MathPro, Inc., Refining Economics of A Natural Low Sulfur, Low RVP Gasoline Standard, prepared for The 

International Council on Clean Transportation, October 25, 2011 (hereinafter “MathPro Study”).

2

See MathPro Study, p. 4.

3

See Baker & O’Brien, Inc. Potential Supply and Cost Impacts of Lower Sulfur, Lower RVP Gasoline, prepared 

for the American Petroleum Institute, July 2011 (hereinafter “Baker & O’Brien 2011 Study”), and The Baker & 

O’Brien, Inc., Addendum to Potential Supply and Cost Impacts of Lower Sulfur, Lower RVP Gasoline, Prepared 

for the American Petroleum Institute, March 2012 (hereinafter “Baker & O’Brien 2012 Study”).

4

See Baker & O’Brien 2012 Study, page 12.

5 Baker & O’Brien base their analysis on an assumption that U.S. refiners annually produce 8.152 million barrels 

per day of hydrocarbon and ethanol gasoline. See Baker & O’Brien 2012 Study, Table 5. This volume equals 

124.521 billion gallons per year. Baker & O’Brien’s total annual cost of reducing the sulfur content of gasoline 

produced by U.S. refiners to 10 ppm is $2.390 billion. See Baker & O’Brien 2012 Study, page 9. Dividing this 
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as a consequence of implementing the Tier 3 standards (i.e., the Baker & O’Brien analysis indicates that 

all U.S. refineries would find it cost-effective to make the investments necessary to comply with these 

standards and that the capital required to make these investments will be available).6 

Regarding other estimates of the cost of implementing Tier 3 standards, in a letter to 

Congressman Ed Whitfield dated February 27, 2012, the EPA stated that its estimate of reducing the 

sulfur content of gasoline to 10 ppm was about one cent per gallon, which is consistent with the MathPro 

estimates. Also, in her Opening Statement before the Subcommittee on Energy and Power of the 

Committee on Energy and Commerce, EPA Assistant Administrator Gina McCarthy stated that “we 

estimate the impact on fuel costs [of Tier 3 gasoline sulfur reduction] to be less than one penny per gallon 

when the program goes into effect in 2017 or later.”7 

We analyze the MathPro and Baker & O’Brien estimates of the U.S. refiners’ average cost of 

compliance with the planned EPA Tier 3 gasoline sulfur-reduction program to identify the source of the 

difference between two cost estimates. We also assess the reasonableness of the competing cost estimates. 

In addition, we evaluate the appropriateness of the methodological (modeling) approaches employed by 

MathPro and Baker & O’Brien and the reliability and relevance of Baker & O’Brien’s marginal cost of 

compliance estimates.

The next issue we evaluate is whether and to what extent the U.S. refiners’ Tier 3 compliance 

costs would be fully passed through to consumers in the form of higher U.S. retail gasoline prices. The 

analysis of this issue involves identifying the market factors that determine U.S. retail gasoline prices, 

and, on the basis of this determination, use multiple regression analysis to estimate the likelihood that the 

compliance costs would be passed on to consumers. Finally, the expected health and economic benefits 

that would occur as a consequence of implementing the planned EPA Tier 3 gasoline sulfur reduction 

program are estimated.

II. Summary of Conclusions

MathPro’s and Baker & O’Brien’s estimates of the average Tier 3 compliance cost for U.S. 

refineries are about one cent per gallon and about two cents per gallon, respectively. The roughly one 

 

total annual cost by 124,521 billion gallons results in a per gallon cost of $0.019 per gallon or 1.9 cents per 

gallon.

6 Baker & O’Brien 2012 Study, pp. 4-5 and Figure 2 on p. 5. See also Baker & O’Brien 2011 Study, pp. 36-37 

and 40-41.

7 Opening Statement of Gina McCarthy, Assistant Administrator, Office of Air and Radiation, U.S. 

Environmental Protection Agency, Hearing on Gasoline Regulations Act of 2012, Subcommittee on Energy and 

Power, Committee on Energy and Commerce, U.S. House of Representatives, March 28, 2012, p. 5.
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cent per gallon difference in the two estimates is due almost entirely to the difference between MathPro’s 

and Baker & O’Brien’s estimates of the U.S. refiners’ compliance-related investment costs. Interviews 

with companies engaged in implementing the refinery upgrades required to reduce the sulfur content of 

gasoline confirm that the MathPro estimates are in the reasonable range and that Baker & O’Brien’s 

estimates are not. On balance, the Baker & O’Brien estimates are too high. When the Baker & O’Brien 

U.S. refiner compliance-related investment costs are adjusted to be within the reasonable range, the 

MathPro and Baker & O’Brien total costs of compliance are virtually identical (i.e., in the vicinity of one 

cent per gallon).

Baker & O’Brien and the API have claimed that the Baker & O’Brien methodology (modeling 

approach) is superior to that of MathPro. In fact, both methodological approaches have their pluses and 

minuses with neither being clearly superior to the other. However, the differences in the methodologies 

employed by MathPro and Baker & O’Brien are not the source of the differences in their estimates of the 

average cost of the U.S. refiners’ compliance with Tier 3.

Baker & O’Brien and API both emphasize Baker & O’Brien’s estimate of the marginal cost of the 

U.S. refiners’ compliance with Tier 3. This marginal compliance cost is the highest cost of compliance 

across all U.S. refineries (i.e., the compliance cost for the U.S. refinery that can least efficiently attain 

compliance). Because of several deficiencies, the marginal cost estimates produced by Baker & O’Brien 

are biased upward and not reliable. The Baker & O’Brien deficiencies include a lack of quality data for 

the individual U.S. refiners and Baker & O’Brien’s failure to take into account averaging and trading of 

sulfur content credits that the EPA allows. Averaging and trading is a well-established market 

mechanism to provide the refining industry with the means to meet the lower sulfur content standards

efficiently. Averaging and trading allows refiners to offset gasoline with an average sulfur content above 

10 ppm with gasoline produced by other refiners that has an average sulfur content below 10 ppm. 

Because averaging and trading reduces the average cost of compliance, the U.S. refining industry’s 

marginal compliance cost is reduced towards its average compliance cost.8 Although these deficiencies in 

the Baker & O’Brien Study are not as significant as Baker & O’Brian’s capital cost errors, these

deficiencies still result in at least a small upward bias in Baker & O’Brien’s average cost of compliance 

estimates.

 

8 This result has been demonstrated in the context of carbon cap and trade. For example, see Environmental 

Economics: Carbon Tax vs. Cap and Trade, http://www.env-econ.net/carbon_tax_vs_capandtrade.html; see 

also Alfred Endres, Environmental Economics: Theory and Policy, Cambridge University Press, Rev. Exp. 

Edition, December 6, 2010, pp. 110-129 and 239-246.
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The recent sharp increases in U.S. retail gasoline prices are a major economic concern. However, 

these gasoline price increases have nothing to do with the EPA’s planned Tier 3 reductions in the sulfur 

content of gasoline in 2017 or later. The recent sharp increases in global crude oil prices account for the 

entire recent increase in U.S. retail gasoline prices.

The implementation in 2017 or later of the planned EPA Tier 3 gasoline sulfur content reductions 

would not necessarily result in any increase in U.S. retail gasoline prices. The effect of an increase in 

U.S. refining costs due to the reduction in the sulfur content of gasoline will be through the effect of this 

increase on the costs of the marginal supplier of motor gasoline which need not be a U.S. refiner (i.e., it 

could be a supplier located outside the U.S.). The API and Baker & O’Brien focus on the marginal cost 

of compliance with Tier 3. There is no basis for assuming that the refinery with the highest cost of 

compliance will be the marginal supplier of gasoline. Therefore, even if one had a reliable estimate of the 

marginal cost of compliance, which Baker & O’Brien do not provide, one could not then assume that this 

marginal cost of compliance would result in an equal increase in the marginal cost of supply of motor 

gasoline. As a consequence, API’s and Baker & O’Brien’s inference that the retail price of gasoline 

would be expected to increase by the marginal cost of compliance has no basis.

Moreover, if the API actually believed that the Baker and O'Brien marginal cost estimates were 

correct and that refiners would be able to pass these marginal costs on to consumers in the form of higher 

gasoline prices (as implied by Baker & O'Brien and API), then refiners would make a profit from Tier 3 

by selling gasoline for six cents to nine cents per gallon more while incurring only a 1.9 cents per gallon 

average increase in costs. Given that the API is opposing Tier 3, it appears that it doesn’t believe that the 

marginal compliance costs can be passed on to consumers and/or it doesn’t believe that these marginal 

costs of compliance are substantially above the average cost of compliance. 

Further, the likely average increase in U.S. refining costs is expected to be in the vicinity of one 

cent per gallon so any increase that might occur would be small. There is no certainty that even the small 

increase in average U.S. refining costs associated with reducing the sulfur content of gasoline to 10 ppm 

would be passed on to consumers. The U.S. retail price of gasoline is determined by many factors with 

the global price of crude oil being by far the most important. U.S. refiners’ margins are an important 

determinant of U.S. retail gasoline prices, and these margins reflect overall refined petroleum product 

supply and demand conditions. Therefore, it is impossible to say with any certainty whether retail 

gasoline prices would go up after the EPA Tier 3 gasoline sulfur content reductions are implemented in 

2017 or later. 

To assess the likelihood that the expected one-cent-per-gallon average increase in U.S. refiners’ 

costs associated with Tier 3 compliance would be passed through to consumers, we used a multiple 
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regression analysis to test whether the increased costs to U.S. refiners of implementing the EPA’s Tier 2 

gasoline sulfur content reduction from 300 ppm to 30 ppm were passed on to consumers in the form of 

higher U.S. retail gasoline prices. The Tier 2 sulfur reduction program increased U.S. refiners’ costs by 

about two cents per gallon or about double the estimated cost of the Tier 3 gasoline sulfur content 

reduction. The multiple regression analysis found that the Tier 2 costs were not passed on to consumers 

in the form of higher U.S. retail gasoline prices. This result suggests that it is highly unlikely that the Tier 

3 costs would be passed on to consumers in the form of higher U.S. retail gasoline prices.

The health benefits generated by implementing the planned EPA Tier 3 gasoline sulfur content 

reduction are substantial. By 2020, the estimated health benefits are between $5 and $6 billion (in 2006 

dollars) and, by 2030, are between $10 and $11 billion (in 2006 dollars). These health benefits alone 

dwarf the MathPro estimates of the average annual in U.S. refiner costs of $1.5 billion. In addition, there 

are economic benefits stemming from having a healthier more productive workforce, from the Tier 3 

compliance-related implementation investments and ongoing annual operating outlays, and from the 

emission control and auto industry outlays for the development and implementation of Tier 3 motor 

vehicle technology. We have quantified the economic benefits from the U.S. refining industry’s Tier 3 

compliance-related investment and ongoing annual operating outlays. Making the investments needed to 

reduce the sulfur content of gasoline adds $6.1 billion to U.S. gross domestic product (value added) over 

the three-year investment period. The ongoing annual operation of these refinery modifications supports 

almost 5,300 domestic jobs each year.

III. Cost to the U.S. Refining Industry of Implementing Tier 3 Rules

A. Background and Overview

In February 2012, the EPA announced that its Tier 3 rules would involve only a reduction in the 

sulfur content of gasoline and would not include a reduction in gasoline vapor pressure (“RVP”).9 With 

respect to gasoline sulfur content, the EPA is expected to reduce the allowable sulfur content of gasoline 

from 30 parts per million (“ppm”) to 10 ppm. Two recent studies have estimated the cost of the EPA 

mandated sulfur reduction to the U.S. refining industry. The first, sponsored by the International Council 

 

9 EPA Administrator Lisa Jackson made this clear when she appeared before the House Energy and Commerce 

Committee on February 28, 2012. EPA Assistant Administrator Gina McCarthy reiterated this limitation in her 

written opening statement when she testified before the Subcommittee on Energy and Power, Committee on 

Energy and Commerce on March 28, 2012. Ms. McCarthy stated: “The only fuel requirement we are 

considering for Tier 3 is one that would lower the amount of sulfur in gasoline, which is necessary to operate 

the pollution control equipment to achieve new Tier 3 vehicle standards. To be clear, the Agency is not 

considering addressing issues associated with Reid vapor pressure in any Tier 3 proposal that eventually is 

released.”
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on Clean Transportation, was prepared by MathPro Inc. (hereinafter “MathPro Study”).10 The MathPro 

Study considered the costs of reducing the sulfur content of gasoline on a standalone basis and of jointly 

reducing the sulfur content and RVP of gasoline. The second, sponsored by the American Petroleum 

Institute (“API”), was prepared by Baker & O’Brien, Inc. (hereinafter “Baker & O’Brien Study”).11 

When it was first released in July 2011, the Baker & O’Brien Study estimated the cost to U.S. refiners of 

jointly reducing the sulfur content and RVP of gasoline. In an addendum released in March 2012, the 

Baker & O’Brien Study was expanded to include an estimate of the cost to U.S. refiners of reducing the 

sulfur content of gasoline on a standalone basis.

The analyses underlying the MathPro and Baker & O’Brien studies are conceptually similar. As 

demonstrated below, the cost estimates in the two studies differ almost entirely because of the differences 

in their estimated capital costs of upgrading U.S. refineries to produce the lower sulfur gasoline. The 

MathPro Study’s capital cost estimates imply an increase in the U.S. refiners’ average gasoline production 

cost of about one cent per gallon, whereas the comparable estimate in the Baker & O’Brien Study is about 

two cents per gallon. 

However, the Baker & O’Brien Study and its sponsor, API, have not presented the two cents per 

gallon average cost increase estimate; instead, they presented an estimated marginal cost of production 

increase of six to nine cents per gallon. The Baker & O’Brien Study’s estimate of the marginal cost 

increase is not reliable and biased upward because it does not take into account the averaging and trading 

allowed under the EPA rules. Averaging and trading allows some refiners with a high cost of compliance 

to offset some gasoline with a sulfur content above 10 ppm with gasoline produced by other refiners with 

a low cost of compliance that has a sulfur content below 10 ppm. Averaging and trading reduces the 

average refiners’ cost of compliance, and reduces the refiners’ marginal cost of compliance towards their

average cost.12

 

10 MathPro, Refining Economics of a National Low Sulfur, Low RVP Gasoline Standard, October 25, 2011.

11 Baker & O’Brien, Potential Supply and Cost Impacts of Lower Sulfur, Lower RVP Gasoline, July 2011 

(hereinafter “Baker & O’Brien 2011 Study”); and Baker & O’Brien, Addendum to Potential Supply and Cost 

Impacts of Lower Sulfur, Lower RVP Gasoline, March 2012 (hereinafter “Baker & O’Brien 2012 Study”).

12 This result has been demonstrated in the context of carbon cap and trade. For example, see Environmental 

Economics: Carbon Tax vs. Cap and Trade, http://www.env-econ.net/carbon_tax_vs_capandtrade.html; see 

also Alfred Endres, Environmental Economics: Theory and Policy, Cambridge University Press, Rev. Exp. 

Edition, December 6, 2010, pp. 110-129 and 239-246.
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B. Evaluation of the MathPro and Baker & O’Brien Studies

The API claims that Baker & O’Brien’s modeling approach is superior to that of MathPro.13 

Whereas Baker & O’Brien model costs on a highly disaggregated refinery-by-refinery basis, MathPro’s 

model relies on aggregated data from the Petroleum Administration for Defense District (“PADD”). As 

we explain below, the more disaggregated Baker & O’Brien approach cannot be presumed to produce 

more reliable results. Further, our subsequent evaluation of the assumptions underlying the two studies 

reveals that the difference in the estimates of the average refining cost increase can be explained almost 

entirely by differences between the capital cost assumptions in the two studies (i.e., the difference in the 

structures of the two models is not the source of the different results). Finally, the implications of the 

Baker & O’Brien Study’s not taking averaging and trading into account are evaluated.

1. The Differences in the Baker & O’Brien and MathPro Modeling 

Approaches

The API claims that Baker & O’Brien’s modeling approach is better because its U.S. refinery 

model identifies every U.S. refinery, whereas MathPro’s U.S. refinery model combines all refineries 

within a PADD.14 This claim rests on the assumption that the quality of data available at the individual 

refinery level is the same as (or better than) it is at the PADD level. For at least two reasons, however, the 

quality of data available at the PADD level is much higher. First, the owners of the individual refineries 

do not disclose detailed information on their individual refinery crude input slates or refined product 

production slates (i.e., the mix of refined products produced -- e.g., the amounts of gasoline, diesel fuel, 

jet fuel, etc). Second, the details of each refinery’s operating characteristics are not disclosed, and these 

characteristics cannot be inferred by analyzing their crude input and refined product output slates because 

data on these slates are not available. 

In contrast, public data on crude input and refined product output slates are available at the 

PADD level, which permit inferences about the characteristics of the average refinery in the PADD. 

These inferences may be used to adjust the refinery model to produce the actual refined product output 

 

13 API, Tier 3 Gasoline Rulemaking, March 2012, which was released with the March 2012 addendum to the 

Baker & O’Brien Study; API Critique of the AAM October 6, 2011 Letter to Lisa Jackson and AAM White 

Paper, November 11, 2011, http://www.api.org/~/media/Files/Policy/Alternatives/API-Critique-of-AAM-SProposal-Detailed-Comments.ashx.

14 API, Tier 3 Gasoline Rulemaking, March 2012, which was released with the March 2012 addendum to the 

Baker & O’Brien Study; see also API Critique of the AAM October 6, 2011 Letter to Lisa Jackson and AAM 

White Paper, November 11, 2011, http://www.api.org/~/media/Files/Policy/Alternatives/API-Critique-ofAAM-S-Proposal-Detailed-Comments.ashx.
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8

slate of the PADD.

15

 Given the lack of individual refinery crude input and refined product output slate 

data, Baker & O’Brien cannot adjust the individual refinery models to reflect actual operating conditions. 

Accordingly, when estimating the average refinery cost impact of reducing the sulfur content of gasoline 

from 30 ppm to 10 ppm, there is no basis for claiming that the Baker & O’Brien refinery modeling 

approach is superior. 

Moreover, the lack of detailed information and data for the individual refineries included in the 

Baker & O’Brien model makes Baker & O’Brien’s calculations of the marginal cost of reducing the sulfur 

content unreliable. This marginal cost is the highest cost per gallon cost incurred by any refinery to 

reduce the sulfur content from 30 ppm to 10 ppm. To be at all accurate, this estimate requires detailed 

data about each refinery, which are not available. 

API also claims that MathPro’s modeling approach leads to “over-optimization,” which, in turn,

understates costs.16 By over-optimization, the API means that the MathPro approach presumes that the 

actual averaging and trading process does not function as effectively and efficiently as the MathPro model 

implies. MathPro’s modeling approach is consistent with an active and highly efficient averaging and 

trading process (e.g., refiners that face high compliance costs will trade sulfur credits with other refiners 

that have low compliance costs).17 In contrast, Baker & O’Brien’s modeling approach does not take into 

account averaging and trading, and thereby implicitly assumes that averaging and trading do not occur. 

MathPro’s approach more closely conforms with the averaging and trading experience under the Tier 2 

gasoline sulfur reduction process.18 Further, Baker & O’Brien’s failure to properly account for averaging 

and trading biases its marginal cost estimate upward. A highly active and efficient averaging and trading 

process will reduce the marginal cost towards the average cost as well as reducing the average cost.

19

 

15 See MathPro Study, pp. 7-8.

16 API, Tier 3 Gasoline Rulemaking, March 2012, which was released with a March 2012 addendum to the Baker 

& O’Brien Study; see also API Critique of the AAM October 6, 2011 Letter to Lisa Jackson and AAM White 

Paper, November 11, 2011, http://www.api.org/~/media/Files/Policy/Alternatives/API-Critique-of-AAM-SProposal-Detailed-Comments.ashx.

17 Opening Statement of Gina McCarthy, Assistant Administrator, Office of Air and Radiation, U.S. 

Environmental Protection Agency, Hearing on Gasoline Regulations Act of 2012, Subcommittee on Energy and 

Power, Committee on Energy and Commerce, U.S. House of Representatives, March 28, 2012, p. 5.

18 In her oral testimony on March 28, 2012, before the Subcommittee on Energy and Power of the Committee on 

Energy and Commerce, EPA Assistant Administrator Gina McCarthy testified that the established sulfur 

averaging and trading program developed when the Tier 2 gasoline sulfur reductions were implemented would 

continue to operate under Tier 3. See also EPA Document, Gasoline Sulfur Averaging, Banking, & Trading 

(ABT), www.epa.gov/tier2/frm/abt.pps .

19 This result has been demonstrated in the context of carbon cap and trade. For example, see Environmental 

Economics: Carbon Tax vs. Cap and Trade, http://www.env-econ.net/carbon_tax_vs_capandtrade.html, see 
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9

2. The Differences in the Baker & O’Brien and MathPro Assumptions 

Table 1 compares MathPro’s and Baker & O’Brien’s estimates of the annual total refining 

compliance cost for reducing the sulfur content of gasoline from 30 ppm to 10 ppm. Baker & O’Brien’s

total cost estimate is $0.859 billion higher than the MathPro estimate. About 80 percent of this difference 

is due to the difference between Baker & O’Brien’s and MathPro’s annual capital and fixed cost charges

($0.690 billion). Therefore, we focus below on identifying the reasons for the differences between their 

annual capital and fixed cost estimates.

Table 1

Comparison of MathPro’s and Baker & O’Brien’s 

Annual U.S. Refining Compliance Cost Estimates

(Billions of Dollars Per Year)

Annual Compliance Cost Component

MathPro Baker & O’Brien

Difference:

Baker & O’Brien minus

MathPro

Capital and Fixed Charges $0.999 $1.689 $0.690

All Other Costs $0.532 $0.701 $0.169

Total Compliance Costs $1.531 $2.390 $0.859

Sources: MathPro Study, Exhibit A-1; Baker & O’Brien 2012 Study, Figure 5, p. 9.

Table 2 presents MathPro’s and Baker & O’Brien’s estimated annual capital and fixed costs and 

the assumptions underlying these estimates. Panel 1 of Table 2 presents the annual capital and fixed 

charge estimates. Panel 2 shows the estimated costs of desulfurization investment on a dollars-per-barrelper-day basis. The sulfur content of gasoline can be reduced by removing the sulfur from the crude oil 

inputs to a refinery (FCC feed desulfurization) or by removing the sulfur directly from the gasoline 

produced by the refinery (FCC naphtha desulfurization). MathPro assumed that FCC naphtha 

desulfurization would be used by all refineries to reduce the sulfur content of gasoline from 30 ppm to 10 

ppm.20 In comparison, Baker & O’Brien assumed that FCC naphtha desulfurization revamps or new 

builds would occur at 46 refineries (33 revamps and 13 new builds) and that FCC feed desulfurization 

revamps or new builds would occur at 24 refineries (23 revamps and 1 new build).21

 

also Alfred Endres, Environmental Economics: Theory and Policy, Cambridge University Press, Rev. Exp. 

Edition, December 6, 2010, pp. 110-129 and 239-246.

20 MathPro Study, pp. 14-16.

21 Baker & O’Brien 2012 Study, pp. 4-5 and Figure 2.
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10

Table 2

Comparison of MathPro and Baker & O’Brien Estimates of

Annual Capital and Fixed Charges and The Underlying Assumptions

1. Annual Capital and Fixed Charges (Billions of Dollars Per Year)

MathPro Baker & O’Brien

$0.999 $1.689

2. Desulfurization Investment Costs for a New Build

Dollars Per Barrel Per Day

Type of Desulfurization MathPro Baker & O’Brien

FCC Naphtha Desulfurization $1,830 $6,537

FCC Feed Desulfurization $6,700 $4,674

3. Revamp/Expansion Investment Costs As A Percentage of New Build Costs

MathPro Baker & O’Brien

50% 30% to 70%

4. Annual Capital Charge Calculation Assumptions

Assumption MathPro Baker & O’Brien

Rate of Return (%) 10% after tax 10% after tax

Operating Life 15 years 15 years

Depreciation Schedule 10 years; double declining 

balance

10 years; accelerated

Construction Period 3 years 2 years

Tax Rate-Federal & State (%) 40% 38%

Sources: (1) MathPro Study, Exhibit A-1; Baker & O’Brien 2012 Study, Figure 5, p. 9; (2) MathPro Study, p. 13; 

Baker & O’Brien 2011 Study, p. 24; (3) MathPro Study, p. 12; Baker & O’Brien 2011 Study, p. 24; (4) MathPro 

Study, p. 13; Baker & O’Brien 2011 Study, p. 25.

Notes: The MathPro estimates are for a unit installed at a Gulf Coast refinery. Baker & O’Brien do not specify a 

refinery location.

MathPro’s FCC naphtha-desulfurization investment costs are much lower than those used by 

Baker & O’Brien, and, as shown below, the difference in these costs accounts for the entire difference in 

the Tier 3 compliance cost estimates of MathPro and Baker & O’Brien. To assess the reasonableness of 

MathPro’s estimated investment costs, we interviewed experts at companies that constructed or installed 

desulfurization units at U.S. refineries, and we asked them to comment on the reasonableness of the 

MathPro estimates.
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11

Regarding MathPro’s estimate of $1,830 per barrel per day for a new build FCC naphtha

sulfurization unit at a Gulf Coast refinery, the interviewed experts uniformly stated that this estimate was 

within a reasonable range (from $1,500 to somewhat above $1,830 per barrel per day). Although the 

highest upper end of the range response was $2,500 per barrel per day, some respondents stated that the 

$1,830 per barrel per day estimate was conservative (i.e., near the upper end of the range). These 

responses indicate that Baker & O’Brien’s estimate of $6,537 per barrel per day for a new build is not 

reasonable and is too high.

Regarding MathPro’s estimated $6,700 per barrel per day for a new build FCC feed

desulfurization unit at a Gulf Coast refinery, the interviewed experts uniformly stated that this estimate 

was above the reasonable range (from $5,000 to $6,000 per barrel per day). MathPro did not use this 

estimate, however, because it assumed that only FCC naphtha desulfurization would be used to reduce the 

sulfur content of gasoline from 30 ppm to 10 ppm. Baker & O’Brien’s FCC feed desulfurization estimate 

of $4,674 per barrel per day, which was used in its study, is slightly below the reasonable range.

Moreover, the implied ratio of FCC naphtha to feed desulfurization new build investment costs 

from the Baker & O’Brien study is also outside the reasonable range offered by the companies 

interviewed. The survey respondents suggested that the naptha-to-feed ratio was approximately one to 

three. Yet Baker & O’Brien’s implied ratio is about four to three ($6,537 per barrel per day for a new 

build FCC naphtha desulfurization to $4,674 per barrel per day for a new build FCC feed desulfurization 

unit). In contrast, MathPro’s estimated investment cost of $1,830 per barrel per day for a new build FCC 

naphtha desulfurization unit is about 27 percent of its $6,700 per barrel per day estimate for a new build 

FCC feed desulfurization unit, much closer to the one-to-three ratio provided by the survey respondents. 

Because Baker & O’Brien assumes that almost two-thirds of the new build/revamps by U.S. 

refiners to reduce the sulfur content of gasoline from 30 ppm to 10 ppm will involve FCC naphtha

desulfurization units (46 of 70), Baker & O’Brien’s gross overestimate of these costs lead to an 

overstatement of annual capital charges. In contrast, the underestimation by Baker & O’Brien of the 

investment cost for a new build FCC feed desulfurization unit was relatively small (i.e., the lower end of a 

reasonable range provided by the companies interviewed was $5,000 per barrel per day which is only 

$326 per barrel per day above the Baker & O’Brien estimate of $4,674 per barrel per day). 

Unfortunately, this relatively more precise estimate is only applicable to 24 of 70 of the assumed new 

builds/revamps. Therefore, Baker & O’Brien’s estimates for the investment costs for a new build naphtha 

and feed desulfurization units result in a substantial overstatement of the annual capital charges.

The third panel of Table 2 presents MathPro’s and Baker & O’Brien’s assumptions regarding the 

relationship between the cost of revamps/expansions and new builds. MathPro assumes that the per-
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12

barrel-per-day investment cost of a revamp/expansion is 50 percent of the per-barrel-per-day cost of a 

new build. Baker & O’Brien provides a range of 30 to 70 percent. Because MathPro’s assumed ratio is 

contained within Baker & O’Brien’s assumed range, the differences in these assumptions is unlikely to be 

the source of significant differences between the investment cost estimates. In an alternative calculation, 

MathPro adopts a more optimistic assumption that the revamp/expansion investment cost would be 30

percent of the new build investment cost, lending support for the lower end of Baker & O’Brien’s range.

The fourth panel of Table 2 presents the assumptions involved in the calculation of the annual 

capital charges. The first three assumptions are essentially the same for the two studies.

22

 MathPro 

assumes a three-year construction period while Baker & O’Brien assumes a two-year construction period. 

The longer construction period used by MathPro increases its estimated annual capital charges. MathPro 

assumes a 40 percent combined federal and state tax rate while Baker & O’Brien assumes a 38 percent 

combined federal and state tax rate. The higher tax rate used by MathPro slightly increases its estimated 

annual capital charge. However, the effects of the longer construction period and the higher tax rate are 

relatively small. 

3. The Potential Effect on Retail Gasoline Prices if U.S. Refiners Can Pass on 

the Cost of Compliance to Consumers

The two compliance cost estimates are shown in Table 3 below, along with an adjusted Baker & 

O’Brien estimate to correct for its overstatement of capital charges discussed above. In particular, we 

replace Baker & O’Brien’s estimate of the annual capital charges with those calculated by MathPro. The 

total annual U.S. refiner compliance cost estimates are $1.53 billion for MathPro, $2.39 billion for Baker 

& O’Brien, and $1.70 billion for the Adjusted Baker & O’Brien.

Table 3

Adjustment of Baker & O’Brien’s Annual U.S. Refining 

Compliance Cost Estimates to Correct for Overstatement

of Annual Capital Charges (billions)

Annual Compliance Cost Component MathPro Baker & O’Brien

Adjusted

Baker & O’Brien

Capital and Fixed Charges $0.999 $1.689 $0.999

All Other Costs $0.532 $0.701 $0.701

Total Compliance Costs $1.531 $2.390 $1.700

Sources: MathPro Study, Exhibit A-1; Baker & O’Brien 2012 Study, Figure 5, p. 9; and Navigant Economics.

 

22 Baker & O’Brien do not specify what form of accelerated depreciation they employ. However, a double 

declining balance methodology is widely used.
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13

 If the U.S. refiners could fully pass these compliance costs through to consumers, the effect on 

the average retail price of gasoline would be the total compliance costs divided by the number of gallons 

of gasoline (including the ethanol component) produced by U.S. refiners. For PADDs 1, 2, 3 and 4, 

MathPro estimates that annual U.S. gasoline production to be 7.079 million barrels per day.23 For PADDs 

1, 2, 3, 4, and 5 (the entire U.S.), Baker & O’Brien estimates annual U.S. gasoline production to be 8.152 

million barrels per day.24

Table 4 below restates the total compliance costs shown in Table 3 in cents per gallon of gasoline 

produced. The MathPro estimate is 1.4 cents per gallon while the Baker & O’Brien estimate is 1.9 cents 

per gallon. Finally, the adjusted Baker & O’Brien estimate, which substitutes MathPro’s annual capital 

and fixed charge estimates for Baker & O’Brien’s estimate, is 1.4 cents per gallon. This result confirms 

that the relevant difference between MathPro’s and Baker & O’Brien’s estimates of the total cost of 

compliance is the difference between their annual capital and fixed charge estimates.

Table 4

U.S. Refining Compliance Cost Estimates Stated 

on a Cents Per Gallon Produced Basis

MathPro Baker & O’Brien

Adjusted

Baker & O’Brien

Total Compliance Cost (Billions of Dollars per 

Year) 

$1.531 $2.390 $1.700

Refining Gasoline Production

Millions of Barrels Per Day(1) 7.079 8.152 8.152

Billions of Gallons Per Year(2)108.521 124.970 124.970

Compliance Cost Per Gallon(3)(Cents Per Gallon) 1.4 1.9 1.4

Notes: (1) MathPro Study, Exhibit A-1; Baker & O’Brien 2011 Study; Table 5; (2) Billions of gallons per year equals

millions of barrels per day times (365 times 42 divided by 1,000); (3) Compliance cost per gallon in cents per gallon equals total 

compliance cost in billions of dollars per year times 100 divided by billions of gallons per year.

4. Other Estimates of Tier 3 Compliance Costs

In her Opening Statement before the Subcommittee on Energy and Power of the Committee on 

Energy and Commerce, EPA Assistant Administrator Gina McCarthy stated that “we estimate the impact 

on fuel costs [of Tier 3 gasoline sulfur reduction] to be less than one penny per gallon when the program 

 

23 MathPro Study, Exhibit A-1.

24 Baker & O’Brien 2011 Study, Table 5.
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14

goes into effect in 2017 or later.”25 MathPro performed an alternative calculation of the Tier 3 

compliance costs, in which it changed two of its assumptions: (1) the investment cost for a 

revamp/expansion was assumed to be 30 percent of the investment costs for a new build; and (2) a rate 

of return of 7 percent before tax was adopted, which is the rate of return used by the EPA in its 

calculations.26 Based on this alternative MathPro calculation, the Tier 3 gasoline sulfur-reduction cost to 

U.S. refiners would be less than one penny per gallon (0.8 cents per gallon). 

5. Conclusions Regarding the U.S. Refiners’ Compliance Cost to Accomplish 

the Tier 3 Gasoline Sulfur Content Reduction

The reasonable range of the U.S. refiners’ cost of complying with the EPA’s Tier 3 gasoline 

sulfur reduction appears to be 0.8 to 1.4 cents per gallon (i.e., in the vicinity of 1 cent per gallon). 

However, this expression of the compliance costs on a cents per gallon basis does not imply that these 

compliance costs will be passed through fully to consumers (i.e., result in retail gasoline prices being 

higher by about 1 cent per gallon). The likelihood that the U.S. refiners will be able to pass the one cent 

per gallon increase through to consumers is evaluated below. In particular, we evaluate whether U.S. 

refiners were able to pass through the cost of complying with the Tier 2 gasoline sulfur content reduction 

from 300 ppm to 30 ppm. This evaluation suggests that refiners were not able to pass through these 

compliance costs through to consumers.

C. API and Baker & O’Brien Have A History of Overstating the Costs and Impacts of 

EPA Motor Fuel Sulfur Content Regulations

In 2001, API retained Baker & O’Brien to estimate the compliance costs and to evaluate the other 

impacts on the U.S. refining industry of implementing the EPA ultra low sulfur diesel (ULSD) program.

27

 

Compared with other estimates, Baker & O’Brien produced relatively high U.S. refinery compliance cost 

estimates. The range of ULSD compliance cost estimates was 4.2 cents per gallon to 6.2 cents per gallon. 

The Baker & O’Brien compliance cost estimate was 6.2 cents per gallon. By comparison, the EPA’s 

 

25 Opening Statement of Gina McCarthy, Assistant Administrator, Office of Air and Radiation, U.S. 

Environmental Protection Agency, Hearing on Gasoline Regulations Act of 2012, Subcommittee on Energy and 

Power, Committee on Energy and Commerce, U.S. House of Representatives, March 28, 2012, p. 5.

26 The 7% before-tax rate of return is effectively a discount rate. The 7% before-tax rate discount rate is often 

used as the societal discount rate.

27 EIA, The Transition to Ultra-Low-Sulfur Diesel Fuel: Effects in Prices and Supply, May 2001, hereinafter 

“EIA ULSD Transition”), p. 3; see also Baker & O’Brien, An Assessment of the Impact of Non-Road Diesel 

Fuel Sulfur Regulation on Distillate Fuel Production and Availability in the U.S., Prepared for the American 

Petroleum Institute (API), July 2003 (hereinafter “Baker & O’Brien 2003 Study”). This report discusses the 

results of Baker & O’Brien’s analyses of introducing on-road and non-road ULSD.
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15

compliance cost estimate was 4.5 cents per gallon.28 Excluding the Baker & O’Brien estimate, the average 

of all the compliance cost estimates was 4.9 cents per gallon.29

In 2003, Baker & O’Brien projected the likely effects of implementing the EPA’s on-road ULSD 

regulations on the U.S. refinery sector in terms of expected refinery closures and U.S. refinery production

of ULSD. Baker & O’Brien projected that as many as 13 U.S. refiners might close by 2010 due to an 

inability to attract or justify the capital required to comply with the EPA’s on-road ULSD regulations.30 

Baker & O’Brien further claimed that the implementation of the EPA non-road ULSD regulations would 

accelerate and increase the likelihood of these 13 refinery closures. Indeed, Baker & O’Brien suggested 

that the EPA on-road ULSD program would substantially reduce the supply of diesel fuel, and it would 

even make the U.S. a net importer of diesel fuel. As it turns out, U.S. refinery production of 500 ppm or 

less sulfur content distillate has increased substantially since 2005 as shown in Figure 1.

 

28 John F. Anderson and Todd Sherwood, EPA, Comparison of EPA and Other Estimates of Mobile Source Rule 

Cost Changes to Actual Price Changes, Paper Presented to the SAE Government Industry Meeting, 

Washington, DC, May 14, 2004, Table 2. 

29 Id. Two estimates were provided in the form of a range. The average of 4.9 cents per gallon is calculated on 

the basis of the mid-point of these two ranges.

30 Baker & O’Brien 2003 Study, p. 8.
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16

After 2005, U.S. refiners’ production of ULSD (15 ppm or less sulfur content) increased sharply; 

as of 2011, ULSD accounted for 96 percent of total low sulfur distillate production. Under the EPA onroad ULSD program, Baker & O’Brien claimed that, by 2010, U.S. refiner’s production of low sulfur 

(500 ppm or less sulfur content) distillate would fall short of U.S. consumption by 601 thousand barrels 

per day (“MBD”).31 In fact, in 2010, U.S. refiners’ production of low sulfur distillate exceeded U.S. 

consumption by 451 MBD, and U.S. net exports of low sulfur distillate were 458 MBD.32

 

31 Baker & O’Brien 2003 Study, p. 53.

32 U.S. Department of Energy, Energy Information Administration, U.S. Supply and Disposition 

(http://www.eia.gov/dnav/pet/pet_sum_snd_d_nus_mbblpd_a_cur-1.htm) .

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 MBD

Figure 1

Refinery and Blender Net Production of Low Sulfur

(500 ppm or Less) Distillate Fuel Oil

1993 - 2011

U.S. Refinery and Blender Net Production of Distillate Fuel Oil 0 to 500 ppm Sulfur

U.S. Refinery and Blender Net Production of Distillate Fuel Oil Greater than 15 to 500 ppm Sulfur

U.S. Refinery and Blender Net Production of Distillate Fuel Oil 0 to 15 ppm Sulfur

Source: EIA.
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17

IV. Analysis of the Potential Effects of EPA Gasoline Sulfur Content Regulations on 

U.S. Retail Gasoline Prices

A. The Factors that Determine the Retail Price of Gasoline

The U.S. retail price of gasoline is determined primarily by global crude oil prices and 

secondarily by U.S. refinery margins. Figure 2 below shows the components of U.S. retail gasoline prices 

as of March 2012.

Figure 2

The Components of U.S. Retail Gasoline Prices

March 2012

Source: U.S. Department of Energy, Energy Information 

Administration, Gasoline and Diesel Fuel Update 

(http://www.eia.gov/petroleum/gasdiesel/).

The tax component of U.S. retail gasoline prices is set by federal and state governments, and it is not 

sensitive to market conditions. If the gasoline taxes component is eliminated, the shares among the 

remaining three components (i.e., the shares of the U.S. retail gasoline price excluding taxes) are: 

(1) global crude oil prices account for 75 percent; (2) U.S. refinery margins account for 18 percent; and 

(3) distribution and marketing costs account for 7 percent.

B. The Recent Increase in Crude Oil Prices Explains Current High U.S. Retail Gasoline 

Prices

Sharply rising prices for refined petroleum products (e.g., motor gasoline, diesel fuel, and jet fuel) 

are a major current economic concern. However, this refined product price inflation is due almost 

entirely to sharply rising global crude oil prices. As shown in Figure 3 below, the increase in the U.S. 

retail gasoline prices excluding taxes between March 2009 and February 2012 can be more than fully 

accounted for by the increase in the Brent crude oil price over the same period. The solution to the 
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18

problem of sharply increasing global crude oil prices and U.S. refined product prices involves promoting 

increased global crude oil supplies and reduced consumption of refined petroleum products, which can be 

achieved through implementation of new energy-efficient technologies. In any event, the planned EPA 

Tier 3 gasoline sulfur content reduction cannot have an effect on U.S. retail gasoline prices until it is

implemented, which is currently slated to occur no sooner than 2017.

158.4

173.3

0.0

50.0

100.0

150.0

200.0

250.0

Gasoline Crude Oil Cents per Gallon

Figure 3

Change in U.S. Retail Gasoline Price Excluding Taxes and Brent Crude Oil 

Price Between March 2009 and February 2012

Notes:

Gasoline price is U.S. Total Gasoline Retail Sales by Refiners. Crude oil price is Brent crude oil FOB Europe.

Source: U.S. Department of Energy, Energy Information Administration (www.eia.gov).
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19

C. Using Multiple Regression Analysis to Determine Whether the EPA’s Proposed 

Gasoline Sulfur Reduction Program Compliance Costs Are Likely to Be Passed on to 

Consumers

Figure 4 below plots the U.S. retail price of gasoline (excluding taxes) expressed in dollars per 

gallon and the Brent crude oil price expressed in dollars per barrel. Figure 4 also includes circles around 

the periods when unexpected or unusual events occurred. The circle drawn around 2003 and 2004 

corresponds to the period when numerous shocks to the market occurred. The 2003 and 2004 period also 

is when the transition to attainment of the Tier 2 sulfur standards occurs. As explained in the Technical 

Appendix, the other unexpected and unusual events that occurred during the 2003 and 2004 period are the 

primary cause of the “above normal” gasoline prices during this period. However, as discussed below, 

retail gasoline prices during this period were affected by numerous other unexpected or unusual events. 

Circles also are drawn around the periods affected by the 2005 hurricanes and around the periods in 2006 

and 2007 that were affected by the MTBE-to-ethanol oxygenate transition. Finally, a circle is drawn 

around the sharp drop in retail gasoline prices in 2008 due to the global recession; this drop can be 

explained by the corresponding sharp drop in crude oil prices.
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20

Figure 4

We used multiple regression analysis to test whether the implementation of the EPA Tier 2 sulfur 

reduction standards had a statistically significant effect on retail gasoline prices, controlling for all other 

factors. We used monthly data from January 2001 through January 2012. The control variables in the 

regression analysis included the global price of crude oil (the Brent price), the U.S. refining margin, and 

market events (e.g., the 2005 hurricanes and MTBE issues in 2006 and 2007). The role of these factors in 

explaining the variation in the retail price of gasoline was addressed recently in a study by the Federal 

Trade Commission.33 The effects of the transition to Tier 2 on the retail price of gasoline, if any, would 

have occurred during 2003 and 2004 (but there were numerous shocks to the market during this period), 

 

33 Federal Trade Commission, Bureau of Economics, Gasoline Price Changes and the Petroleum Industry: An 

Update, An FTC Staff Study, September 2011, pp. i-ii, 5-6, and 23-26, 

http://www.ftc.gov/os/2011/09/110901gasolinepricereport.pdf .

$0

$20

$40

$60

$80

$100

$120

$140

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Price (Dollars per Gallon) Price (Dollars per Barrel)

Comparison of the Monthly National Average Price of Gasoline

(excluding taxes) and the Price of Brent Crude

January 2001 - February 2012

U.S. Total Gasoline Retail Sales (excluding taxes) by Refiners (left axis)

Europe Brent Spot Price FOB (right axis)

Source: EIA.

Global

Recession

2006 & 2007 Summer Price

Spikes post MTBE removal

2005 Post Hurricane

Price Spike

Numerous Unusual and/or Unexpected Events: Refinery outages,

strong demand growth, low inventories, MTBE to ethanol transition,

and transition to Tier 2 gasoline sulfur reduction.
Embargoed Until 10 AM June 14, 2012

21

and the permanent effects on the retail price of gasoline, if any, would occur from 2005 forward. The 

details of the multiple regression analysis are discussed in the attached Technical Appendix.

The EPA’s Tier 2 sulfur reduction program for gasoline called for a reduction in the sulfur 

content of gasoline from 300 parts per million (ppm) to 30 ppm. This sulfur content reduction was 

phased in over time. During the first phase, the average sulfur content of gasoline had to be reduced from 

300 ppm to 180 ppm by the beginning of 2004. During the second phase, the average sulfur content of 

gasoline had to be reduced from 180 ppm to 30 ppm by the beginning of 2006. The EPA projected that 

the total cost to U.S. refiners of the Tier 2 gasoline sulfur content reduction would be 1.7 to 1.9 cents per 

gallon, and the API, based on a study prepared by MathPro, estimated that the cost would be 2.6 cents per 

gallon.34 (Both estimates exceed the estimated cost of the Tier 3 gasoline sulfur content reduction to U.S. 

refiners, which is roughly one cent per gallon.) If the U.S. refiners’ compliance costs of the Tier 2 

gasoline sulfur content regulation were fully passed on to consumers, one would expect to see about a two 

cents per gallon increase in U.S. retail gasoline prices.

The U.S. retail gasoline price excluding taxes and its predicted value generated by the estimated 

regression model are presented in Figure 5 below, which shows that the predicted and actual U.S. retail 

gasoline prices are very close, indicates a high “goodness of fit.” The regression model is highly accurate, 

as reflected by the model’s R-squared (99.3 percent). The R-squared statistic measures the percentage of 

the variance of the dependent variable (the U.S. retail price of gasoline excluding taxes) that is explained 

by the regression model (beyond what can be explained by knowledge of the mean). The estimated 

regression model is statistically significant at the highest level (the 1% level).

 

34 John F. Anderson and Todd Sherwood, EPA, Comparison of EPA and Other Estimates of Mobile Source Rule 

Cost Changes to Actual Price Changes, Paper Presented to the SAE Government Industry Meeting, 

Washington, DC, May 14, 2004, Table 2.
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22

Figure 5

The regression model results presented in the Technical Appendix confirm that the global crude 

oil price is by far the most important determinant of retail gasoline prices. The U.S. refinery margin, 

which reflects the relationship between supply and demand for refined petroleum products (i.e., refined 

product market tightness), is a distanct second in importance. As anticipated, the 2005 hurricanes and the 

2006 and 2007 MTBE to ethanol transition issues explained some of the variation in retail prices as well. 

Finally, there were numerous unusual and unexpected market events during 2003 and 2004 that caused 

U.S. retail gasoline prices to be higher than would be expected given the global crude oil price and U.S. 

refinery margins, including changes in gasoline specifications.

35 In its assessment of why U.S. retail 

 

35 These events include refinery outages, low gasoline inventories, strong gasoline demand growth, the transition 

from MTBE to ethanol as an oxygenate in California, New York, and Connecticut on January 1, 2004, slighly 

reduced gasoline supply due to more stringent product specifications (transition from MTBE to ethanol and 

transition to lower sulfur content gasoline), uncertainty regarding the availability of gasoline imports (due to 

transition from MTBE to ethanol and transition to lower sulfur content gasoline), and higher transportation 

costs. See EIA, Inquiry into August 2003, Gasoline Price Spike, November 2000, pp. 15-17, 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf ; Oil & Gas Journal, Refining 

industry to sustain strong margins through 2004, March 15, 2004, 

0

50

100

150

200

250

300

350

400

Feb-0 1 Feb-0 2 Feb-0 3 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Cents per Gallon

Predicted vs. Actual Retail Gasoline Prices Excluding Taxes

February 2001 - January 2012

Actual U.S. Total Gasoline Retail Sales Prices by Refiners Predicted Values
Embargoed Until 10 AM June 14, 2012

23

gasoline prices were substantially higher than expected given global crude oil prices in 2004, the EIA 

emphasized the transition from MTBE to ethanol.36 However, in 2003, neither the transition from MTBE 

to ethanol nor the transition to lower sulfur content gasoline were named by EIA as a contributing factor 

to higher retail gasoline prices.37 Given global crude oil prices, the higher than expected U.S. retail 

gasoline prices in 2003 and 2004 were primarily the result of factors other than the transition to lower 

sulfur gasoline. 

Most importantly, for the period 2005 forward, there is no statistically significant effect of the 

Tier 2 gasoline sulfur content reduction on U.S. retail gasoline prices (i.e., the EPA Tier 2 gasoline sulfur 

content regulations had no statistically significant effect on U.S retail gasoline prices ). Because the 

expected impact of Tier 2 regulations was twice the size of Tier 3 (two cents versus one cent per gallon), 

and because Tier 2 regulations do not appear to have increased retail gas prices, it is highly unlikely that 

the EPA Tier 3 gasoline sulfur content regulations will have a statistically signiciant effect on U.S retail 

gasoline prices.

That the U.S. refiners would not likely be able to fully pass-through to consumers even a one cent 

per gallon cost increase is not surprising. The U.S. refining sector is highly competitive, and the markups over costs for U.S. refiners (i.e., the refiners’ margins) are determined by the overall refined 

petroleum product supply and demand conditions, which are highly volatile.

V. Benefits of Implementing the EPA’s Planned Tier 3 Gasoline Sulfur Reduction 

Program

A. Health Benefits Are Substantial

According to a study by Northeast States for Coordinated Air Use Management (“NESCAUM”), 

the reduction in the sulfur content of gasoline will improve human health, which is a significant economic 

benefit that must be considered in any proper cost-benefit analysis. Reducing the sulfur content of 

gasoline to 10 ppm would reduce nitrogen oxides emissions (NOx) by approximately 25 percent; the 

 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf; U.S. Department of Energy, 

Energy Information Administration, Short-Term Energy Outlook April 2004, Summer 2004 Motor Gasoline 

Outlook, p. 1, (http://www.eia.gov/forecasts/steo/special/summer/2004_summer_gas.pdf); Statement of Guy F. 

Caruso, Administrator, Energy Information Administration, Department of Energy before the Government 

Reform Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, United States House of 

Representatives, July 7, 2004, pp. 2-4, (http://www.eia.gov/neic/speeches/caruso070704.htm .

36 Id.

37 Id.
Embargoed Until 10 AM June 14, 2012

24

reduction in NOx is achieved by allowing pollution control equipment to operate more effectively.38 NOx

emissions contribute to ozone concentrations and are a precursor to fine particulate matter. NOx 

contributes to a number of health and environmental problems, including respiratory problems such as 

asthma, ground level ozone, haze, water acidification, acid rain, plant damage, soil damage, and oxygen 

depletion in water.39 In the Northeast and Mid-Atlantic area, the largest source of NOx is gasoline 

vehicles, which account for almost 30 percent of NOx emissions.40 

The NESCAUM study estimated the health benefits of implementing the Tier 3 gasoline sulfur 

content reduction in the U.S. Northeast and Mid-Atlantic areas only. NESCAUM provides estimates of 

the health benefits for particulate emissions (referred to as PM2.5 particles) and for ozone. Using data 

obtained from NACAA and the EPA, we have estimated national health benefits due to the reductions in 

PM2.5 particle emissions nationwide as a consequence of the Tier 3 gasoline sulfur content reductions.41 

However, for the ozone health benefits, there was no comparable national source. Further, we determined 

that there was no acceptable methodology for extrapolating NESCAUM’s regional estimate of ozone 

health benefits to the nation. Therefore, we report only the ozone health benefits calculated by 

NESCAUM for the Northeast and Mid-Atlantic area.

Table 5 below shows the total annual health benefits calculated for 2020 and 2030. In 2020, the 

range of annual health benefits is $5.2 to $5.9 billion (in 2006 dollars). By 2030, the range of annual 

health benefits is $10.1 billion to $10.8 billion (in 2006 dollars). This conservative estimate of annual 

health benefits by itself substantially exceeds MathPro’s estimate of the annual increase in U.S. refining

costs of $1.5 billion per year.

 

38 Arthur Marin, NESCAUM, Benefits and Costs of Tier 3 Low Sulfur Gasoline Program, CT DEEP SIPRAC 

Meeting, January 12, 2012 (“Marin Study”), pp. 6-7 and NESCAUM, Assessment of Clean Gasoline in the 

Northeast and Mid-Atlantic States, November 21, 2011 (“NESCAUM Assessment”).

39 Marin Study, p. 6-7.

40 NESCAUM Assessment, p. 4-1.

41 NACAA, Cleaner Cars, Cleaner Fuel, Cleaner Air: The Need for and Benefits of Tier 3 Vehicle Fuel 

Regulations, October 2011, http://www.4cleanair.org/Documents/NACAATier3VehandFuelRep (hereinafter 

“NACCA Assessment”); EPA, PM2.5 Benefit Per Ton Estimates, 

http://www.epa.gov/oaqps001/benmap/bpt.html, (hereinafter “EPA Benefits”).
Embargoed Until 10 AM June 14, 2012

25

Table 5

B. Economic Benefits Are Substantial

The health benefits described create economic benefits, because healthier people are more 

productive and miss less work due to illness resulting in a more productive economy. In addition, sulfur 

content reduction will permit the implementation of cost-effective vehicle technologies, which will 

provide substantial environmental benefits at a lower cost than would be possible if the sulfur content of 

motor gasoline were not reduced. Stated differently, reducing the sulfur content of motor gasoline will 

reduce the costs of the motor vehicles that will satisfy the Tier 3 pollution standards, thereby benefitting 

automobile consumers. 

A national input-output model and its associated multipliers was used to calculate the nationwide 

economic effect of installation and operation of the refinery upgrades needed to comply with the Tier 3 

Value of Annual Health Benefits Resulting from Reducing the 

Sulfur Content of Gasoline from 30 ppm to 10 ppm

(Billions of 2006 Dollars)

Reduced NOx, VOC, and Ozone As Of: Low End High End

2020 $5.2 $5.9

2030 $10.1 $10.8

Notes :

Sources :

1. The NOx and VOC benefits are nationwide, are based on NACAA and EPA analyses, 

and are for 2020 and 2030.

2. The ozone benefits are for the U.S. Northeast and Mid-Atlantic regions, are based on 

a NESCAUM analysis, and are for 2018. The 2018 value is used for both 2020 and 

2030.

3. NESCAUM data from Assessment of Clean Gasoline in the Northeast and MidAtlantic States , November 21, 2011, http://www.nescaum.org/documents/nescaum-tier-3-

low-s-gasoline-20111121.pdf.

2. NACAA data from Cleaner Cars, Cleaner Fuel, Cleaner Air: The Need for and 

Benefits of Tier 3 Vehicle and Fuel Regulations , October 2011, 

http://www.4cleanair.org/Documents/NACAATier3VehandFuelReportFINALOct2011.

1. EPA data from PM2.5 Benefit Per Ton Estimates , 

http://www.epa.gov/oaqps001/benmap/bpt.html.

3. The NOx and VOC benefit estimates based on NACAA and EPA analyses are single 

point estimates. The NESCAUM analysis provided low end and high end figures for 

ozone-related health benefits which are added to the NACAA point estimates to find the 

low end and high end figures shown above.
Embargoed Until 10 AM June 14, 2012

26

gasoline sulfur content standards.42 Based on the MathPro estimates, the investment cost for the 

installation of the refinery upgrades would be $3.917 billion spread over three years. Annual operating 

costs for these upgrades are $0.532 billion. The economic effects include the direct effects (i.e., the direct 

employment and purchases from others) and the indirect effects (i.e., the subsequent spending by the 

upgrade’s direct employees, suppliers, and the employees of these suppliers).43

As shown in Table 6 below, installation of the refinery modifications produces almost 24,500 

jobs for full time equivalent employees with total associated employee compensation of $1.161 billion for 

each of the three years of installation. The value added to the national economy is $2.027 billion each 

year. Federal, state, and local taxes on the corporate profits and personal income created by the refinery 

upgrades is $0.502 billion per year. According to our analysis, the annual operation of the refinery 

modifications produces almost 5,300 jobs for full time equivalent employees with total associated 

employee compensation of $0.294 billion. The value added to the national economy is $0.632 billion. 

Federal, state, and local taxes on the corporate profits and personal income is $0.138 billion per year.

 

42 Input-Output Models are widely used for economic assessments in both the public and private sector. In the public 

sector, for example, the Department of Defense uses Input-Output Models to estimate the regional impacts of military 

base closings. State transportation departments use Input-Output Models to estimate the regional impacts of airport 

construction and expansion. In the private-sector, analysts and consultants use Input-Output Models to estimate the 

regional impacts of a variety of projects, such as the development of shopping malls and sports stadiums. The 

regional input-output models, RIMS II, were developed and are maintained by the U.S. Department of Commerce, 

Bureau of Economic Analysis (BEA). RIMS II was developed and is maintained by the BEA. The model was 

developed in the 1970s and has been continuously updated and refined. RIMS II is widely used to determine the 

economic impacts of projects and programs on the national economy and regional economies within the United 

States. RIMS II is based on a 62 industry input-output model that accurately captures the interactions among the 

various industries within the economy. RIMS II is used to determine the economy-wide effects on employment, 

earnings, and value added of a project taking into account the project’s direct employment, its purchases from others, 

and the subsequent spending by the project’s direct employees, suppliers, and the employees of these suppliers (i.e., 

the indirect effects).

43 The national economic impacts of installation and operation of the refinery modifications consist of direct and 

indirect changes in (1): the number of full time equivalent employees each year; (2) total employee compensation 

each year; (3) increase in value added (i.e., increased GDP) each year; and (4) increased Federal, state, and local tax 

revenues each year. The installation of the modifications to the refineries is assumed to take place over three years 

from 2014 through 2016. Installation expenditures are $3.917 billion and are assumed to be spread equally over the 

three years. Installation expenditures consist of: (1) purchases of industrial controls and control accessories; (2) 

construction labor to install the industrial controls; (3) construction management labor; and (4) engineering labor to 

design the installation of the industrial controls. The operation of the modifications to the refineries is assumed to start 

in 2017 when installation of the refinery upgrades is complete. Operating expenditures each year are $0.532 billion. 

The expenditures associated with operations consist of: (1) power; (2) labor; (3) chemicals; (4) tools and other 

materials; and (5) waste disposal.
Embargoed Until 10 AM June 14, 2012

27

Finally, there will be a further economic benefit due to an increase in value added and jobs 

created in the emission control industry and in the auto industry due to the development and 

implementation of the Tier 3 technology. We have not been able to quantify these benefits at this time.

VI. Conclusions

Baker & O’Brien’s estimates of the costs to U.S. refineries due to complying with the EPA Tier 3 

regulations appear to be greatly exaggerated. An appropriate adjustment to its overstated capital costs 

yields costs estimates that are similar to those of the EPA and of MathPro. Expressed on a per gallon of 

gasoline basis, the likely costs are de minimus (about one cent per gallon). Even though the EPA’s Tier 2 

sulfur reduction regulations were expected to increase U.S. refineries’ costs by twice as much (two cents 

versus one cent per gallon), there is no detectable effect of Tier 2 sulfur reduction regulation on the U.S. 

retail gasoline price. Therefore, it is highly unlikely that the Tier 3 costs would have a detectable effect 

on the U.S. retail gasoline price.

We estimate that the health benefits alone of adopting Tier 3 sulfur reduction regulation likely 

compensate (in a Pareto sense) for the costs to U.S. refineries. Other economic benefits, including the 

reduction in the cost of automobiles that are compliant with Tier 3 pollution standards, will redound to the 

benefit of consumers. Finally, making the investment needed to reduce the sulfur content of gasoline 

adds $6.1 billion to the U.S. gross domestic product (value added) over the three-year construction period, 

and the annual operation of these refinery modifications supports almost 5,300 domestic jobs each year.

Table 6

The Economic Impact of Upgrades to Refineries

to Conform with Tier 3 Standards

Economic Impacts

Installation 

Each Year

Annual 

Operation

Full Time Equivalent Employees (Job Years) 24,456 5,296

Total Employee Compensation

(Billions of Dollars)

$1.161 $0.294

Total Value Added

(GDP, Billions of Dollars)

$2.027 $0.632

Total Federal, State, and Local Tax Revenues

(Billions of Dollars)

$0.502 $0.138

Source: Navigant Economics.
TECHNICAL APPENDIX

Page 1 of 13

Detailed Technical Discussion of the Multiple Regression 

Analysis of U.S. Retail Gasoline Price Determinants

Methodology

Monthly U.S. retail gasoline price data from January 2001 through January 2012 were analyzed using 

multiple regression analysis. This analysis tested the statistical significance of factors that were believed 

to potentially affect the retail price of gasoline. The explanatory factors evaluated in the regression 

analysis included the global price of crude oil (the Brent price), the U.S. refinery margin, and market 

events (e.g., the 2005 hurricanes and MTBE issues in 2006 and 2007). The role of these factors in 

explaining the variation in the retail price of gasoline was addressed recently in a study by the Federal 

Trade Commission.1 In addition, the multiple regression analysis was used to test whether the 

implementation of the EPA Tier 2 sulfur reduction standards had a statistically significant effect on retail 

gasoline prices.2 The effects of the transition to Tier 2 on the retail price of gasoline, if any, would have 

occurred during 2003 and 2004, but there were other “shocks” to the U.S. retail gasoline market during 

2003 and 2004. The permanent effects of Tier 2 on the retail price of gasoline, if any, would occur from 

2005 forward.

Regarding the other “shocks” to the U.S. retail gasoline market during 2003 and 2004, there were 

numerous unusual and unexpected market events during 2003 and 2004 which caused U.S. retail gasoline 

prices to be higher than would be expected given the global crude oil price and U.S. refinery margins. 

These events include refinery outages, low gasoline inventories, strong gasoline demand growth, the 

transition from MTBE to ethanol as an oxygenate in California, New York, and Connecticut in January 1, 

2004, slightly reduced gasoline supply due to more stringent product specifications (transition from 

MTBE to ethanol and transition to lower sulfur content gasoline), uncertainty regarding the availability of 

gasoline imports (due to transition from MTBE to ethanol and transition to lower sulfur content gasoline), 

and higher transportation costs.3 Of the two changes in gasoline specifications, the transition from MTBE 

 

1

Federal Trade Commission, Bureau of Economics, Gasoline Price Changes and the Petroleum Industry: An 

Update, An FTC Staff Study, September 2011, pp. i-ii, 5-6, and 23-26, 

http://www.ftc.gov/os/2011/09/110901gasolinepricereport.pdf .

2 Multiple regression analysis is a standard empirical technique used in a wide variety of disciplines. A multiple 

regression model is one that models (or explains) associations between the “dependent variable” under study –

here, U.S. gasoline prices – and “explanatory variables” thought to be related to variation in the dependent 

variable. There are 133 monthly observations in the dataset used to perform the multiple regression analysis. 

3 EIA, Inquiry into August 2003, Gasoline Price Spike, November 2000, pp. 15-17, 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf ; Oil & Gas Journal, Refining 
TECHNICAL APPENDIX

Page 2 of 13

to ethanol was given the greatest emphasis by the EIA in its assessment of why U.S. retail gasoline prices 

were substantially higher than expected given global crude oil prices in 2004.4 However, in 2003, neither 

the transition from MTBE to ethanol nor the transition from MTBE to ethanol were named by EIA as a 

contributing factor to higher retail gasoline prices.5 Therefore, given global crude oil prices, the higher 

than expected U.S. retail gasoline prices in 2003 and 2004 were primarily the result of factors other than 

the transition to lower sulfur gasoline. 

Figure 1 below plots the U.S. retail price of gasoline (excluding taxes) expressed in dollars per gallon and 

the Brent crude oil price expressed in dollars per barrel. Figure 1 also includes circles around the periods 

when unexpected and/or unusual events occurred. The circle drawn around 2003 and 2004 corresponds to 

the period when the effects of the transition to the reduced Tier 2 gasoline sulfur content, if any, would 

have occurred. However, as outlined above, retail gasoline prices during this period were affected by 

numerous other unexpected and/or unusual events which are discussed in detail below. Circles also are 

drawn around the periods affected by the 2005 hurricanes and around the periods in 2006 and 2007 that 

were affected strongly by the MTBE to ethanol oxygenate transition. Finally, a circle is drawn around the 

sharp drop in retail gasoline prices in 2008 due to the global recession, but this drop can be explained by 

the corresponding sharp drop in crude oil prices.

 

industry to sustain strong margins through 2004, March 15, 2004, 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf; U.S. 

Department of Energy, Energy Information Administration, Short-Term Energy Outlook April 2004, Summer 

2004 Motor Gasoline Outlook, p. 1, 

(http://www.eia.gov/forecasts/steo/special/summer/2004_summer_gas.pdf); Statement of Guy F. 

Caruso, Administrator, Energy Information Administration, Department of Energy before the Government

Reform Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, United States House of 

Representatives, July 7, 2004, pp. 2-4, (http://www.eia.gov/neic/speeches/caruso070704.htm .

4

Id.

5

Id.
TECHNICAL APPENDIX

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Figure 1

Regression Model Specification

The regression model specification estimated is as follows: 

gasP_notaxt = β0 + β1brentt-1 + β1Δbrentt + β2ref_margint + β3hurr_dumt + β4MTBE_06t + 

β5MTBE_07t + β6Shocks_03_04t + β7Tier2_05_ont + Monthly Dummy Variablest

Table 1 below provides a description of the variables used in estimating the regression model. 

$0

$20

$40

$60

$80

$100

$120

$140

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Price (Dollars per Gallon) Price (Dollars per Barrel)

Comparison of the Monthly National Average Price of Gasoline

(excluding taxes) and the Price of Brent Crude

January 2001 - February 2012

U.S. Total Gasoline Retail Sales (excluding taxes) by Refiners (left axis)

Europe Brent Spot Price FOB (right axis)

Source: EIA.

Global

Recession

2006 & 2007 Summer Price

Spikes post MTBE removal

2005 Post Hurricane

Price Spike

Numerous Unusual and/or Unexpected Events: Refinery outages,

strong demand growth, low inventories, MTBE to ethanol transition,

and transition to Tier 2 gasoline sulfur reduction.
TECHNICAL APPENDIX

Page 4 of 13

 Table 1: Description of Variables Used in the Regression Model

Variable Description

gasP_notax Dependent variable: U.S. Total Gasoline Retail Sales by Refiners (Dollars per Gallon, 

excluding taxes). Source: EIA. 

Brent

Europe Brent Crude Oil Spot Price FOB (converted to Dollars per Gallon). Source: EIA. 

Both the lagged value (i.e., the Brent price in the prior month, brentt-1) and the first difference 

(i.e., the month-to-month change, Δbrentt) are included in the regression model. 

ref_margin U.S. refining total cash operating margin (converted to Dollars per Gallon). Source: Muse 

Stancil

month_dum1 –

month_dum11 Monthly dummy variables to control for recognized seasonality in U.S. gasoline prices.6

hurr_dum A dummy variable equal to 1 for the period Sept. – Oct. 2005 (0 otherwise) to control for the 

effects on U.S. gasoline prices of hurricanes Katrina and Rita in Fall 2005.7

MTBE_06, 

MTBE_07

Dummy variables equal to 1 for the Summers of 2006 and 2007, respectively (0 otherwise), to 

control for the Summer “price spikes” attributable to MTBE removal.8

Shocks_03_04

Dummy variable equal to 1 for the years 2003 and 2004 (0 otherwise) intended to control for 

numerous “shocks” potentially affecting U.S. gasoline prices. It was during this period that 

there was a mandated reduction in gasoline’s sulphur content from about 300 ppm 180 ppm by 

the start of 2004.9

Tier2_05_on

Dummy variable equal to 1 for the year 2005 onward (0 otherwise) intended to control for any 

increase in U.S. gasoline prices during the period when the mandated reduction in its sulphur 

content was from 300 ppm to 30 ppm was completed by the start of 2006.10 

 

6

See, e.g., Du and Hayes (2008), “The gasoline market is highly seasonal due to stronger demand in spring and 

summer. Gasoline price tends to gradually rise before and after summer. ... We include a set of monthly 

dummies to account for the seasonal pattern.” (Xiaodong Du and Dermot J. Hayes, “The Impact of Ethanol 

Production on U.S. and Regional Gasoline Prices and on the Profitability of the U.S. Oil Refinery Industry,” 

Working Paper 08-WP 467, Department of Economics and Center for Agricultural & Rural Development, Iowa 

State University, 2008, p.8.)

7

“Hurricane Katrina, which made landfall on August 29, 2005, caused the immediate loss of 27% of the nation’s 

crude oil production and 13% of national refining capacity. ... Prices were falling back towards pre-Katrina 

levels when Hurricane Rita made landfall on September 23 and caused the loss of another 8% of crude 

production and 14% of refining capacity. By four weeks after Hurricane Rita, prices in many areas had returned 

to pre-Katrina levels, and by December, prices had returned to where they were early in the summer of 2005. 

While the price increases following the hurricanes were significant, the price spike was relatively short-lived.” 

Gasoline Price Changes and the Petroleum Industry: An Update. FTC, Bureau of Economic Analysis, 

September 2001, pp. 24-25.

8 The FTC has identified “price spikes” in gasoline prices relative to crude oil prices in the Summer of 2006 and 

the Summer of 2007 related to the transition from methyl tertiary butyl ether (MTBE) to ethanol. Gasoline 

Price Changes and the Petroleum Industry: An Update. FTC, Bureau of Economic Analysis, September 2001, 

pp. 5, 25-26.

9 The EPA Tier 2 sulfur standards reduced the sulfur content of gasoline from about 300 ppm to 30 ppm by 2006. 

It occurred in two distinct phases. The first phase called for the reduction in sulphur content to 180 ppm by the 

start of 2004; the second phase called for the reduction in sulfur content from 180 ppm to 30 ppm by 2006.

10 Id.
TECHNICAL APPENDIX

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The EPA’s Tier 2 sulfur reduction program for gasoline called for a reduction in the sulfur content of 

gasoline from 300 parts per million (ppm) to 30 ppm. This sulfur content reduction was phased-in. 

During the first phase, the average sulfur content of gasoline had to be reduced from 300 ppm to 180 ppm 

by the beginning of 2004. During the second phase, the average sulfur content of gasoline had to be 

reduced from 180 ppm to 30 ppm by the beginning of 2006. The EPA estimated that the total cost to U.S. 

refiners of the Tier 2 gasoline sulfur content reduction would be 1.7 to 1.9 cents per gallon, and the API, 

based on a study prepared by MathPro, estimated that the cost would be 2.6 cents per gallon.11 Therefore, 

the estimated cost to U.S. refiners of the Tier 2 gasoline sulfur content reduction was about 2 cents per 

gallon while the estimated cost of the Tier 3 gasoline sulfur content reduction to U.S. refiners is about 1 

cent per gallon. If the U.S. refiners’ compliance costs of the Tier 2 gasoline sulfur content regulation 

were fully passed on to consumers, one would expect to see about a 2 cents per gallon increase in U.S. 

retail gasoline prices.

The purposes of the two Tier 2 related dummy variables are different. The first, Shocks_03_04, is 

intended to capture the effect of numerous unusual or unexpected events that occur during 2003 and 2004 

on the U.S. retail price of gasoline, including the transition from 300 ppm to 180 ppm by the start of 

2004, and then the movement towards the 30 ppm goal during 2004 (e.g., any transitory shortages of 

gasoline related to attaining the sulfur standards). However, contemporaneous with this potential 

influence are several other substantial market events occurred that would be expected to influence the 

U.S. retail price of gasoline (See Figure 1 and discussion below). Tier2_05_on is intended to capture any 

permanent effects on the U.S. retail price of gasoline due to the reduction of the sulfur content of gasoline 

from 300 ppm to 30 ppm by the start of 2006. Given that the estimated average cost to the U.S. refiners 

of complying with the Tier 2 sulfur content of gasoline regulations is in the vicinity of 2 cents per gallon, 

one would expect that the regression coefficient on Tier2_05_on would be in the vicinity of 2 cents per 

gallon (assuming a full pass-through of the U.S. refiners’ compliance costs).

A qualification to the interpretation of the two Tier 2 related dummy variables in Table 1 is necessary 

because other market factors changed particularly during the 2003 to 2004 period (covered by the 

Shocks_03_04 dummy variable) and during the 2005 forward period (covered by the Tier2_05_on 

dummy variable). As a consequence, one cannot presume that a retail price increase during these two 

 

11 John F. Anderson and Todd Sherwood, EPA, Comparison of EPA and Other Estimates of Mobile Source Rule 

Cost Changes to Actual Price Changes, Paper Presented to the SAE Government Industry Meeting, 

Washington, DC, May 14, 2004, Table 2.
TECHNICAL APPENDIX

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periods that is not explained by the other explanatory factors was necessarily due to the implementation of 

the Tier 2 gasoline sulfur content reduction. As discussed below, as part of the discussion of the 

regression model estimation results, the factors other than implementing the Tier 2 gasoline sulfur sulfur 

oil reduction are particularly important during the 2003 to 2004 period covered by the Shocks_03_04 

dummy variable.

Regression Model Estimation Results

The regression model estimation results are presented in Table 2 and Table 3 below. The adjusted Rsquared statistics underneath Tables 1 and 2 measure the percentage of the variance in the dependent 

variable that is explained by the regression model. The “adjustment” corrects the R-squared for degrees 

of freedom. If an explanatory variable is added to a regression model, the adjusted R-squared will rise or 

fall depending on whether or not the additional explanatory variable makes a statistically significant 

contribution to the accuracy of the estimated regression model. 

The regression specification used in Table 3 is identical to that used in Table 2 except that the variable 

“Tier2_05_on” is omitted because it is statistically insignificant in the results shown in Table 2 (i.e., 

Tier2_05_on does not make a statistically significant contribution to the accuracy of the regression 

model).12 The adjusted R-squared statistics have identical values in Tables 2 and 3 indicating that the 

explanatory variable “Tier2_05_on” does not make a statistically significant contribution to explaining 

the variance in the U.S. retail price of gasoline. While statistically insignificant, the regression coefficient 

in Tier2_05_on in Table 2 is 2.l cents per gallon which is consistent with the estimated U.S. refiners’ cost 

of compliance of about 2 cents per gallon. 

 

12 Stata 10.1 for Windows was used to perform the estimations. The “β’s” in the regression specification 

represent regression coefficients that are estimated and reported in Tables 2 and 3. Robust standard errors are 

used to account for a variety of technical issues (e.g., the possible presence of arbitrary forms of autocorrelation 

and heteroskedasticity). Formal statistical tests indicate that the “residuals” from the regressions are stationary. 

This indicates that they represent a “cointegrating vector” among the explanatory variables so that standard 

errors are consistently estimated, and that the regression results are meaningful (and not spurious). In 

particular, while the times series used in the regressions (i.e., gasoline price, Brent price, and refinery margin) 

are individually non-stationary, they are cointegrated. Formal statistical tests confirm these findings and are 

available upon request.
TECHNICAL APPENDIX

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Table 2: Regression Model Estimation Results Including Tier 2_05_on

Note: The Adjusted R-squared (expressed as a percentage) equals 99.1%.

 _cons .273803 .0261335 10.48 0.000 .2220228 .3255831

 Tier2_05_on .0210653 .026774 0.79 0.433 -.031984 .0741146

Shocks_03_04 .0842546 .015392 5.47 0.000 .0537573 .1147518

 MTBE_07 .1184097 .046843 2.53 0.013 .0255962 .2112231

 MTBE_06 .0943489 .040353 2.34 0.021 .0143947 .1743032

 hurr_dum .1074283 .0453668 2.37 0.020 .0175398 .1973168

 month_dum11 .036027 .0322155 1.12 0.266 -.0278039 .099858

 month_dum10 .0664602 .0321564 2.07 0.041 .0027464 .130174

 month_dum9 .1062632 .0310538 3.42 0.001 .0447341 .1677923

 month_dum8 .0870313 .0262258 3.32 0.001 .0350682 .1389943

 month_dum7 .1119949 .0273339 4.10 0.000 .0578363 .1661535

 month_dum6 .1562905 .033111 4.72 0.000 .0906854 .2218956

 month_dum5 .1769586 .0295633 5.99 0.000 .1183828 .2355345

 month_dum4 .1111136 .026536 4.19 0.000 .0585359 .1636913

 month_dum3 .0770951 .0291928 2.64 0.009 .0192534 .1349368

 month_dum2 .0193204 .0299509 0.65 0.520 -.0400235 .0786644

 month_dum1 .0188129 .0303161 0.62 0.536 -.0412546 .0788803

 ref_margin .788483 .0965854 8.16 0.000 .5971114 .9798546

 D1. .6207283 .0736136 8.43 0.000 .4748725 .7665842

L1. .9515957 .0138523 68.70 0.000 .9241491 .9790422

brent

gasP_notax Coef. Std. Err. t P>|t| [95% Conf. Interval]

Robust

 Root MSE = .06812

 R-squared = 0.9926

 Prob > F = 0.0000

 F( 19, 112) = 1379.76

Linear regression Number of obs = 132
TECHNICAL APPENDIX

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Table 3: Regression Model Estimation Results Excluding the Tier2_05_0n

Note: The Adjusted R-squared (expressed as a percentage) equals 99.1%.

In Table 3 above, the most important explanatory factor is the Brent crude oil price with the U.S. refinery 

margin being a distant second in importance. The 2005 hurricanes and the issues associated with the 

transition from MTBE to ethanol as an oxygenate during 2006 and 2007 had a statistically significant 

effect on the U.S. retail price of gasoline. In addition, as shown in Table 3 above, the variable intended to 

control for numerous “shocks” to the market during 2003 and 2004 (“Shocks_03_04”) is positive and 

statistically significant. There are numerous market “shocks” that are captured by the Shocks_03_04 

explanatory variable. Gasoline prices were unusually high during the summer of 2003 (particularly in 

August) due to low refiner inventories of refined products and crude oil, unexpected refinery outages, and 

strong summer gasoline demand.13 High winter demand for distillates depleted inventories which caused 

refineries to plan to produce relatively more distillate and less gasoline than normal during the summer of 

2003.14 In addition, there were substantial refinery outages during June and July 2003 in some parts of the 

country.15 There also was an electricity blackout in August 2003 which caused refinery shutdowns.16 

There is no mention by the EIA of any issues related to the transition to low sulfur gasoline during 2003.17 

 

13 EIA, Inquiry into August 2003, Gasoline Price Spike, November 2000, pp. 15-17, 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf .

14 Id.

15 Id.

 _cons .2756814 .0262263 10.51 0.000 .2237225 .3276404

Shocks_03_04 .0753474 .0138127 5.45 0.000 .047982 .1027128

 MTBE_07 .1200742 .0462439 2.60 0.011 .0284567 .2116916

 MTBE_06 .0944099 .0404674 2.33 0.021 .0142368 .174583

 hurr_dum .1063092 .04489 2.37 0.020 .017374 .1952444

 month_dum11 .0355382 .0314156 1.13 0.260 -.0267017 .0977781

 month_dum10 .0647937 .0320144 2.02 0.045 .0013675 .1282199

 month_dum9 .1035406 .0312444 3.31 0.001 .0416398 .1654414

 month_dum8 .0840827 .0263907 3.19 0.002 .0317979 .1363675

 month_dum7 .1094042 .0274055 3.99 0.000 .0551091 .1636994

 month_dum6 .1536496 .0324126 4.74 0.000 .0894343 .2178648

 month_dum5 .1738783 .0291106 5.97 0.000 .116205 .2315517

 month_dum4 .1084548 .0261497 4.15 0.000 .0566476 .160262

 month_dum3 .0760365 .0291377 2.61 0.010 .0183094 .1337636

 month_dum2 .019367 .0296066 0.65 0.514 -.039289 .0780231

 month_dum1 .0201034 .0297718 0.68 0.501 -.0388798 .0790867

 ref_margin .8079564 .0881157 9.17 0.000 .6333833 .9825296

 D1. .6251273 .0716022 8.73 0.000 .4832705 .7669841

L1. .9592639 .0092446 103.77 0.000 .9409487 .977579

brent

gasP_notax Coef. Std. Err. t P>|t| [95% Conf. Interval]

Robust

 Root MSE = .06802

 R-squared = 0.9926

 Prob > F = 0.0000

 F( 18, 113) = 1391.23

Linear regression Number of obs = 132
TECHNICAL APPENDIX

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Retail gasoline prices also were relatively high in 2004 due to “strengthening product demand, stagnant 

capacity growth, and slightly reduced supply due to more-stringent product specifications.”18 The last of 

the three factors listed above includes, but is not limited to, the reduction in the sulfur content of gasoline 

(e.g., California, New York, and Connecticut banned MTBE use beginning January 1, 2004).19 The EIA 

indicated that gasoline markets remained tight as the 2004 driving season began, and that conditions were 

likely to remain volatile throughout the summer.20 The EIA stated that “[h]igh crude oil costs, strong 

gasoline demand growth, low gasoline inventories, uncertainty about the availability of gasoline imports, 

high transportation costs, and changes in gasoline specification have added to current and expected 

gasoline costs and pump prices.”21 The EIA went on to say that “[t]he combined impact of high crude oil 

prices, continuing growth in demand, low inventories, and the ongoing transition from methyl tertiary 

butyl ether (MTBE) to ethanol in several regions are projected to contribute to high average motor 

gasoline prices for this driving season.”22 The EIA’s emphasis related to the effects of changes in 

gasoline specifications was on the impacts of the switch from MTBE to ethanol in the three states, but it 

did mention the potential impacts of the transition to the Tier 2 lower sulfur standards. The EIA stated 

that, in addition to the factors discussed above, retail gasoline prices in the summer of 2004 also could be 

affected by “the reduction in permissible sulfur content mandated by the Environmental Protection 

Agency.”23 The EIA further stated that “for the summer [of 2004], motor gasoline supplies are expected 

to be tight due to low stocks, more stringent reformulation requirements [resulting from the transition 

from MTBE to ethanol], and lower sulfur content allowances.”24 

 

16 Id.

17 Id.

18 Oil & Gas Journal, Refining industry to sustain strong margins through 2004, March 15, 2004, 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf .

19 Id.

20 U.S. Department of Energy, Energy Information Administration, Short-Term Energy Outlook April 2004, 

Summer 2004 Motor Gasoline Outlook, p. 1, 

(http://www.eia.gov/forecasts/steo/special/summer/2004_summer_gas.pdf).

21 Id., p. 1.

22 Id., p. 3.

23 Id., p. 4.

24 Id., p. 11, see also Id., p. 8.
TECHNICAL APPENDIX

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In testimony before the Government Reform Subcommittee on Energy Policy, Natural Resources and 

Regulatory Affairs by Guy F. Caruso, Administrator, EIA on July 7, 2004, Mr. Caruso cited high crude 

prices and high gasoline demand as reasons for the high retail gasoline prices.25 Mr. Caruso stated that 

gasoline supply was tight in part because of lower than expected gasoline imports. Mr. Caruso attributed 

these lower than expected gasoline imports to world market conditions in general and to “the effect of 

required sulfur content reductions under the Tier 2/Gasoline Sulfur regulations as well as other changes in 

U.S. requirements for higher-valued cleaner products.”26

The higher than expected retail gasoline prices during the summer in 2003 and 2004 are due to numerous 

factors. In 2003, there is no indication that the Tier 2 gasoline sulfur regulations were a factor. In 2004, 

the evidence is that the Tier 2 gasoline sulfur regulations were a contributing factor among many to the 

higher retail gasoline prices. The estimated regression coefficient on the Shocks_03_04 explanatory 

variable in Table 3 of 7.5 cents per gallon is due to the combined effect of all the factors discussed above. 

Further, given the emphasis in the EIA’s discussion of the various risks, it appears that the contribution of 

the transition to the Tier 2 gasoline sulfur content standards was relatively minor.

 

25 Statement of Guy F. Caruso, Administrator, Energy Information Administration, Department of Energy before 

the Government Reform Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, United 

States House of Representatives, July 7, 2004, pp. 2-4, 

(http://www.eia.gov/neic/speeches/caruso070704.htm).

26 Id., p. 4.
TECHNICAL APPENDIX

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Conclusions

The U.S. retail gasoline price excluding taxes and its predicted value generated by the estimated 

regression model results shown in Table 3 are presented in Figure 2 below. Figure 2 demonstrates 

visually that the regression model is highly accurate. The adjusted R-squared statistic measures the 

percentage of the variance of the dependent variable (the U.S. retail price of gasoline excluding taxes) that 

is explained by the regression model, which, for the estimated regression model in Table 3 above, is 

99.1%. The estimated regression model is statistically significant at the highest level (the 1% level).

Figure 2

The estimated regression model results shown in Table 3 above confirm that the global crude oil price is 

by far the most important determinant of retail gasoline prices. The U.S. refinery margin, which reflects 

the relationship between supply and demand for refined petroleum products, is a distant second in 

importance. The seasonal dummy variables and the various market event variables (hurr_dum; 

MTBE_06; MTBE_07; and Shocks_03_04) are the third in importance. These market event variables 

0

5 0

100

150

200

250

300

350

400

Feb-0 1 Feb-0 2 Feb-0 3 Feb-0 4 Feb-0 5 Feb-0 6 Feb-0 7 Feb-0 8 Feb-0 9 Feb-1 0 Feb-11 Cents per Gallon

Predicted vs. Actual Retail Gasoline Prices Excluding Taxes

February 2001 - January 2012

Actual U.S. Total Gasoline Retail Sales Prices by Refiners Predicted Values
TECHNICAL APPENDIX

Page 12 of 13

capture the effects of unexpected and/or unusual market events during the regression model estimation 

period that caused the U.S. retail price of gasoline to be higher than would be expected based on the 

global crude oil price and the U.S. refinery margins. These market events include the 2005 hurricanes 

and the 2006 and 2007 MTBE to ethanol transition issues. Finally, there were numerous unusual and 

unexpected market events during 2003 and 2004 which caused U.S. retail gasoline prices to be higher 

than would be expected given the global crude oil price and U.S. refinery margins. These 2003/2004 

events include refinery outages, low gasoline inventories, strong gasoline demand growth, the transition 

from MTBE to ethanol as an oxygenate in California, New York, and Connecticut in January 1, 2004, 

slightly reduced gasoline supply due to more stringent product specifications (transition from MTBE to 

ethanol and transition to lower sulfur content gasoline), uncertainty regarding the availability of gasoline 

imports (due to transition from MTBE to ethanol and transition to lower sulfur content gasoline), and 

higher transportation costs.27 Of the two changes in gasoline specifications, the transition from MTBE to 

ethanol was given the greatest emphasis by the EIA in its assessment of why U.S. retail gasoline prices 

were substantially higher than expected given global crude oil prices in 2004.28 However, in 2003, neither 

the transition from MTBE to ethanol nor the transition from MTBE to ethanol were named by EIA as a 

contributing factor to higher retail gasoline prices.29 Therefore, given global crude oil prices, the higher 

than expected U.S. retail gasoline prices in 2003 and 2004 were primarily the result of factors other than 

the transition to lower sulfur gasoline. 

For the period 2005 forward, there is no statistically significant effect of the Tier 2 gasoline sulfur content 

reduction on U.S. retail gasoline prices (i.e., the EPA Tier 2 gasoline sulfur content regulations which 

increased U.S. refiner costs by about 2 cents per gallon had no statistically significant effect on U.S retail 

gasoline prices). Therefore, it is highly unlikely that the EPA Tier 3 gasoline sulfur content regulations 

 

27 EIA, Inquiry into August 2003, Gasoline Price Spike, November 2000, pp. 15-17, 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf ; Oil & Gas Journal, Refining 

industry to sustain strong margins through 2004, March 15, 2004, 

http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/gasps/gasps.pdf; U.S. 

Department of Energy, Energy Information Administration, Short-Term Energy Outlook April 2004, Summer 

2004 Motor Gasoline Outlook, p. 1, 

(http://www.eia.gov/forecasts/steo/special/summer/2004_summer_gas.pdf); Statement of Guy F. 

Caruso, Administrator, Energy Information Administration, Department of Energy before the Government 

Reform Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, United States House of 

Representatives, July 7, 2004, pp. 2-4, (http://www.eia.gov/neic/speeches/caruso070704.htm .

28 Id.

29 Id.
TECHNICAL APPENDIX

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which are expected to increase U.S. refiner costs by about 1 cent per gallon will have a statistically 

significant effect on U.S retail gasoline prices.