PETROLEUM 

REFINING

Industry's Outlook 

Depends on Market 

Changes and Key 

Environmental 

Regulations

Report to Congressional Requesters

March 2014

GAO-14-249

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-249, a report to 

congressional requesters

March 2014

PETROLEUM REFINING

Industry's Outlook Depends on Market Changes and 

Key Environmental Regulations 

Why GAO Did This Study

The U.S. petroleum refining industry—

the largest refining industry in the 

world—experienced a period of high 

product prices and industry profits from

the early 2000s through about 2007. 

Since the recession of 2007 to 2009, 

the industry has been in transition.

Federal and state agencies regulate 

petroleum refining and the use of 

petroleum products to protect human 

health and the environment, as well as 

for other purposes. EPA, DOT, and 

California recently proposed or 

strengthened five key regulations, 

including EPA and DOT's coordinated 

fuel economy and GHG vehicle 

emission standards, and EPA's RFS, 

which has required that refiners and 

others ensure transportation fuels 

include increasing amounts of 

renewable fuels such as ethanol 

produced from corn. 

GAO was asked to provide information 

on the domestic petroleum refining 

industry. This report examines: (1) 

major changes that have recently 

affected the industry and (2) the future 

of the industry. GAO reviewed 

information including studies by 

agencies and consultants and 

company financial filings; interviewed 

stakeholders, including agency officials 

and representatives of refiners and 

environmental organizations; and 

reviewed forecasts by the Energy 

Information Administration and others. 

What GAO Recommends

GAO recommends that EPA identify 

the underlying causes of delays in 

issuing RFS standards and implement 

a plan to issue RFS standards on time. 

EPA generally agreed with GAO's 

findings and recommendations.

What GAO Found

Stakeholders GAO contacted and information reviewed by GAO identified the 

following three major changes that have recently affected the domestic petroleum 

refining industry: 

• Increased production. U.S. and Canadian crude oil production have 

increased, leading to lower costs of crude oil for some refiners. After 

generally declining for decades, monthly U.S. crude oil production increased 

over 55 percent compared with average production in 2008. 

• Declining consumption. Domestic consumption of petroleum products 

declined by 11 percent from 2005 through 2012, resulting in a smaller 

domestic market for refiners. 

• Key regulations. Two key regulations—the Environmental Protection 

Agency’s (EPA) and Department of Transportation's (DOT) coordinated fuel 

economy and greenhouse gas (GHG) vehicle emission standards, as well as 

EPA's Renewable Fuel Standard (RFS)—have contributed to declining 

petroleum-based fuel consumption. For some refiners, compliance with the 

RFS increased costs in the first half of 2013, though costs have since 

declined to some degree from their peak. According to some stakeholders 

GAO contacted, this was primarily due to RFS requirements exceeding the 

capability of the transportation fuel infrastructure to distribute and the fleet of 

vehicles to use renewable fuels. Moreover, EPA has missed the statutory 

deadline to issue regulations establishing annual RFS blending standards 

since 2009. EPA has not systematically identified the underlying causes of 

these delays or changed its approach in order to avoid them. A late RFS 

contributes to industry uncertainty, which can increase costs because 

industry cannot plan and budget effectively, according to some stakeholders. 

Stakeholders GAO contacted and information reviewed generally suggested that 

the U.S. refining industry's outlook depends on the following factors: 

• Domestic consumption. Future consumption of petroleum products is 

uncertain, with projections ranging from stable to slightly increasing through 

2020 but not returning to consumption levels of the past. Forecasts GAO 

reviewed suggest higher future refinery production in scenarios with higher 

domestic consumption.

• Costs of key regulations. The extent to which requirements in the key 

regulations increase costs for refiners will affect the industry's outlook. For 

example, future costs to comply with RFS may depend on the annual 

renewable fuel volumes EPA sets and whether EPA issues annual RFS 

standards on time. In general, increasing costs may be absorbed by refiners 

(i.e., by reducing their profits), be passed on to consumers through higher 

prices, or both. 

• Foreign markets. The U.S. refining industry has increasingly relied on foreign 

markets. Exports grew from 7 percent of production in 2007 to 17 percent in 

2012. The extent to which domestic refiners export their products will depend 

on the competitiveness of U.S. refiners. Factors that may affect 

competitiveness include domestic environmental regulations, levels of U.S. 

and Canadian crude oil production, and the balance between global refining 

capacity and demand for petroleum products. 

View GAO-14-249. For more information, 

contact Frank Rusco at (202) 512-3841 or 

ruscof@gao.gov.
Page i GAO-14-249 Petroleum Refining

Letter 1 

Background 4

Market Changes and Key Environmental Regulations Likely 

Affected the Refining Industry 20

Industry Outlook Depends on a Number of Factors 35

Conclusions 49

Recommendations for Executive Action 50

Agency Comments and Our Evaluation 50

Appendix I Scope and Methodology 53

Appendix II List of Stakeholders 56

Appendix III Further Information Regarding the Renewable Fuel Standard, 

Compliance Credits, and the Blend Wall 58

Appendix IV Comments from the Environmental Protection Agency 59

Appendix V GAO Contact and Staff Acknowledgments 64

Related GAO Products 65

Figures

Figure 1: Location and Capacity of Petroleum Refineries and 

Capacity by Region as of January 1, 2013 6

Figure 2: Petroleum Products Made from a Barrel of Crude Oil in 

the United States in 2012 8

Figure 3: Primary Transportation Infrastructure for Crude Oil, 

Petroleum Products, and Renewable Fuels 10

Figure 4: U.S. Real Annual Average Retail Regular Gasoline Price 

& Refining Component of Retail Price, 1976-2012 12

Contents
Page ii GAO-14-249 Petroleum Refining

Figure 5: Renewable Fuel Standard Volumes Established by the 

Energy Independence and Security Act of 2007 14

Figure 6: Corporate Average Fuel Economy (CAFE) Standards, 

1978-2025 16

Figure 7: Monthly Crude Oil Production in Texas, North Dakota 

and the Rest of the United States, January 1981-

September 2013 22

Figure 8: Domestic Consumption of Gasoline, Diesel and Other

Petroleum Products, 1981-2012 25

Figure 9: Timeline of EPA’s Issuance of Proposed and Final RFS 

Standards (2009-2014) 31

Figure 10: Historical (1995-2012) and Projected (2020) U.S. 

Consumption of Gasoline, Diesel, and Jet Fuel 37

Figure 11: Historical (1995-2012) and Projected U.S. Exports of 

Petroleum Products (2015 and 2020) 44

Figure 12: Historical (1995-2013) and Projected (2015 and 2020) 

U.S. Crude Oil Production 49
Page iii GAO-14-249 Petroleum Refining

Abbreviations

CAFE Corporate Average Fuel Economy

CARB California Air Resources Board

CI carbon intensity

DOE Department of Energy

DOT Department of Transportation

EIA Energy Information Administration

EPA Environmental Protection Agency

GHG greenhouse gas

IEA International Energy Agency

LCFS Low Carbon Fuel Standard

NHTSA National Highway Traffic Safety Administration

OMB Office of Management and Budget

ppm parts per million

PSD Prevention of Significant Deterioration

RFS Renewable Fuel Standard

RIN renewable identification number

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Page 1 GAO-14-249 Petroleum Refining

441 G St. N.W.

Washington, DC 20548

March 14, 2014

The Honorable David Vitter

Ranking Member

Committee on Environment and Public Works

United States Senate

The Honorable James Inhofe

United States Senate

The petroleum refining industry in the United States—the largest refining 

industry in the world—experienced what some observers and industry 

analysts have called a “golden age” from the early 2000s through about 

2007. As we reported in 2007, this period was characterized by increased 

petroleum product prices, as well as higher price volatility and industry 

profits.1 Conditions changed with the recession of 2007 to 2009—the 

most severe in this country since the 1930s—and the industry has since 

been in transition. Amid declining refining profits, seven refineries have 

closed since 2008, and the remaining refineries have not been run as 

intensively. Conditions have improved more recently, with an Energy 

Information Administration (EIA) official noting that the industry may be in 

a second golden age.2 Petroleum refineries process crude oil into 

transportation fuels and other products (e.g., gasoline, diesel, and 

kerosene) that together comprise the largest source of energy in the 

United States—36 percent of the energy consumed in 2012, according to 

data from EIA. Domestic petroleum refineries produce the majority of the 

fuels used in our transportation system, which also uses a small portion of 

other fuels such as renewable fuels produced from corn, sugar cane, and 

soybeans.

Federal and state agencies regulate aspects of petroleum refining and the 

use of refined petroleum products for several purposes, including to 

protect human health and the environment, and to respond to concerns 

 

1

See GAO, Energy Markets: Increasing Globalization of Petroleum Products Markets, 

Tightening Refining Demand and Supply Balance, and Other Trends Have Implications for 

U.S. Energy Supply, Prices, and Price Volatility, GAO-08-14 (Washington, D.C.: Dec. 20, 

2007).

2

EIA is a statistical agency within the Department of Energy (DOE) that collects, analyzes, 

and disseminates independent information on energy issues. 
 

Page 2 GAO-14-249 Petroleum Refining

regarding the nation’s dependence on imported crude oil. Petroleum 

refining and the combustion of gasoline and diesel emit carbon dioxide, a 

greenhouse gas (GHG) linked to climate change. To address climate 

change and other concerns, the Environmental Protection Agency (EPA), 

the primary federal agency responsible for implementing many of the 

nation’s environmental laws, along with the Department of Transportation 

(DOT) and the state of California recently proposed or strengthened five 

key environmental regulations as follows:3

• Renewable Fuel Standard (RFS). Established in light of concerns 

such as climate change and the nation’s dependence on imported 

crude oil, the RFS provides that U.S. transportation fuels must contain 

certain percentages of renewable fuels. Under the law establishing 

the program, volumes of renewable fuels were to increase over time, 

though EPA determines requirements annually and may reduce 

percentages under certain circumstances.4

• Corporate Average Fuel Economy (CAFE) and GHG vehicle emission 

standards. A coordinated program in which DOT establishes fleetwide gas mileage or fuel economy standards and EPA establishes 

GHG emission standards for vehicle manufacturers.

• Tier 3 Motor Vehicle Emission and Fuel Standards. EPA’s standards 

for vehicles and transportation fuels to reduce emissions of certain air 

pollutants. 

• Stationary source GHG requirements. EPA’s new requirements to 

address GHG emissions at new refineries and refineries that 

undertake major modifications.

• Low Carbon Fuel Standard (LCFS). California’s recently implemented 

LCFS requires reductions to the amount of carbon in California’s 

transportation fuels. California is important for the domestic refining 

industry because it is the nation’s largest consumer of petroleum-

 

3

We use the term key environmental regulations to refer to these five regulations. 

4

The RFS was created in the Energy Policy Act of 2005, and then expanded through the 

Energy Independence and Security Act of 2007. See Pub. L. No. 109-58, § 1501 (2005) 

and Pub. L. No. 110-140, §§ 201-203, 210 (2007), codified as amended at 42 U.S.C. § 

7545(o) (2013). 
 

Page 3 GAO-14-249 Petroleum Refining

based transportation fuels. It also has the nation’s third largest refining 

capacity, after Texas and Louisiana.

You asked us to provide information about the domestic petroleum 

refining industry and its market environment. This report examines what is 

known about: (1) major changes—including key environmental 

regulations—that have recently affected the domestic petroleum refining 

industry and (2) major factors that may affect the future of the domestic 

petroleum refining industry—including its production, profitability, and 

competitiveness in foreign markets.

To conduct this work, we reviewed information, including studies by 

federal agencies and consultants, and company financial regulatory 

filings; and summarized the results of interviews with a nonprobability 

sample of 32 stakeholders. Stakeholders included representatives from 

refining companies, environmental organizations, consultants, and 

officials from federal and state agencies. We also visited several 

refineries of selected refining companies. We selected these stakeholders 

to represent broad and differing perspectives on these issues based on 

recommendations from agencies, industry associations, and others. We 

took into account such factors as the location and size of companies’ 

refineries. Because we used a nonprobability sample, the views of 

stakeholders are not generalizable to all potential stakeholders but 

provide illustrative examples of the range of views. Similarly, the 

conditions at the refineries we visited are not generalizable to all 

refineries. The stakeholder views we summarize were not necessarily 

supported by all types of stakeholders, though we identify differing views 

where appropriate. The stakeholders we contacted and information we 

reviewed identified a number of changes that have affected industry and 

factors that may affect its future, and we report on those that were most 

often cited. Based on our research and information from stakeholders, we 

identified five key regulations that were recently strengthened or 

proposed, though other regulations may also affect the industry. To 

illustrate major changes affecting industry over time, we summarized 

historical data from EIA. We took several steps to assess the reliability of 

EIA data, including reviewing documentation, interviewing EIA staff, and 

consulting with stakeholders. We determined the EIA data to be 

sufficiently reliable for the purposes of this report. To provide information 

about major factors that could affect the industry, we also reviewed 
 

Page 4 GAO-14-249 Petroleum Refining

forecasts from EIA, the International Energy Agency (IEA),5 and IHS,6 and 

summarized projections through 2020 under different scenarios. While 

forecasts are subject to inherent uncertainties, we found these forecasts 

to be reasonable for describing a range of views about potential 

conditions of the domestic refining industry and major factors that will help 

determine these conditions.7 Appendix I provides additional information 

on our scope and methodology, and appendix II lists the stakeholders we 

interviewed.

We conducted this performance audit from November 2012 to March 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

This section describes the petroleum refining industry and the five key 

regulations that we reviewed.

According to data from EIA, there were 143 petroleum refineries in the 

United States as of January 2013, with a capacity to process 17.8 million 

barrels of crude oil per day.8 While there are refineries in most regions of 

the country, most refining capacity (almost 90 percent) is located in the 

 

5

IEA is an international organization composed of 28 of the member nations of the 

Organisation for Economic Co-operation and Development that, among other things, 

collects energy data and provides research and analysis on ways to ensure reliable, 

affordable, and clean energy. 

6

IHS is a firm that provides comprehensive economic and financial information on 

countries, regions, and industries.

7

Forecasts reflect assumptions and data available at the time the forecasts are developed. 

The forecasts we reviewed were developed at different points in time. For example, the 

2013 EIA forecast we reviewed was released in April 2013 while IHS’s forecast was 

released in October 2013. More recent forecasts may more fully reflect recent 

developments such as changes in economic growth and in crude oil production.

8

A refinery’s capacity refers to the maximum amount of crude oil designed to flow into the 

distillation unit of a refinery, also known as the crude unit.

Background

Petroleum Refining 

Industry
 

Page 5 GAO-14-249 Petroleum Refining

Gulf Coast, West Coast, and Midwest regions (see fig. 1).9 These 

refineries employed over 70,000 people in 2013.

 

9

These regions are Petroleum Administration for Defense Districts, which were created 

during World War II to help organize the allocation of petroleum products. Many petroleum 

data collection organizations use these regions to organize their data for analytical 

purposes. 
 

Page 6 GAO-14-249 Petroleum Refining

Figure 1: Location and Capacity of Petroleum Refineries and Capacity by Region as of January 1, 2013

Note: These regions are Petroleum Administration for Defense Districts.

Refineries process crude oil into products primarily through a distillation 

process that separates crude oil into different fractions based on their 

boiling points, which can then be further processed into final products. 

One barrel of crude oil can be processed into varying amounts of 
 

Page 7 GAO-14-249 Petroleum Refining

gasoline, diesel, jet fuel, and other petroleum products depending on the 

configuration—or complexity—of the refinery and the type of crude oil that 

is being refined. Through the addition of specialized equipment, refineries 

can be optimized—or “upgraded”—to produce greater proportions of 

specific types of products or to use different types of crude oil. For 

example, a coker unit upgrades the low-value residual oil from the 

distillation process into higher value products such as diesel, increasing a 

refinery’s ability to process heavier crude oils.10 As shown in Figure 2, 

from a barrel of crude oil, U.S. refineries primarily produce gasoline, 

diesel, and jet fuel that are used in the transportation sector, along with 

heating oil and liquefied petroleum gases such as propane used in home 

heating.11

 

10Coking processes use temperatures greater than 900 degrees Fahrenheit to thermally 

break molecules that make up feedstocks into products such as diesel, leaving behind 

petroleum coke—a coal-like material. Petroleum coke is used as a fuel input to produce 

electricity or as a raw material in the steel and aluminum industry.

11Except where noted, we use the term diesel to refer to what EIA calls distillate fuel oil. 

Distillate fuel oil is a general term that includes primarily diesel fuel, as well as fuel oils 

used for heating and electric power generation. In 2011, 90 percent of distillate fuel oil was 

diesel according to EIA data. 
 

Page 8 GAO-14-249 Petroleum Refining

Figure 2: Petroleum Products Made from a Barrel of Crude Oil in the United States 

in 2012

a

Note: Numbers do not add to 100 due to independent rounding.

Other products include heavy fuel oil, petroleum coke, asphalt and road oil, and other miscellaneous 

products.

The U.S. petroleum refining industry consists of firms of varying sizes 

that, in addition to operating refineries, may also have operations in other 

related industry segments: (1) the upstream segment, which consists of 

the exploration for and production of crude oil; (2) the midstream 

segment, which consists of pipelines and other infrastructure used to 

transport crude oil and refined products; (3) the downstream segment, 

which consists of the refining and marketing of petroleum products such 

as gasoline and heating oil; and (4) the renewable fuels segment, where 

biorefineries produce renewable fuels that are blended with petroleum 

products at wholesale terminals before being distributed to consumers. 

To varying degrees, refiners may primarily operate refineries—these are 

called merchant refiners—or may be integrated, participating in various 

other related industry segments. HollyFrontier Corporation is an example 

of a merchant refiner that purchases crude oil from unaffiliated producers 

and sells refined products to other companies operating retail fuel outlets, 
 

Page 9 GAO-14-249 Petroleum Refining

while Chevron is an example of a fully integrated company, a refiner that 

also produces crude oil and operates pipelines and retail fueling outlets 

across the United States.

Crude oil, petroleum products, and renewable fuels are transported 

between market participants through an extensive supply infrastructure 

including pipelines, tanker vessels, rail, trucks, wholesale terminals, and 

retail outlets. (See fig. 3.) In 2012, refineries received the majority of their 

crude oil by pipeline (over 50 percent) and by tanker vessel (37 percent), 

with trucks and rail generally playing a more limited role according to EIA 

data.
 

Page 10 GAO-14-249 Petroleum Refining

Figure 3: Primary Transportation Infrastructure for Crude Oil, Petroleum Products, and Renewable Fuels

Note: Other means of transportation are also used to move petroleum and renewable fuels to 

wholesale terminals. For example, for ethanol, barges are also used to a limited extent.
 

Page 11 GAO-14-249 Petroleum Refining

As we reported in 2007, according to industry officials and experts, the 

refining industry was a low-return industry for much of the prior two 

decades.12 Retail prices for regular gasoline averaged $3.63 per gallon in 

2012, the highest annual average price when adjusted for inflation since 

1976, the earliest comparable data available from EIA.13 Retail prices 

have declined in 2013—gasoline averaged $3.55 in the first half of 2013 

and $3.18 in November 2013—but are still near historic highs. Market 

dynamics anywhere along the supply chain can influence consumer 

prices, beginning with upstream crude oil production, the production of 

renewable fuels, through downstream refining and retailing.14 According 

to EIA data, increases in crude oil costs have been the largest component 

of the recent increases in gasoline prices. The refining component of 

prices—including labor, materials, energy, and other costs of the refining 

process, as well as profits to refinery owners—has fluctuated over time 

but has not increased in a significant way since 2000, when EIA began 

reporting estimates of the components of retail prices (see fig.4).

 

12GAO-08-14. 

13Prices in this section were converted to 2012 dollars using the Bureau of Labor 

Statistics’ Consumer Price Index. 

14We have previously reported on several factors affecting these dynamics. See, for 

example: GAO, Energy Markets: Estimates of the Effects of Mergers and Market 

Concentration on Wholesale Gasoline Prices, GAO-09-659 (Washington, D.C.: June 12, 

2009); GAO-08-14; and GAO, Motor Fuels: Understanding the Factors That Influence the 

Retail Price of Gasoline, GAO-05-525SP (Washington, D.C.: May 2, 2005). A more 

complete list of related reports is included at the end of this report.
 

Page 12 GAO-14-249 Petroleum Refining

Figure 4: U.S. Real Annual Average Retail Regular Gasoline Price and Refining Component of Retail Price, 1976-2012

Note: EIA began reporting estimates of the components of retail prices in 2000. Prices were 

converted to 2012 dollars using the Bureau of Labor Statistics’ Consumer Price Index.

The five key environmental regulations affecting the domestic refining 

industry that we reviewed are concerned with various health, 

environmental, and other issues.

Under the RFS, since 2006, transportation fuels sold in the United States 

have been required to contain increasing amounts of renewable fuels 

such as ethanol and biodiesel. EPA is responsible for administering the 

RFS and annually issues regulations that establish the percentage of 

gasoline and diesel fuels that refiners, importers, and other obligated 

parties must ensure are renewable fuels. Congress established the RFS 

in light of concerns such as climate change and the nation’s dependence 

on imported crude oil. As shown in figure 5, the law generally required 

that transportation fuels contain 9 billion gallons of renewable fuels in 

2008, and that volumes increase 4-fold through 2022 to 36 billion gallons. 

The Administrator of EPA is authorized to waive the RFS levels 

established in the act if the Administrator determines—in consultation with 

the Secretaries of Agriculture and Energy—that implementing the 

requirement would severely harm the economy or environment, that there 

Key Regulations Affecting 

the Domestic Refining 

Industry

RFS
 

Page 13 GAO-14-249 Petroleum Refining

is an inadequate domestic supply, or in certain other situations.15 The 

major source of renewable fuels has traditionally been ethanol produced 

from corn; however, as we reported in 2009, the increased cultivation of 

corn for ethanol, its conversion into renewable fuels, and the storage and 

use of these fuels could affect water supplies, water quality, air quality, 

soil quality, and biodiversity.16 Under the RFS’ statutory provisions, the 

increasing amounts of renewable fuels are to primarily come from 

renewable fuels other than corn ethanol—called advanced biofuels—that 

meet certain criteria, including reducing GHG emissions by at least 50 

percent compared with the gasoline or diesel fuel they displace.17

According to EPA, achieving the RFS’ statutory blending levels in 2022 

could result in total benefits—including those related to overall fuel costs, 

energy security, health, and GHG effects—of between $13 and $26 billion 

and could reduce GHG emissions by 138 million metric tons of carbon 

dioxide equivalent emissions, equal to taking about 27 million vehicles off 

the road.18

 

15EPA may also reduce the requirements for total renewable fuel and advanced biofuel in 

years when EPA reduces cellulosic biofuel or biomass-based diesel under applicable 

provisions. See 42 U.S.C. § 7545(o)(7)(D)-(E) (2013). EPA also must provide public notice 

and an opportunity for comment before making a determination for a waiver. 

16See GAO, Biofuels: Potential Effects and Challenges of Required Increases in 

Production and Use, GAO-09-446 (Washington, D.C.: Aug. 25, 2009) and GAO, EnergyWater Nexus: Many Uncertainties Remain about National and Regional Effects of 

Increased Biofuel Production on Water Resources, GAO-10-116 (Washington, D.C.: Nov. 

30, 2009).

17Beginning in 2015, the RFS’ statutory provisions call for more than half of advanced 

biofuels to be produced from cellulosic materials, which can include perennial grasses, 

crop residue, and the branches and leaves of trees. Such cellulosic biofuels must 

generally achieve at least a 60 percent reduction in life cycle greenhouse gas emissions 

compared with the gasoline or diesel fuel they displace. However, according to EIA, all 

EIA forecasts and projections made since the passage of the Energy Independence and 

Security Act of 2007 anticipated large shortfalls between the RFS targets and the volumes 

of cellulosic biofuels. In addition, some advanced biofuels must be produced from 

biomass-based diesel, which generally includes diesel made from biomass feedstocks 

such as soybeans. 

18EPA’s estimates of the benefits and costs of the regulations presented throughout this 

report refer to monetized amounts. As not all benefits and costs can be monetized, these 

may represent a subset of overall benefits and costs of the regulations. We did not 

independently assess EPA’s estimates of the benefits or costs of these regulations. We 

are examining EPA’s economic analyses in relation to its adherence to guidance for 

regulatory analysis and expect to report later this year on these issues. 
 

Page 14 GAO-14-249 Petroleum Refining

Figure 5: Renewable Fuel Standard Volumes Established by the Energy Independence and Security Act of 2007

The federal government has regulated vehicle fuel economy through 

CAFE standards since 1978 and, more recently, aligned these standards 

with new GHG vehicle emission standards in a joint national program 

aimed at reducing oil consumption and GHG emissions from the 

transportation sector.19 CAFE standards are administered by the National 

Highway Traffic Safety Administration (NHTSA) and require that vehicle 

manufacturers meet fleet-wide average fuel economy standards for 

vehicles.20 The Energy Independence and Security Act of 2007 instituted 

several changes to the CAFE standards and, in 2009, the administration 

announced a new program to increase vehicle fuel economy and reduce 

 

19The Energy Policy and Conservation Act, Pub. L. No. 94-163 tit. III (1975) established 

CAFE standards effective beginning in model year 1978.

20The NHTSA, under DOT, is responsible for setting and enforcing CAFE standards, 

among other things. 

CAFE and GHG Vehicle 

Emission Standards
 

Page 15 GAO-14-249 Petroleum Refining

vehicle GHG emissions, which was implemented by a joint rulemaking 

with NHTSA raising CAFE standards and EPA establishing the first GHG 

emissions standards for vehicles.21 Although the CAFE and GHG vehicle 

emission standards are distinct, their targets were aligned for compliance 

purposes. NHTSA and EPA put the national program into place by issuing 

coordinated regulations covering vehicle model years 2012 to 2025.22 As 

shown in figure 6, fuel economy standards for cars largely remained 

unchanged from 1990 through 2010, but vehicle manufacturers are now 

expected to meet increasingly stringent standards reaching the projected 

combined average fuel economy of about 50 miles per gallon by 2025—

about 80 percent more efficient than required under the 2011 standards.23

EPA estimated that the 2011-2025 standards may save consumers and 

businesses $1.7 trillion, reduce oil consumption by 12 billion barrels, and 

reduce GHG emissions by 6 billion metric tons over the lifetime of the 

vehicles sold during model years 2011-2025.24

 

21The Energy Independence and Security Act of 2007, Pub. L. No. 110-140, tit. 1, subtit. 

A. Among other things, the act extended and codified NHTSA’s reform of the CAFE 

standards by moving from a single fleet standard to an attribute-based standard for light 

trucks and passenger vehicles. The move from a single standard for a fleet to attributebased standards for each vehicle model based on a vehicle’s footprint was designed to 

address a number of downsides associated with moving to smaller vehicles, including 

potential safety implications and consumer choice limitations, see GAO, Vehicle Fuel 

Economy: NHTSA and EPA’s Partnership for Setting Fuel Economy and Greenhouse Gas 

Emissions Standards Improved Analysis and Should Be Maintained, GAO-10-336

(Washington, D.C.: Feb. 25, 2010). 

22In the coordinated rulemaking, NHTSA issued regulations establishing CAFE standards 

for model years 2012 to 2021 and identified nonbinding, projected standards for model 

years 2022-2025 due to a statutory requirement that allows the agency to set CAFE 

standards for not more than 5 model years in a given rulemaking. See 77 Fed. Reg. 

62,624, 62,639 (Oct. 15, 2012). For further information on these rulemakings and the 

process used to set them, see GAO-10-336. 

23The national program of CAFE and GHG vehicle emission standards is projected to 

result in an industry-wide fuel economy of 54.5 miles per gallon in 2025 if all GHG 

reductions are achieved with fuel economy technologies, but use of air conditioning 

refrigerant credits would lower the expected fuel economy to about 50 miles per gallon. 

Actual fuel economy will differ, depending on the fleet of vehicles sold and how 

manufacturers choose to meet the standards given certain flexibilities, including credits for 

improved air conditioning efficiency. 

24In model year 2011, CAFE standards alone were in effect; from 2012-2025, both CAFE 

and GHG vehicle emission standards are in effect. 
 

Page 16 GAO-14-249 Petroleum Refining

Figure 6: Corporate Average Fuel Economy (CAFE) Standards, 1978-2025

Note: Data from 2011 on are projected fuel economy based on final standards, and data for 2022-

2025 are based on projected standards. Projected fuel economy for 2017-2025 used model year 

2008 as the baseline. Actual fuel economy may differ, depending on the fleet of vehicles sold and 

how manufacturers choose to meet the standards given flexibilities in the standards, including credits 

for improved air conditioning efficiency. The figure indicates CAFE standards, which are generally 

aligned with EPA’s greenhouse gas vehicle emission standards.

Under the Clean Air Act, EPA is authorized to establish certain standards 

for new motor vehicles and fuels to address air pollution that may 

reasonably be anticipated to endanger public health or welfare.25 On May 

21, 2013, EPA proposed the Tier 3 standards, and on March 3, 2014, 

EPA announced the final Tier 3 standards which establish more stringent 

 

25Clean Air Act Amendments of 1970 §§ 202, 211(c)(1), Pub. L. No. 91-604, 84 Stat. 1676 

(1970), codified as amended at 42 U.S.C. §§ 7521, 7545(c)(1) (2013) (commonly referred 

to as the Clean Air Act).

Tier 3 Motor Vehicle Emission 

and Fuel Standards
 

Page 17 GAO-14-249 Petroleum Refining

vehicle emission standards and reduce the sulfur content of gasoline.26

(Because EPA finalized this rulemaking after the draft report was 

completed and provided to agencies, the views of stakeholders and other 

information on Tier 3 that we reviewed and summarize in the rest of this 

report relate primarily to the proposed standards. EPA stated that the final

rulemaking is very similar to the proposal, and that EPA made some 

changes—including to the sulfur provisions—based on public input.) 

According to EPA, more than 149 million Americans experience 

unhealthy levels of air pollution that has been linked to respiratory and 

cardiovascular problems and other adverse health effects. Cars and light 

trucks are significant contributors to air pollution, and EPA estimated that 

the Tier 3 standards will reduce pollution from such sources. The 

standards set more stringent tailpipe emission standards for new vehicles 

and generally require refiners to lower the sulfur content of gasoline from 

30 parts per million (ppm) to 10 ppm on an annual average basis by 

2017, among other things.27 According to EPA, reducing the sulfur 

content of gasoline allows emissions control systems to work more 

effectively for existing and new vehicles and would therefore enable more 

stringent vehicle emissions standards. EPA estimated that the Tier 3 

standards would reduce on-highway vehicle emissions of nitrogen oxides, 

a pollutant that has been liked to respiratory illnesses, by 10 percent in 

2018, and 25 percent in 2030.28 According to EPA estimates, by 2030, 

annual emission reductions from the Tier 3 standards would generate 

annual benefits of between $6.7 and $19 billion and prevent up to 2,000 

premature deaths annually. EPA estimated that the vehicle and fuel 

standards would cost approximately $1.5 billion in 2030, including costs 

for refiners to install and operate equipment to remove sulfur from 

 

26For the proposed standards, see: 78 Fed. Reg. 29,816 (May 21, 2013). The final 

standards were signed by the Administrator of the EPA on March 3, 2014. (See: EPA, 

Control of Air Pollution from Motor Vehicles: Tier 3 Motor Vehicle Emission and Fuel 

Standards, Final rule, accessed March 5, 2014, 

http://www.epa.gov/otaq/documents/tier3/tier-3-fr-preamble-regs-3-3-14.pdf.) The Tier 3 

standards replace the current vehicle emission and fuel sulfur standards that were 

established in 2000 under Tier 2. See 65 Fed. Reg. 6698 (Feb. 10, 2000). Tier 2 

standards generally reduced sulfur in gasoline from 300 ppm to 30 ppm on an annual 

average basis and were phased in from 2004 through 2007.

27EPA also will provide a 3-year delay for certain small refiners, as well as certain small 

volume refineries that processed 75,000 or fewer barrels of crude oil per day averaged 

over 2011. 

28EPA, Control of Air Pollution from Motor Vehicles: Tier 3 Motor Vehicle Emission and 

Fuel Standards Final Rule; Regulatory Impact Analysis. (EPA-420-R-14-005, March 

2014).
 

Page 18 GAO-14-249 Petroleum Refining

gasoline, as well as costs for vehicle manufacturers to improve the 

emissions performance of vehicles.

Under the Clean Air Act, EPA is authorized to take certain steps to 

address emissions from stationary sources, including refineries. EPA has 

regulated certain emissions of air pollutants from stationary sources for 

several decades, and EPA recently issued rules concerning how GHGs 

are to be included in certain existing permitting processes.29 Specifically, 

permitting authorities30 are to include GHG emission control requirements 

in Prevention of Significant Deterioration (PSD) permits and certain other 

permits issued to refineries and other stationary sources that trigger GHG 

emissions thresholds.31 Since 2011, construction of any new refineries 

and certain refineries that are modified have generally been subject to the 

use of the “best available control technology” for GHG emissions. The 

best available control technology is determined for each facility based on 

an analysis of available technologies considering cost and other factors. 

According to EPA, in most cases, the best available control technology 

selected for GHGs are energy efficiency improvements. For example, for 

refineries, this could involve the installation of heat recovery units, which 

capture and use otherwise wasted heat in the refinery process. Such 

energy efficiency improvements can lower GHG emissions and other 

pollutants while reducing fuel consumption and saving money. Current 

regulations do not require existing facilities to take any steps to control 

GHG emissions unless they undertake a major modification. Examples of 

major modifications at a refinery include a significant expansion of crude 

 

29Several industry groups have challenged EPA’s determination that its regulation of GHG 

emissions from new motor vehicles triggered permitting requirements under the Clean Air 

Act for stationary sources that emit GHGs. The U.S. Court of Appeals for the D.C. Circuit 

upheld EPA’s determination, and the Supreme Court granted a petition to review the D.C. 

Circuit’s judgment and will consider the issue in 2014. 

30Permitting authorities include EPA regions and approved state and local agencies. 

Some states are not approved to issue GHG permits. In these states, EPA regions issue 

GHG permits.

31Permits that address GHG emissions from new or modified stationary sources are 

known as PSD permits. PSD permits address GHG emissions only for those sources and 

projects meeting specific emission thresholds. In addition, operating permits, also known 

as Title V permits, can be triggered by sources that emit GHGs at specified emissions 

thresholds. Operating permits generally do not add new pollution control requirements but 

contain procedural requirements such as compliance monitoring and reporting. Thus, only 

PSD permits will impose GHG emission control requirements. 

Stationary Source GHG 

Requirements
 

Page 19 GAO-14-249 Petroleum Refining

oil processing units, or installing new secondary processing units that 

would increase GHG emissions above specified thresholds.

California’s LCFS aims to lower GHG emissions by reducing the level of 

carbon in transportation fuels. Established by the California Air Resources 

Board (CARB) following state legislation and an executive order, the 

LCFS has been fully in effect since January 2011. The LCFS would 

change the mix of fuels and vehicles in California to reduce emissions 

throughout the fuel “life cycle”—which includes emissions associated with 

producing, transporting, distributing, and using the fuel. To reduce 

emissions, carbon intensity (CI) scores are used, which are to reflect 

each fuel’s life cycle GHG emissions. Refiners generally are required to 

ensure that the overall CI score for their fuels—which can include 

gasoline, diesel, and their blendstocks and substitutes—meets the annual 

carbon intensity target for a given year. Unlike the RFS, which requires 

certain types of renewable fuels be used, under LCFS refiners can meet 

the CI reduction targets using a variety of low carbon fuel technologies. 

Low carbon fuel technologies include renewable fuels from waste and 

cellulosic materials, natural gas, electricity used in plug-in vehicles, and 

hydrogen used in fuel cell vehicles. The original LCFS statewide 

reduction targets for gasoline, diesel, and their substitutes started at 0.25 

percent of 2010 values in 2011 and increased to 10 percent by 2020.

However, in 2013 a state Court of Appeal found that CARB must correct 

certain aspects of the procedures by which the LCFS was originally 

adopted.32 CARB officials subsequently announced a regulatory package 

would be proposed in 2014, and that the 2013 standards—a 1 percent 

decrease in carbon intensity from 2010 values—will remain in effect 

through 2014.

To comply with LCFS, refiners can produce their own low carbon fuels, 

buy such fuels from other producers to blend into their products and sell 

on the market, or purchase credits generated by others. Refiners can also 

generate credits—which can be banked and traded—if their use of low 

carbon fuels results in greater-than-required carbon intensity reductions. 

CARB estimated that the 2020 targets would reduce GHG emissions 

 

32Specifically, the California Fifth District Court of Appeal allowed the LCFS regulations to 

remain in effect, but found that the manner in which the CARB adopted the LCFS violated 

certain procedural requirements of the California Environmental Quality Act and 

California's Administrative Procedures Act. As a result, CARB anticipates addressing the 

court's concerns with a regulatory package in 2014. 

LCFS
 

Page 20 GAO-14-249 Petroleum Refining

associated with the transportation sector in California by 10 percent in 

2020, or 23 million metric tons of carbon dioxide equivalent.33

Stakeholders we interviewed identified three major changes that have 

likely recently affected the domestic petroleum refining industry.34 First, 

crude oil production in the United States and Canada has increased, 

which has lowered the cost of purchasing crude oil for some refiners but 

poses some challenges related to crude oil transportation infrastructure 

constraints and the types of crude oils produced. Second, after many 

years of generally increasing domestic consumption of petroleum 

products, consumption has fallen since 2005, resulting in a smaller 

domestic market for refiners. Third, two key environmental regulations—

CAFE and GHG vehicle emission standards and the RFS—have likely 

recently contributed to declining consumption of petroleum fuels, and 

compliance with the RFS has increased costs for some refiners.

U.S. and Canadian crude oil production has increased in recent years, 

leading to lower crude oil costs for some refiners, according to several 

stakeholders we contacted. According to EIA data, U.S. production of 

crude oil reached its highest level in 1970 and generally declined through 

2008, reaching a level of almost one-half of its peak. During this time, the 

United States increasingly relied on imported crude oil to meet growing 

domestic energy needs. However, recent improvements in technologies 

have allowed companies that develop petroleum resources to extract oil 

from shale formations that were previously considered to be inaccessible 

because traditional techniques did not yield sufficient amounts for 

economically viable production. In particular, the application of horizontal 

drilling techniques and hydraulic fracturing—a process that injects a 

combination of water, sand, and chemical additives under high pressure 

to create and maintain fractures in underground rock formations that allow 

oil and natural gas to flow—have increased U.S. crude oil and natural gas 

 

33CARB, Staff Report: Initial Statement of Reasons Proposed Regulation to Implement the 

Low Carbon Fuel Standard, Volume I (Sacramento, CA: Mar. 5, 2009).

34The stakeholder views summarized throughout this report were not necessarily 

supported by all types of stakeholders, though we identify differing views where 

appropriate. 

Market Changes and 

Key Environmental 

Regulations Likely 

Affected the Refining 

Industry

Increased Crude Oil 

Production Has Lowered 

Crude Oil Costs for Some 

Refiners
 

Page 21 GAO-14-249 Petroleum Refining

production.35 As shown in figure 7, monthly domestic crude oil production 

has increased by over 55 percent through September 2013 compared 

with average production in 2008. According to EIA, increases in 

production in 2012 and 2013 were the largest annual increases since the 

beginning of U.S. commercial crude oil production in 1859. Much of the 

increase in crude oil production has been from shale and other 

formations, such as the Bakken in North Dakota and the Eagle Ford in 

Texas, according to EIA data. Similarly, crude oil production in Canada—

the largest foreign supplier of crude oil to the United States—has also 

increased significantly in recent years. From 2005 through 2012, total 

Canadian crude oil production increased by 32 percent and U.S. imports 

from Canada increased almost 50 percent.

 

35For more information, see: GAO, Oil and Gas: Information on Shale Resources, 

Development, and Environmental and Public Health Risks, GAO-12-732 (Washington, 

D.C.: Sept. 5, 2012). 
 

Page 22 GAO-14-249 Petroleum Refining

Figure 7: Monthly Crude Oil Production in Texas, North Dakota and the Rest of the United States, January 1981-September 

2013

The rapid growth in U.S. and Canadian crude oil production has lowered 

the cost of crude oil for some domestic refiners that have the access and 

ability to process these crude oils. For example, West Texas Intermediate 

crude oil—a domestic crude oil used as a benchmark for pricing—was 

$17.60 per barrel less expensive in 2012 than Brent, an international 

benchmark crude oil from the European North Sea that was historically 

about the same price as West Texas Intermediate. Those refineries able 

to take advantage of these lower priced crude oils have benefited 

because crude oil costs are the largest cost for refiners.36 However, all 

 

36Closely related to increases in crude oil production, natural gas production has also 

increased in the United States in recent years. This increasing availability and lower prices 

for natural gas have been a benefit to domestic petroleum refiners since natural gas is an 

important energy source for many petroleum refineries, according to several stakeholders 

we contacted. 
 

Page 23 GAO-14-249 Petroleum Refining

refineries may not have been able to take advantage of these crude oils 

to the same extent for two key reasons:

• Transportation infrastructure challenges. The development of 

domestic and Canadian crude oil production has created some 

challenges for U.S. crude oil transportation infrastructure because 

some of the growth in production has been in areas with limited 

transportation linkages to refining centers. Most of the system of 

crude oil pipelines in the United States was constructed in the 1950s, 

1960s, and 1970s to accommodate the needs of the refining sector 

and demand centers at that time. According to DOE officials, this

infrastructure was designed primarily to move crude oil from the South 

to the North, but emerging crude oil production centers in Western 

Canada, Texas, and North Dakota have strained the existing pipeline 

infrastructure. Though pipeline capacity has increased—investments 

increased pipeline capacity to deliver crude oil to a key Cushing, 

Oklahoma hub by about 815,000 barrels per day from 2010 through 

2013—EIA reported that it has been inadequate. Because of these 

challenges, some refineries may not have been able to take full 

advantage of crude oil production increases or had to rely on other 

more expensive crude oil transportation options such as truck, rail, or 

barge. For example, two of the refineries we visited recently installed 

facilities to enable them to receive crude oil from North Dakota or 

Canada by rail. According to EIA data, while refinery receipts of crude 

oil by these methods of transportation is a small percentage of total 

receipts, they have increased 57 percent from 2011 to 2012. 

Infrastructure constraints have, according to EIA, contributed to 

discounted prices for some domestic crude oils.

• Configuration constraints at refineries. Increasingly, the crude oil 

being produced in the United States and Canada has different 

characteristics from the crude oils that some domestic refineries are 

configured to use. Production of new domestic crude oil has tended to 

be light and sweet, whereas a portion of new Canadian production 

has been heavy and sour crude oils.37 To a certain extent, some 

 

37Crude oil is generally classified according to two parameters: density and sulfur content. 

Less dense crude oils are known as “light,” while denser crude oils are known as “heavy.” 

Crude oils with relatively low sulfur content are known as “sweet,” while crude oils with 

higher sulfur content are known as “sour.” In general, heavier and more sour crude oils 

require more complex and expensive refineries to process the crude oil into usable 

products.
 

Page 24 GAO-14-249 Petroleum Refining

refineries can use these crude oils, but some have invested in new 

equipment in order to do so. For example, representatives of one 

refiner told us they had invested over $2.2 billion in a project including 

a new coking unit at a refinery to refine heavier and more sour crude 

oil from Canada.

After decades of generally increasing domestic consumption of petroleum 

products, consumption has declined since 2005, resulting in a smaller 

domestic market for refiners, according to several stakeholders we 

contacted. Overall, consumption of gasoline, diesel, and other petroleum 

products in the United States increased from 1983 through 2005. In 2007, 

EIA projected that U.S. consumption would increase by nearly 30 percent 

between 2005 and 2030. As we reported in late 2007, trends in domestic 

refining capacity had not kept pace with consumption growth, though it 

was unclear whether and for how long that market tightness would 

continue.38 However, as shown in figure 8, domestic consumption of 

petroleum products overall peaked in 2005 at 20.8 million barrels per day, 

and it declined by 11 percent through 2012. Consumption of gasoline, 

diesel, and jet fuel peaked in 2007 and declined by over 8 percent 

through 2012. More recent data indicate that these trends may now be 

starting to shift, as EIA estimated that petroleum product consumption 

increased in the first 11 months of 2013 compared with the first 11

months of 2012.

 

38See GAO-08-14. 

Domestic Consumption of 

Petroleum Products Has 

Declined
 

Page 25 GAO-14-249 Petroleum Refining

Figure 8: Domestic Consumption of Gasoline, Diesel, and Other Petroleum Products, 1981-2012

Note: Data presented here include final consumption of fuels including petroleum-based fuels that 

have been blended with renewable fuels.

a

Other petroleum products include kerosene, natural gas liquids, and other petroleum products.

According to several stakeholders we contacted and information we 

reviewed, a number of factors can affect consumption of petroleum 

products, including economic activity and crude oil and petroleum prices. 

For example, the recession of 2007 to 2009 reduced economic activity 

and demand for gasoline, and historically high gasoline prices have 

discouraged the use of gasoline. Stakeholders and information we 

reviewed also cited the effect of more stringent fuel economy standards 

and the RFS, which are discussed in the next section.

Several stakeholders told us that this broad shift from growing to falling 

consumption of petroleum products has affected the domestic refining 

industry because it has resulted in a smaller domestic market. The U.S. 

market is important for domestic refineries because U.S. refiners have 
 

Page 26 GAO-14-249 Petroleum Refining

historically primarily sold their products domestically. On average, the 

United States exported almost 1 million barrels per day of domestic 

petroleum products from 2000 through 2005—less than 6 percent of U.S. 

refinery production. As discussed below, the refining industry has shifted 

sales to export markets amid a declining domestic market.

According to stakeholders and the information we reviewed, two recently 

strengthened key environmental regulations—the coordinated CAFE and 

GHG vehicle emission standards, and the RFS—have likely affected the 

refining industry by reducing the consumption of petroleum fuels, and 

compliance with the RFS has recently increased costs for some refiners, 

as well as other challenges. The other three key environmental 

regulations we reviewed have had minimal effects to date because they 

have either not yet been implemented or have generally not affected the 

industry in a major way, according to several stakeholders and 

information we reviewed.

According to information we reviewed and two stakeholders we 

contacted, CAFE and GHG vehicle emission standards have contributed 

to reductions in the consumption of petroleum fuels, but the extent is 

unclear. These standards aim to reduce oil consumption, and although 

they do not require changes at the refinery level, they can affect refineries 

indirectly by contributing to improvements in the overall efficiency of the 

vehicle fleet and, therefore, reducing fuels consumption. However, the 

National Academy of Sciences reported that it is difficult to isolate the 

effect of CAFE and GHG vehicle emissions standards from other factors 

that also affect consumption, such as higher fuel prices and changing 

driving habits.39

Stakeholders had different views on the extent to which CAFE and GHG 

vehicle emission standards have affected consumption of petroleum 

products. We reported, in 2007, that CAFE standards—along with higher 

fuel prices and other factors—contributed to a reduction in transportation 

 

39See: National Research Council, Effectiveness and Impact of Corporate Average Fuel 

Economy (CAFE) Standards (Washington, D.C.: The National Academies Press, 2002). 

Two Key Regulations 

Have Likely Contributed to 

Declining Fuel 

Consumption and 

Compliance with One Has 

Increased Some Refiners’ 

Costs

CAFE and GHG Vehicle 

Emission Standards
 

Page 27 GAO-14-249 Petroleum Refining

fuel consumption of 2.8 million barrels per day in 2002.40 CAFE standards 

for cars largely did not change from 1990 through 2010, but they were 

strengthened beginning with model year 2011. According to EPA and 

DOE officials, since the standards did not change until recently, CAFE 

and GHG vehicle emissions standards did not cause the shift from 

growing consumption to declining consumption discussed previously. 

Regarding the strengthened standards, EPA estimated in 2010 that 

vehicles were expected to save 1.3 billion gallons of gasoline in 2013 

compared with model year 2011 standards.41 This is equivalent to about 1 

percent of EIA’s projection of gasoline consumption in 2013. A 

stakeholder told us that the CAFE and GHG vehicle emissions standards 

have likely had a relatively large impact on petroleum demand declines in 

the past few years, but it is unclear how much declining demand overall 

can be attributed to these standards versus other factors such as the 

recent economic recession and higher fuel prices. On the other hand, 

EPA and DOE officials, and a refinery representative told us that the most 

recent changes to CAFE and GHG vehicle emissions standards have had 

a marginal effect on petroleum demand so far. DOE officials also told us 

that the impact of the standards has been limited because they affect new 

car sales, and there are a relatively small number of new vehicles in the 

overall fleet.

Several stakeholders we contacted and information we reviewed cited 

three main effects that the RFS has had on the domestic petroleum 

refining industry or individual refiners—compliance has increased costs, 

declining domestic consumption, and investment uncertainty. In addition, 

EPA has been late in issuing annual RFS standards, and several factors 

contribute to the delays.

 

40See: GAO, Vehicle Fuel Economy: Reforming Fuel Economy Standards Could Help 

Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could 

Complement These Standards, GAO-07-921 (Washington, D.C.: Aug. 2, 2007). Other 

factors contributing to reduced transportation fuel consumption include higher fuel prices. 

See: National Academies of Sciences, 2002.

41See: EPA, Final Rulemaking to Establish Light-Duty Vehicle Greenhouse Gas Emission 

Standards and Corporate Average Fuel Economy Standards Regulatory Impact Analysis, 

EPA-420-R-10-009 (Washington, D.C.: April 2010). 

RFS
 

Page 28 GAO-14-249 Petroleum Refining

RFS Has Had Three Main Effects

Stakeholders we contacted and information we reviewed identified three 

main ways the RFS has affected U.S. petroleum refiners: (1) compliance 

has recently increased costs for some refiners, (2) required blending of 

renewable fuels has contributed to declining domestic consumption of 

petroleum-based transportation fuels, and (3) EPA’s delays in issuing 

annual RFS standards may have contributed to investment uncertainty for 

some refiners. First, compliance with the RFS has recently increased 

costs for some refiners, according to information we reviewed and several 

stakeholders we contacted. Under the RFS regulations, refiners and other 

obligated parties are required to ensure U.S. transportation fuels include 

certain amounts of renewable fuels. To comply, refiners generally have 

two options—they can purchase and blend renewable fuels themselves, 

or they can pay others to blend or use renewable fuels by purchasing 

credits.42 These credits can be freely traded, and prices for credits are 

established based on the market and generally reflect the stringency of 

requirements and the costs of incorporating additional renewable fuels 

into the transportation fuel system to comply with the RFS—if costs 

increase, credits prices would tend to increase as well. According to EIA, 

corn-based ethanol credit prices were low—between $0.01 and $0.05 per 

gallon between 2006 and much of 2012—because it was generally 

economical to blend up to or above the level required by the RFS. 

However, in 2013, prices for these credits increased to over $1.40 per 

gallon in July before declining to about $0.20 per gallon as of midNovember 2013.

Several stakeholders told us this increase in credit prices was primarily 

due to RFS requirements exceeding the capability of the transportation 

fuel infrastructure to distribute and the fleet of vehicles to use renewable 

fuels, referred to as the “blend wall.” A refiner we spoke with also 

attributed the decline in credit prices in the second half of 2013 to EPA’s 

statements expressing its desire to address the blend wall. We have 

 

42EPA uses renewable identification numbers to track compliance with the RFS. In this 

report, we refer to these as credits. Renewable fuel producers, refiners, and fuel blenders, 

among others, can acquire credits under the RFS, though only refiners and importers of 

petroleum-based transportation fuels are obligated under the RFS. If a company 

generates more credits than it needs for compliance in a given year, excess credits can be 

sold to others, or saved for the following compliance year, subject to certain constraints. 
 

Page 29 GAO-14-249 Petroleum Refining

previously reported on the blend wall and other challenges to the 

increasing use of renewable fuels.43

While the RFS applies to all refiners in the same way, the effect of the 

rise in credit prices may depend on each refiner’s situation. However, in 

comments to this report EPA stated that refiners experience the same 

compliance costs. As a result of higher costs, several stakeholders told us 

refiners could reduce production, produce more jet fuel, which is not 

subject to RFS requirements, or increase exports to nations where the 

RFS does not apply. (See app. III for more information about the blend 

wall, RFS credits, and views on how they have affected U.S. refiners.)

Second, the RFS has contributed to the declining domestic consumption 

of petroleum-based transportation fuels. Under the RFS regulation, 

refiners and other obligated parties are required to ensure U.S. 

transportation fuels include certain amounts of renewable fuels. As a 

result, refiners and other industry participants have blended increasing 

amounts of renewable fuels. For example, consumption of ethanol has 

increased almost 8-fold since 2000, from 1.7 billion gallons in 2000 to 

12.9 billion gallons in 2012. According to EIA, increased ethanol use 

since 2007 displaced over 4 billion gallons of petroleum-based gasoline, 

or about 3 percent of gasoline consumption in 2012. As discussed 

previously, decreases in consumption affect refiners by decreasing the 

size of the domestic market. Since the RFS was established in light of 

concerns about the nation’s dependence on imported crude oil, 

decreased consumption of petroleum products may further some of the 

objectives of the RFS.

Third, the RFS has contributed to investment uncertainty for refiners 

according to several stakeholders because EPA has not issued annual 

 

43See: GAO, Biofuels: Challenges to the Transportation, Sale, and Use of Intermediate 

Ethanol Blends, GAO-11-513 (Washington, D.C.: June 3, 2011), and Biofuels: Potential 

Effects and Challenges of Required Increases in Production and Use, GAO-09-446

(Washington, D.C.: Aug. 25, 2009). 
 

Page 30 GAO-14-249 Petroleum Refining

RFS standards on time since 2009.44 Beginning in calendar year 2009 

and through calendar year 2022, EPA is required to set annual blending 

percentages for total renewable fuels, advanced biofuels, cellulosic 

biofuels, and biomass-based diesel fuels by November 30 of the 

preceding calendar year.45 However, as shown in figure 9, EPA has 

missed the statutory deadline to set annual percentages since 2009.46

Most recently, EPA issued 2013 standards in August 2013—over 8 

months late—and has not issued the 2014 standards. EPA proposed the 

2014 standards on November 29, 2013, and EPA officials told us that 

they plan to finalize the standards in Spring 2014. The RFS compliance 

period—the time during which refiners and other parties incur obligations 

under RFS and can take steps to incorporate additional renewable fuels 

to create credits for compliance—is set by statute to be a full calendar 

year, and delays do not change this compliance period.

47 As a result, 

when the RFS standards are issued late, the industry has less time to 

plan and budget effectively. Several representatives of refiners told us 

 

44The RFS has also posed compliance challenges for refiners and other market 

participants because of concerns over fraud in the market for RFS compliance credits. 

Credits must be validly generated in order for renewable fuel producers to be able to 

transfer or use them for compliance purposes. For example, EPA has issued several 

notices of violation alleging that five companies generated more than 170 million gallons 

of invalid credits without producing qualifying renewable fuels. These invalid credits had 

been used for compliance by many refining companies. EPA recently issued a Notice of 

Proposed Rulemaking, which describes a voluntary program known as the Quality 

Assurance Program to help assure that credits are validly generated. The notice proposes 

that voluntary third parties verify the validity of credits through steps such as verification of 

type of feedstocks, verification that volumes produced are consistent with amount of 

feedstocks processed, and verification that credits generated are appropriately 

categorized and match the volumes produced. 

45The requirement for cellulosic biofuel began in calendar year 2010. 

46For calendar years after 2012, EPA is also required to set biomass-based diesel 

volumes at least 14 months in advance. Though not shown in figure 9, EPA has also been 

late in issuing final standards for biomass-based diesel. EPA issued the final volume 

standards for 2013 in September 2012—about 10 months late. As of March 2014, EPA is 

16 months late in finalizing standards for 2014 and 4 months late in finalizing standards for 

2015. EPA proposed standards for 2014 and 2015 on Nov. 29, 2013, which have not been 

finalized.

47The RFS compliance deadline—the date by which refiners and other obligated parties 

must demonstrate compliance to EPA—is established by EPA through implementing 

regulations and has been adjusted by EPA. For example, EPA extended the compliance 

deadline for the 2013 compliance year from February 28, 2014 to June 30, 2014. The 

extension provided more time for refiners and other obligated parties to purchase and 

allocate credits.
 

Page 31 GAO-14-249 Petroleum Refining

that delays in issuing annual RFS standards increase uncertainty for 

refiners and renewable fuel producers, making it more difficult to make 

long-term planning decisions. One refining company representative told 

us that the company has reduced capital investments due to uncertainty 

related to the RFS. In contrast, EPA officials told us that there is no 

indication that delays have caused significant problems for refiners. They 

also noted that delays could actually make annual standards more robust 

since EPA then has more data upon which to base decisions.

Figure 9: Timeline of EPA’s Issuance of Proposed and Final RFS Standards (2009-2014)

Note: The proposed and finalized dates are the regulations’ publication dates in the Federal Register, 

not the dates EPA signed the regulations and publicly released them.
 

Page 32 GAO-14-249 Petroleum Refining

Regulatory Development Processes Contribute to EPA Delays in 

Issuing RFS Standards

EPA officials told us that delays in issuing RFS standards have largely 

been due to the length of the regulatory development process, which 

includes interagency and public reviews. Under the interagency review 

process, EPA is to follow certain procedures before publishing proposed 

or final regulations that establish annual RFS standards, including 

submitting draft proposed and final regulations to the Office of 

Management and Budget (OMB), which coordinates review of the draft 

regulations by other agencies, as well as conducting its own review. The 

interagency review process is to ensure that regulations are consistent 

with the President’s priorities, among other things, and that decisions 

made by one agency do not conflict with the policies or actions taken or 

planned by another. Under the public review process, EPA must publish a 

proposed standard in the Federal Register, provide the public with the 

opportunity to review and comment on the proposal, and address 

comments received before finalizing the regulation. According to EPA 

officials, the interagency and public review processes can be time 

consuming because the RFS standards involve complex and 

controversial issues and balance competing agricultural, energy, and 

environmental policy interests.

In 2009, we recommended that EPA and other agencies track their 

performance for developing significant regulations against targeted 

milestones to identify opportunities for improvement.48 We found that 

monitoring actual versus estimated performance could help agency 

managers identify steps in the process that account for substantial time 

and provide information necessary to evaluate whether time was well 

spent. In this regard, EPA stated in comments to our 2009 report that it 

uses an agency-wide Action Development Process that tracks 14 

milestones as it develops proposed rules and additional milestones in 

developing final regulations. For example, EPA tracks when its senior 

management approves of a document describing the scope of the 

regulation and the analytical work necessary to develop it, known as the 

detailed analytic blueprint. In comments to our 2009 report, EPA stated 

that it used an internal tracking system along with additional information 

 

48See GAO, Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of 

Rules Development as Well as to the Transparency of OMB Regulatory Reviews, 

GAO-09-205 (Washington, D.C.: Apr. 20, 2009). 
 

Page 33 GAO-14-249 Petroleum Refining

to develop regulatory management reports to EPA managers and 

executives. EPA stated at the time that this process helps management 

identify regulations that are off-track so that corrective steps can be taken 

to expedite their completion. EPA officials told us that they develop RFS 

regulations using the same procedures used for developing all EPA 

regulations. However, even with these systems, EPA has not met its 

statutory deadlines under the RFS in the five annual standards since 

2009. EPA has not conducted a systematic review of its experience 

issuing RFS regulations to identify the underlying causes of repeated 

delays and has not identified changes in its approach that may help to 

avoid these delays in the future. Without such analyses and a plan to 

address the underlying causes of the delays, EPA risks repeating them.

Other Key Regulations

The other key regulations that we reviewed—Tier 3 standards, stationary 

source GHG requirements, and LCFS—have had minimal effects to date 

because these regulations either have not yet been implemented (Tier 3 

standards) or, with respect to the other two, have not affected industry 

operations or costs in a major way, according to stakeholders and 

information we reviewed. Specifically:

• Tier 3 standards. Tier 3 standards were proposed on May 21, 2013,

and EPA announced final standards on March 3, 2014; therefore, they 

have had not had a direct effect on industry to date. 

• Stationary source GHG requirements. Representatives of two refiners 

told us that stationary source GHG requirements have been 

burdensome to refiners; however, several other stakeholders told us 

they have not had a major effect, and EPA officials told us they were 

aware of only three refineries that have received major source GHG 

permits since the GHG permitting program was implemented in 

2011.49 A refining company representative expressed concerns to us 

about the lengthy permitting process to authorize GHG emission 

increases. However, stationary source GHG requirements do not 

apply unless an existing refining facility proposes a major modification 

 

49These refineries are the Hyperion Refinery and Energy Center in South Dakota, the 

Sinclair Wyoming Refinery in Wyoming, and the Diamond Shamrock, Valero McKee 

Refinery in Texas. 
 

Page 34 GAO-14-249 Petroleum Refining

or a new refinery is proposed for construction.50 An EPA official said 

that, in most cases, best available control technologies selected to 

comply with GHG requirements for refining facilities involve energy 

efficiency improvement measures that could help refiners reduce fuel 

consumption and save money. Further, EPA officials also explained 

that, in some cases, delays can occur when the refinery applicant has 

not provided EPA with the proper information to proceed with 

processing the permit.51 The Clean Air Act requires that EPA approve 

or deny such permits within 12 months of receiving a complete 

application.

• LCFS. CARB, the entity responsible for implementing LCFS, said the 

regulation has had a modest effect to date—increasing fuel prices by 

about $0.01 per gallon. LCFS is the subject of several ongoing 

lawsuits,52 which resulted in a 4-month delay in some regulatory 

activities and uncertainty about the status of the regulation.53

According to a study conducted by a consultant on behalf of industry, 

the ongoing legal challenge to LCFS is creating uncertainty that 

 

50A major modification refers to a physical or operational change that would result in a 

significant net increase in emissions of a regulated pollutant. However, in our prior work, 

we noted that it can be difficult for unit owners and regulators to know whether an air 

pollution permit is needed, because permitting rules governing applicability are complex 

and because applicability is determined on a case-by-case basis. See: GAO, Air Pollution: 

EPA Needs Better Information on New Source Review Permits, GAO-12-590

(Washington, D.C.: June 22, 2012). 

51State permitting agencies may also issue GHG permits to refineries subject to EPA 

guidance. 

52In a consolidated lawsuit, a Midwest ethanol group and an association of petroleum 

refiners claimed that LCFS discriminates against petroleum and ethanol firms from outside 

the state, and that the regulation was preempted by the Clean Air Act. Following appeal of 

an adverse District Court decision, in September 2013, the Ninth Circuit Court of Appeals 

largely upheld the LCFS by remanding one issue back to the district court for trial. Groups 

representing the energy industry and farmers, among others, have petitioned for the case 

to be reheard before the full Ninth Circuit. LCFS was also challenged in state court on 

administrative procedural grounds, which we describe above. CARB officials told us that 

they were optimistic about the outcome of these legal challenges, and said that their 

expectation is that if the courts do find against CARB on any particular issues, they would 

be able to narrowly adjust the regulations in order to address the court’s findings and did 

not anticipate needing to wholesale replace or rework the regulations.

53In December 2011, a federal judge granted a preliminary injunction against the 

implementation of the LCFS, among other rulings. CARB appealed the decision and the 

Ninth Circuit Court of Appeals stayed the injunction in April 2012 and later reversed the 

District Court on these rulings.
 

Page 35 GAO-14-249 Petroleum Refining

discourages new investments by industry.54 A refining industry trade 

association representative told us many refiners that previously 

invested in new components for their California facilities to process 

heavy crude oils may not be able to make an adequate return on 

investment since the LCFS disincentivizes the use of carbon intensive 

heavy crude oils. However, a CARB official noted that LCFS does not 

specifically prohibit any crude oil from being processed in California 

refineries, but rather it ensures that the LCFS’ goal to reduce carbon 

intensity in transportation fuels is not affected by increased use of 

higher carbon intensity crude oils. Nevertheless, California refiners 

have thus far been able to comply with LCFS requirements by 

blending lower carbon intensive renewable fuels—such as Brazilian 

sugar-cane ethanol—or purchasing carbon credits as an alternative 

method of compliance.

Stakeholders we contacted and information we reviewed generally 

suggest that the outlook of the U.S. refining industry depends on a 

number of factors, in particular: (1) future domestic consumption of 

petroleum products; (2) the extent to which key environmental regulations 

raise costs for domestic refiners; and (3) the extent to which domestic 

refiners will be able to export and compete in international markets.

The outlook of the U.S. refining industry depends on future domestic 

consumption of petroleum products, which is uncertain, according to 

stakeholders we contacted and information we reviewed. As discussed 

above, domestic petroleum product consumption declined by 11 percent 

from 2005 through 2012, and forecasts we reviewed project consumption 

of three major petroleum products—gasoline, diesel, and jet fuel—will be 

stable to slightly increasing through 2020, but not returning to high levels 

of the past.55 Most of the scenarios in forecasts we reviewed from IHS 

 

54The Boston Consulting Group, Understanding the impact of AB 32 (Boston, MA: June 

2012). 

55The IEA forecast that we reviewed did not include a projection of U.S. consumption. EIA 

data track “product supplied,” which approximately represents consumption of petroleum 

products because it measures the disappearance of these products from sources such as 

refineries, bulk terminals, and pipelines. Because the future depends on a multitude of 

factors that can be difficult to predict, EIA’s 2013 and initial 2014 forecast include 28 

scenarios with different assumptions about future conditions, such as economic growth or 

policy changes. (See app. I for additional information on our methodology.) 

Industry Outlook 

Depends on a 

Number of Factors

Uncertain Future Domestic 

Consumption
 

Page 36 GAO-14-249 Petroleum Refining

and EIA project total consumption of gasoline, diesel, and jet fuel to 

increase slightly by 2020, with projections ranging from a decline of 2 

percent to an increase of 7 percent compared with 2012 consumption.56

Expectations differ somewhat by fuel, with all EIA scenarios projecting 

gasoline consumption to decline or remain stable and diesel and jet fuel 

consumption to increase from 2012 to 2020 (see fig. 10). IHS projects an 

increase in the consumption of both gasoline and diesel, with more robust 

growth projected for diesel. Scenarios in the forecasts we reviewed 

generally project consumption to decline after 2020.

 

56Forecasts with more recent data and revised assumptions can indicate somewhat 

different levels of consumption. For example, in its 2013 forecast, IHS projected higher 

domestic consumption in 2020 than its previous year’s forecast. EIA recently released 

initial results of its 2014 forecast, in which EIA projected lower domestic consumption in 

the reference scenario compared with the reference scenario in the 2013 forecast also 

discussed in this report. EIA attributed the difference, in part, to reduced expectations for 

vehicles miles traveled.
 

Page 37 GAO-14-249 Petroleum Refining

Figure 10: Historical (1995-2012) and Projected (2020) U.S. Consumption of Gasoline, Diesel, and Jet Fuel

Note: This figure displays the highest and lowest projections of U.S. consumption of gasoline, diesel, 

and jet fuel in the IHS and EIA forecast scenarios we reviewed. Specifically, for gasoline, the highest 

projection is IHS’s forecast, and the lowest is EIA’s “low or no net imports” scenario, which builds 

numerous assumptions to generate a hypothetical situation in which the United States eliminates net 

imports of liquid fuels. For diesel, the highest projection is EIA’s “high economic growth” scenario, 

which assumes stronger growth in gross domestic product than in the reference scenario, a businessas-usual estimate that assumes current laws and policies are unchanged. The lowest projection for 

diesel is IHS. For jet fuel, the highest projection is EIA’s “high economic growth” scenario, and the 

lowest is EIA’s 2014 “reference” scenario.

Forecasts indicate that the level of future domestic consumption—the size 

of the domestic market for petroleum products—may affect future U.S. 

refinery production. In higher consumption scenarios, EIA’s projections 

suggest higher refinery production than in scenarios with lower domestic

consumption. Specifically, EIA projects that inputs to refineries—which 

track trends in refinery production—in 2020 would be about 1 million 

barrels per day higher in scenarios with higher domestic consumption—a 
 

Page 38 GAO-14-249 Petroleum Refining

difference of about 7 percent of 2012 inputs. This difference is equivalent 

to about eight average-size U.S. refineries.

Several stakeholders we contacted and information we reviewed 

highlighted various factors that can affect future domestic consumption 

levels and thereby the size of the largest market for the production of U.S. 

refineries, including the following:

• Economic growth. Faster economic growth tends to increase 

consumption, and EIA’s forecast scenario with higher economic 

growth assumptions projects greater future consumption of petroleum 

products than a scenario with low economic growth.

• Crude oil and petroleum product prices. Higher prices for crude oil 

and petroleum products tend to decrease consumption. For example, 

of the forecast scenarios we reviewed, the scenario that assumes 

high future oil prices projects lower domestic consumption of 

petroleum products.

• Shifts in consumer behavior and demographic trends. Changes in 

consumer behavior, such as reduced driving, along with demographic 

trends, such as an aging population and fewer young people with 

driving licenses, may reduce future consumption, according to EIA.

• Key regulations. Three of the key regulations we reviewed—CAFE 

and GHG vehicle emission standards, RFS, and LCFS—are expected 

to reduce domestic consumption of petroleum products in the future 

according to information we reviewed, though it is uncertain by how 

much. CAFE and GHG vehicle emission standards will require more 

efficient vehicles in the future, which may reduce future consumption 

of fuels. EPA estimated that the model year 2012-2025 standards are 

projected to reduce U.S. consumption of crude oil by 2.2 million 

barrels per day by 2025, equivalent to almost 15 percent of crude oil 
 

Page 39 GAO-14-249 Petroleum Refining

used by refineries in 2012.57 Similarly, under the RFS statute, unless 

waived by EPA, renewable fuels blending is required to double by 

2022, which EPA estimated would reduce gasoline and diesel 

demand by 13.6 billion gallons, equivalent to about 10 percent of 

consumption in 2012.58 Furthermore, CARB projected that the LCFS 

would help decrease future gasoline consumption in California. 

However, the extent to which these regulations will reduce future 

consumption depends on actions by regulators and market and other 

developments. For example, as discussed above, EPA has proposed 

to reduce renewable fuel requirements for 2014 due to an inadequate 

supply in light of the blend wall and other issues. EPA stated that the 

framework it applied to determine the proposed percentage standards 

could be appropriate for later years. Therefore, the potential for RFS 

to reduce petroleum-based fuel consumption will depend on the 

percentages finalized by EPA, which, in turn will depend on the 

development of advanced renewable fuel sources and market 

infrastructure and could be affected by legal challenges, as well as 

any legislative action to modify the RFS.59

Stakeholders we contacted and information we reviewed generally 

suggest that the outlook of the U.S. refining industry will also depend on 

the extent to which some key regulations—RFS, Tier 3, stationary source 

GHG requirements, and LCFS—increase costs for refiners. In general, 

increasing costs for refiners may be absorbed by refiners themselves 

 

57The American Energy Initiative, Part 22: EPA Greenhouse Gas Regulations, Before the 

Subcomm. on Energy and Power of the H. Comm. on Energy and Commerce, 112th 

Cong. (2012) (statement of EPA Assistant Administrator for Air and Radiation, Regina 

McCarthy). In addition, EPA specifically projected that the 2012-2016 CAFE and GHG 

vehicle emission standards would reduce domestic-refined gasoline consumption by about 

7 billion gallons per year by 2020 and shrink domestic refining by about 3 percent by 

2020. (See: EPA, Final Rulemaking to Establish Light-Duty Vehicle Greenhouse Emission 

Standards and Corporate Average Fuel Economy Standards, Regulatory Impact Analysis

(Washington, D.C.: April 2010.)

58See EPA, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis, EPA420-R-10-006 (Washington, D.C.: February 2010).

59Similarly, while EPA issued GHG vehicle emission standards through 2025, NHTSA is 

required to set CAFE standards only 5 years at a time. CAFE standards for model years 

2022-2025 have been presented by NHTSA as “augural” standards in the interest of 

aiding manufacturers in future product planning, as well as harmonization. A midterm 

evaluation by NHTSA and EPA may result in modifications to both EPA standards and 

NHTSA’s augural standards. In addition, as discussed below, future requirements under 

the LCFS—and their effect on refiners—are uncertain due to various factors.

Costs of Key Regulations
 

Page 40 GAO-14-249 Petroleum Refining

(i.e., by reducing their profits), be passed on to consumers through higher 

product prices, or both. The requirements on domestic refiners from the 

key regulations we reviewed generally are expected to collectively have a 

greater effect in the future, for example, by affecting more refiners (such 

as the stationary source GHG requirements to the extent that more 

refineries make modifications over time), or becoming more stringent in 

the future (such as the RFS), potentially increasing costs for refiners. In 

addition, several stakeholders told us that the uncertainty surrounding 

these regulations—and what costs they will impose—can affect the 

market climate within which refiners and other market participants make 

investment decisions such as whether to expand a refinery’s ability to 

process different crude oils, or to build new advanced biofuel processing 

facilities. Such uncertainty can discourage investments in the industry 

overall.

• RFS. RFS may increase costs for some refiners depending on the 

percentages of renewable fuels required by EPA and on other factors. 

As discussed previously, costs for some refiners to comply with RFS 

rose in 2013, which some of the stakeholders we contacted attributed 

to concerns about the blend wall. The blend wall may remain a 

concern into the future because statutory renewable fuel blending 

requirements continue to increase—they more than double from 2012 

to 2022—while the consumption of petroleum products is expected to 

increase only slightly. Several stakeholders told us that the effect of 

the RFS depends in particular on how EPA addresses the blend wall 

in the annual standards it issues in the future. Furthermore, EPA’s 

timeliness in issuing the standards could also affect costs to the 

extent that delays affect the supply of renewable fuels, RIN prices, 

and refiners’ ability to plan and budget effectively for compliance. 

Several representatives of refiners told us that future delays would 

contribute to investment uncertainty and higher costs for refiners. EPA 

officials said that they did not believe delays have affected market 

participants, and that the market for RFS credits has provided 

flexibility to refiners and other obligated parties. The extent to which 

the RFS increases costs in the future could also be affected by the 

outcome of any relevant litigation and of legislative proposals to 

change the RFS or how EPA implements it.

• Tier 3. According to EPA, to meet the Tier 3 fuel sulfur standards, 

refiners would need to install or upgrade hydrotreating capacity or 
 

Page 41 GAO-14-249 Petroleum Refining

take other steps to reduce the sulfur content in fuels, which will likely 

increase industry-wide costs.60 EPA projected that 67 out of 108

refineries would modify or purchase some equipment, and the capital 

costs of installing this equipment and operating costs to run it would 

average about $0.0065 per gallon, and total $804 million in 2017. An 

industry study of the Tier 3 proposal estimated that the regulation 

would increase costs by up to $0.09 per gallon for the highest-cost 

refinery, and several refinery representatives told us that Tier 3 would 

increase their costs.61 The extent to which the refining industry will be 

affected by Tier 3 standards would have been greater had EPA 

decreased the per-gallon maximum allowable sulfur levels in 

gasoline—known as caps. In the final standards, EPA maintained the 

current 80 ppm cap, but had sought comment on whether it should 

decrease the cap to as low as 20 ppm. A stakeholder told us that Tier 

3 would be manageable if EPA maintained the current caps, but far 

more difficult if the caps were lowered. One study we reviewed 

estimated that industry could incur additional capital expenses to 

achieve lower sulfur caps, ranging from $2 billion to over $6 billion 

dollars depending on the sulfur cap level in the final standards.62

• Stationary source GHG requirements. Several of the refining industry 

representatives we contacted expressed concerns that stationary 

source GHG requirements could become more stringent in the future. 

The current permitting framework is a case-by-case determination that 

takes into account costs, among other factors, and places no 

requirement on existing refineries unless they undertake a major 

modification. However, EPA entered a settlement in which the agency 

agreed to develop national performance standards—called New 

Source Performance Standards—for GHG emissions from new and 

modified refineries, and GHG emissions guidelines for certain facilities 

at existing refineries.63 Although EPA has no current schedule to issue 

these standards, EPA committed in its settlement to issue them, and 

 

60Hydrotreating removes sulfur by converting the sulfur into hydrogen sulfide gas and then 

to elemental sulfur. 

61Baker & O’Brien Incorporated, Addendum to Potential Supply and Cost Impacts of 

Lower Sulfur, Lower RVP Gasoline (March 2012).

62Turner, Mason & Company, Economic and Supply Impacts of a Reduced Cap on 

Gasoline Sulfur Content (Dallas, Texas: February 2013). 

63See: Settlement Agreement, State of New York, et al, v. Environmental Protection 

Agency, No. 08-1279 (D.C. Cir. Dec. 29, 2010). 
 

Page 42 GAO-14-249 Petroleum Refining

several stakeholders expressed concern that future standards could 

impose more strict controls involving higher costs at refineries. A 

stakeholder told us that until EPA clarifies its approach for NSPS, 

many refiners will be reluctant to make certain investments in their 

refineries out of concerns that their investments may be unprofitable 

given future requirements. In addition, some companies may 

preemptively factor in the cost of emissions control technologies in 

their investment analyses.

• LCFS. Two stakeholders and a refining industry trade association told 

us that California refiners could face higher costs or compliance 

challenges unless CARB adjusts future low carbon fuel requirements. 

CARB has estimated that the cost of LCFS on gasoline and gasolinesubstitute fuels is likely to range between an increase of $0.09 per 

gallon, and a decrease of $0.13 per gallon by 2020.64 However, an 

industry study estimated that the LCFS could cost the refining industry 

an average of $0.70 per gallon by 2020.65 The study also projected 

that 5 to 7 of 14 California refineries could cease production by 2020, 

and the LCFS could raise other compliance challenges because of 

insufficient supplies or consumer uptake of cellulosic, Brazilian sugarcane ethanol, and other low carbon intensity fuels or vehicle 

technologies. CARB officials told us that if it proves more difficult than 

expected to meet LCFS requirements, CARB could introduce cost 

containment provisions to increase the availability of credits, such as 

through a “safety valve” to release additional credits at a set price, or 

by providing extra credits to certain compliance approaches.66

Stakeholder told us that the decisions CARB makes with respect to 

the LCFS may affect California refiners’ ability to stay in business and 

compete with refiners in other states and countries.

While the domestic refining industry has increasingly relied on export 

markets, stakeholders and forecasts we reviewed indicate that the 

industry’s future competitiveness is uncertain and that foreign markets 

present both challenges and opportunities for U.S. refiners.

 

64California Air Resources Board, Low Carbon Fuel Standard 2011 Program Review 

Report (Sacramento, CA: December 2011). 

65Boston Consulting Group, Understanding the Impact of AB32 (Boston, MA: June, 2012).

66For example, an electric car could receive three additional credits, thus reducing the 

need for low carbon fuels with limited availability.

Extent to Which Refiners 

Can Export and Compete 

in Foreign Markets
 

Page 43 GAO-14-249 Petroleum Refining

Forecasts and data we reviewed from EIA and IEA suggest that future 

domestic refinery production levels may depend on exports of petroleum 

products.67 Petroleum products are increasingly global commodities, and 

EIA data indicate that as domestic consumption has declined, refiners 

have looked to foreign markets to sell products. Since 1949, the United 

States had been a net importer of petroleum products, but this long-term 

trend reversed in 2011 when the United States became a net exporter of 

total petroleum products. According to EIA data, the United States 

recently exported more petroleum products than other leading exporters, 

including Russia, India, and Singapore, and petroleum product exports 

have represented an increasing share of U.S. refinery production. Exports 

of petroleum products represented 7 percent of refinery production in 

2007 but increased to 17 percent in 2012. Major markets for U.S. exports 

include Central and South America, Mexico, and Europe, to which U.S. 

refiners sent nearly all diesel exports in 2012. The United States exports 

more diesel than gasoline, though U.S. refiners have been increasing 

exports of gasoline to Central and South America and Africa.68

Forecasts that we reviewed generally project that exports will remain 

strong. According to most of the EIA and IHS forecasts we reviewed, 

exports of petroleum products are expected to increase until 2015, but the 

extent of the increase is unclear. As shown in figure 11, EIA scenarios 

project export levels from 2.6 to 3.4 million barrels per day by 2020, a 

relatively wide range.69 Even the lowest projection for petroleum product 

exports in 2020 is above 2010 levels, indicating a general expectation 

that exports will remain strong.

 

67Unless noted otherwise, exports of petroleum products in this section refer specifically to 

finished petroleum products, natural gas liquids and liquid refinery gases, oxygenates 

(excluding fuel ethanol), and motor gasoline blending components. Finished products 

include finished motor gasoline, finished aviation gasoline, kerosene-type jet fuel, 

kerosene, distillate fuel oil, residual fuel oil, and other products. 

68According to EIA, U.S. exports of diesel reached a record monthly high in July 2013, at 

1.4 million barrels per day, and remained strong in August and September 2013. 

Continued growth in global diesel consumption has supported U.S. exports. 

69We did not include IHS data in this figure because they are not public. 

Refiners Projected to Continue 

to Rely on Foreign Markets
 

Page 44 GAO-14-249 Petroleum Refining

Figure 11: Historical (1995-2012) and Projected (2015 and 2020) U.S. Exports of Petroleum Products

Note: This figure displays the highest and lowest projections of U.S. petroleum product exports by the 

EIA forecast scenarios we reviewed. Specifically, the highest projection is from EIA’s “greenhouse 

gas $25 and low gas prices” scenario, which assumes a fee for carbon emissions starting at $25 per 

metric ton in 2014, as well as high crude oil and natural gas resources consistent with EIA’s “high oil 

and gas resource case.” The lowest projection is from EIA’s “low oil and gas resource” scenario, 

which assumes lower crude oil and natural gas resources than in the "reference" scenario.

The extent to which domestic refiners are able to export their products will 

depend on the competitiveness of domestic refiners compared with 

foreign refiners, and stakeholders we contacted and information we 

reviewed highlighted both challenges that may inhibit competitiveness 

and opportunities that may increase it in the future. To sell products 

abroad, refiners need to be competitive—that is, they must be able to 

supply fuels that foreign purchasers want to buy at prices that are 

Foreign Markets Could Present 

Both Challenges and 

Opportunities for U.S. Refiners
 

Page 45 GAO-14-249 Petroleum Refining

attractive. Stakeholders and information we reviewed suggest that various 

factors may affect the U.S. refining industry’s future competitiveness, 

including: (1) the balance between global refining capacity and global 

demand for petroleum products, (2) costs associated with environmental 

regulations, (3) exports to nations with stringent fuel standards, and (4) 

increasing domestic and Canadian crude oil production. More specifically:

• Balance between global refining capacity and demand. IEA data 

indicate that competition from foreign refiners may increase as global 

refining capacity is projected to exceed global consumption, creating 

an imbalance between global supply and demand that may affect U.S. 

refiners. According to IEA, global consumption of petroleum products 

was about 78.9 million barrels per day in 2012 and is projected to 

grow an additional 6 million barrels per day by 2020—with growth 

concentrated in Asia and the Middle East and consumption declining 

in Europe. But IEA projects refining capacity may grow even faster, 

resulting in excess capacity (refining capacity beyond that needed to 

meet consumption) of nearly 15.5 million barrels per day by 2020, in 

contrast to an estimated 4.8 million barrels per day of excess capacity 

in 2012.70 Excess refining capacity is likely to result in greater 

competition in foreign markets overall, and some regions may present 

particular challenges. A large share of the new capacity is expected in 

China, India, and the Middle East, and representatives of two refiners 

indicated concern that capacity additions in some of those regions 

may present competition for U.S. refiners. Several other stakeholders 

were optimistic about domestic refiners’ ability to compete in the 

future. According to IEA, capacity additions in China and India are 

intended to keep pace with growing consumption in those regions, but 

new Middle Eastern refineries are intended to be export facilities and 

may present increased competition to U.S. refiners.

• Costs associated with environmental regulations. As discussed 

above, the key environmental regulations we reviewed could 

collectively impose additional costs on the domestic refining industry. 

These costs could affect the industry’s ability to compete 

internationally to the extent that foreign refiners do not face similar 

costs. In addition, regulatory uncertainty can affect refiners’ 

 

70Excess capacity may result in some refinery closures. IEA’s New Policies Scenario 

projects 6.3 million barrels per day of global refining capacity may be at risk of closure in 

2020, but the projected capacity at risk is outside of North America. 
 

Page 46 GAO-14-249 Petroleum Refining

competitiveness if it inhibits the industry from making investments that 

would otherwise lower costs. Not all of the key regulations we 

reviewed would be expected to affect the industry’s competitiveness. 

In particular, CAFE and GHG vehicle standards do not impose 

requirements on refiners. In addition, although RFS and Tier 3 

standards could impose requirements with potential associated costs 

on some refiners, they would not apply to exported fuels—they apply 

only to fuels sold in the United States regardless of where they are 

produced.

• Potential for increased exports to nations with stringent fuel 

standards. In general, U.S. refineries are among the most 

sophisticated in the world and have generally been optimized to 

produce large proportions of cleaner-burning gasoline. IEA has 

pointed out that refiners in many parts of the world face challenges 

producing fuels that meet high product quality and environmental 

performance standards.71 Therefore, some U.S. refiners may benefit 

from any trend toward higher quality and more stringent 

environmental performance standards. In this regard, actions refiners 

may take to reduce gasoline sulfur to comply with proposed Tier 3 

standards could enable them to export to markets—such as Japan 

and much of Europe—that already require low sulfur gasoline.72 On 

the other hand, representatives of a refiner pointed out that refiners 

could undertake such investments on their own—without Tier 3—if 

such exports were sufficiently economically attractive.

• Increasing domestic and Canadian crude oil production. As discussed 

above, increasing U.S. and Canadian crude oil production has led to 

lower cost crude oil for some refiners, providing a competitive 

advantage.73 All of the forecast scenarios we reviewed from EIA, IEA, 

and IHS anticipate increases in U.S. crude oil production, but the 

projections are uncertain and vary widely—from 6.8 to 9.8 million 

 

71See International Energy Agency, World Energy Outlook 2013 (Paris, France: 

November 2013). 

72According to EPA, Japan, the 30 nations that comprise the European Union, Albania, 

and Bosnia-Herzegovina have 10 ppm gasoline sulfur caps in place. 

73Closely associated with this trend has been the increasing availability and lower costs of 

natural gas, which has also provided a benefit to U.S. refiners. 
 

Page 47 GAO-14-249 Petroleum Refining

barrels per day in 2020 as shown in figure 12.74 Projections are 

revised each year, and expectations for U.S. crude oil production in 

2020 have increased in more recent forecasts. For example, the 

reference scenario in EIA’s most recent forecast projects domestic 

crude oil production to approach a historical high of 9.6 million barrels 

per day in 2020, higher than the reference scenario from the prior 

year.75 Canadian crude oil production—which accounted for about 16 

percent of the crude oil used by U.S. refineries in 2012—is expected 

to increase as well: the reference scenario in EIA’s international 

forecast projects that Canadian petroleum liquids production will 

increase more than 30 percent from 2012 levels, reaching 

approximately 5 million barrels per day in 2020.76 The extent of the 

increase in future crude oil production can have implications for future 

petroleum product exports. For example, EIA’s scenario that assumes 

more domestic crude oil and natural gas resources projects higher 

export levels than a scenario that assumes low crude oil and natural 

gas resources. Several stakeholders told us that various issues could 

mitigate U.S. refiners’ ability to take advantage of growing crude oil 

supplies. In particular, it is unclear whether planned expansions in 

pipelines and rail transportation will keep pace with growing 

production, and these infrastructure expansions could be affected by 

regulatory actions to address pipeline and rail safety.77 Similarly, 

several stakeholders told us that potential future increases in crude oil 

 

74EIA expects most of the increase to come from onshore tight oil formations in the 

Bakken, Eagle Ford, and Permian Basin regions, though increases are likely in domestic 

offshore production as well. 

75EIA’s most recent forecast, the Annual Energy Outlook 2014 Early Release, contains 

reference scenario projections only. Projections for other scenarios were not available at 

the time of this report’s publication. 

76According to EIA, petroleum liquids include crude oil and lease condensate as well as 

natural gas plant liquids, bitumen, extra-heavy oil, and refinery gains.

77For example, in July 2013, a deadly explosion occurred after a railcar carrying crude oil 

derailed in Quebec. In response to petitions it received following the accident, DOT’s 

Pipeline and Hazardous Materials Safety Administration is considering whether to revise 

its regulations to improve railcar safety standards. See 78 Fed. Reg. 54849 (Sept. 6, 

2013).
 

Page 48 GAO-14-249 Petroleum Refining

exports, which are currently minimal, could put pressure on regional 

crude oil prices, reducing the price advantage of U.S. refiners.78

 

78According to EIA data, total crude oil exports totaled 67,000 barrels per day in 2012—1 

percent of total 2012 production. U.S. exports of crude oil must be licensed by the 

Department of Commerce, Bureau of Industry and Security. Current regulations specify 

limited conditions in which license applications will be approved, for example, for exports 

to Canada for use or consumption in Canada and that are transported other than through 

the Trans-Alaska Pipeline, for which some restrictions apply. Other applications for export 

licenses are to be reviewed on a case-by-case basis and generally will be approved if 

determined to be consistent with the national interest and the purposes of the Energy 

Policy and Conservation Act, and any additional statutory controls are satisfied. See 

generally 15 C.F.R. § 754.2 (2013). 
 

Page 49 GAO-14-249 Petroleum Refining

Figure 12: Historical (1995-2013) and Projected (2015 and 2020) U.S. Crude Oil Production

Note: This figure displays the highest and lowest projections of U.S. crude oil production by the IHS 

and EIA forecast scenarios we reviewed. Historical data for 2013 is the 9-month average of 

production through September. Specifically, the highest projection is EIA’s “greenhouse gas $10 and 

low gas prices” scenario, which assumes 100 percent higher oil recovery and 50 percent higher 

undiscovered resources than in the reference scenario, as well as a policy change that applies a $10 

per metric ton fee for carbon emissions throughout the economy beginning in 2014. The lowest 

projection, EIA’s “high net imports” scenario, assumes 50 percent lower crude oil recovery than the 

reference scenario, along with changes that would create the need for increased imports. Also 

displayed is EIA’s 2014 forecast reference scenario that assumes current laws and regulations are 

unchanged.

The domestic petroleum refining industry has been and is expected to 

continue to be affected by several profound changes. Some of these 

changes, such as the growth in crude oil production in the United States 

Conclusions
 

Page 50 GAO-14-249 Petroleum Refining

and Canada, are reshaping the industry and creating new business 

opportunities. To take advantage of some of these opportunities, refiners 

and other market participants will need to invest—to upgrade refineries to 

be able to process different crude oils or to build pipelines or rail 

connections to move more crude oil from production to refining centers. 

Uncertainty can affect the market climate within which these investment 

decisions will be made. In this context, EPA’s timeliness in issuing annual 

percentage standards under the RFS is important to help inform the 

investment decisions of the refining industry. In issuing annual 

percentage standards, EPA may waive the statutory volumes in whole or 

in part according to statutory criteria, which EPA has identified as 

potentially factoring in the blend wall, market developments, and other 

issues. However, EPA has missed the annual deadline for issuing annual 

standards under the RFS in most years. EPA has some systems in place 

to monitor and evaluate progress in developing regulations, which could 

provide useful information for understanding delays in RFS. But EPA has 

not identified the underlying causes of delays, and it has not developed a 

plan to address delays and, therefore, risks repeating delays. EPA delays 

in issuing RFS standards are important because delays do not change 

refiners’ compliance periods accordingly and they therefore create 

uncertainty in the marketplace, potentially harming investment. 

Uncertainty among refiners, renewable fuel producers, and other market 

participants about how EPA will address the blend wall, which can be 

exacerbated by the prospect of litigation, can affect investment decisions 

and ultimately the availability and prices of the fuels they produce.

To improve EPA’s ability to meet the annual statutory deadline for issuing 

annual RFS standards, we recommend that the Administrator of the EPA 

take the following two actions:

• Assess past experience to identify the underlying causes of delays in 

issuing annual RFS standards.

• Develop and implement a plan to address the causes of delays and 

help ensure RFS annual standards are issued on time.

We provided drafts of this report to DOE, DOT, and EPA for review and 

comment. The three agencies provided technical comments on early or 

final drafts, which we incorporated as appropriate.

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 51 GAO-14-249 Petroleum Refining

EPA also provided a letter in which it generally agreed with our findings 

and recommendations and clarified three topics discussed in the report. 

First, regarding the effects of compliance with RFS, EPA asserted that 

refiners experience the same compliance costs regardless of whether 

they are fully integrated, with blending capabilities, or merchant refiners 

that purchase credits for compliance. Based on our work, we found the 

views of several stakeholders differed from EPA's. For example, in a 2011 

study, DOE identified the degree to which a small refiner can actively 

blend production with renewable fuels is a large component that could 

contribute to economic hardship from compliance with the RFS.

79 In 

theory, market-based compliance systems—such as the RFS credit 

system—provide incentives for market participants to make decisions that 

would tend to equalize additional compliance costs over time. However, 

there can be physical infrastructure or contractual constraints, among 

various other factors, that could result in different outcomes in the short 

run. We added additional language to explain EPA's views in the report 

and in Appendix III. 

Second, regarding the time-frame for RFS compliance, EPA stated that 

the RFS compliance deadline—the date by which refiners and other 

obligated parties must demonstrate compliance to EPA—is established 

through implementing regulations, not statute. EPA stated that it adjusted 

the 2013 deadline to provide additional time to demonstrate compliance. 

We acknowledge that EPA can extend the compliance deadline. 

However, the compliance period refers to the time during which refiners 

and other parties incur obligations under RFS and can take steps to 

incorporate additional renewable fuels to generate credits for compliance. 

This period is set by statute to be a full calendar year. We clarified 

language in the report to acknowledge EPA's ability to adjust the 

compliance deadline, essentially providing additional time for obligated 

parties to purchase credits, and its inability to adjust the compliance 

period.

Third, regarding Tier 3 standards, EPA announced the final standards

while our draft was with the agency for comment. EPA stated that the final 

Tier 3 program is very similar to what it proposed, though EPA made 

 

79Department of Energy, Office of Policy and International Affairs, Small Refinery 

Exemption Study: An Investigation into Disproportionate Economic Hardship, March, 

2011.
 

Page 52 GAO-14-249 Petroleum Refining

some changes based on public input and updated its analyses. EPA 

provided technical comments to incorporate information from the final rule 

which we incorporated into the report, as appropriate. However, we were 

not able to obtain stakeholder and other views on the final Tier 3 rule for 

this report. See appendix IV for EPA’s letter.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time we will send copies to the appropriate 

congressional committees and to the Secretaries of Energy and 

Transportation and the Administrator of the EPA. In addition, the report 

will be available at no charge on the GAO website at http://www.gao.gov. 

If you or your staff members have any questions about this report, please 

contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix V.

Frank Rusco

Director, Natural Resources and Environment
Appendix I: Scope and Methodology

Page 53 GAO-14-249 Petroleum Refining

This report provides information on the domestic petroleum refining 

industry and its market and regulatory environment. Specifically, it 

addresses what is known about (1) major changes—including key 

environmental regulations—that have recently affected the domestic 

petroleum refining industry and (2) major factors that may affect the future 

of the domestic petroleum refining industry—including its production, 

profitability, and competitiveness in foreign markets.

To provide information on major changes that have affected the domestic 

petroleum refining industry and the future of the industry, we reviewed 

information including the following:

• studies by federal agencies and consultants,

• company financial regulatory filings, and

• proposed and final regulations and regulatory impact analyses.

To identify studies and other literature, we conducted searches of various 

databases, such as ProQuest and PolicyFile, for studies since published 

2009. We also asked agency officials and other stakeholders we 

contacted to recommend studies.

Based on our research and information from stakeholders, we identified 

five key regulations that were recently strengthened or proposed: (1) the 

Environmental Protection Agency’s (EPA) Renewable Fuels Standard 

regulations, (2) the Department of Transportation’s Corporate Average 

Fuel Economy and EPA’s greenhouse gas vehicle emission standards; 

(3) EPA’s Tier 3 Motor Vehicle Emission and Fuel Standards; (4) EPA’s 

stationary source greenhouse gas requirements; and (5) the state of 

California’s Low Carbon Fuel Standard. We reviewed agency regulatory 

impact assessments and industry and other studies on the effect of these 

regulations on industry. Other regulations may also affect the industry.

We also summarized the results of semistructured interviews with a 

nonprobability sample of 32 stakeholders. (See app. II for a list of these 

stakeholders.) Stakeholders included representatives from refining 

companies, environmental organizations, consultants, and officials from 

federal and state agencies. We also visited several refineries of selected 

refining companies. We selected these stakeholders to represent broad 

and differing perspectives on these issues based on recommendations 

from agencies and industry associations, along with other information. For 

example, to select refiners, we considered, among other factors, the size 

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 54 GAO-14-249 Petroleum Refining

and location of their refineries, and whether they were vertically integrated 

or merchant refiners. When possible, we used a standard set of questions 

in interviewing stakeholders, including questions about the effect of the 

key regulations we reviewed. However, as needed, we also sought 

perspectives on additional questions tailored to these stakeholders’ 

expertise and sought opinions from stakeholders on key issues, such as 

their views on the potential effects of exports on industry. Because we 

used a nonprobability sample, the views of these stakeholders are not 

generalizable to all potential stakeholders, but they provide illustrative 

examples of the range of views. Similarly, the conditions at the refineries 

we visited are not generalizable to all refineries. The stakeholder views 

we summarize were not necessarily supported by all types of 

stakeholders, though we identify differing views where appropriate. 

Stakeholders and information we reviewed identified a number of 

changes that have affected the industry and a number of factors that may 

affect its future, and we report on those that were most often cited.

To illustrate major changes over time and to describe the domestic 

petroleum refining industry, we summarized historical data from the 

Energy Information Administration (EIA) regarding such issues as 

capacity and location of refineries, crude oil production, and consumption 

of petroleum products. To assess the reliability of EIA data, we took 

several steps including reviewing documentation, interviewing EIA staff, 

and consulting with stakeholders. We determined the EIA data to be 

sufficiently reliable for the purposes of this report.

To provide information about the future of the domestic petroleum refining 

industry and major factors that could affect it, we also reviewed forecasts 

from EIA, the International Energy Agency (IEA), and IHS, and 

summarized projections through 2020 under different scenarios.1 We 

selected these forecasts because they made projections through 2020, 

contained information broadly relevant to our report, covered multiple 

scenarios or offered a counterpoint scenario, and contained welldocumented discussions of methodologies used and assumptions made. 

 

1

Department of Energy, Energy Information Administration, Annual Energy Outlook 2013 

with Projections to 2040, DOE/EIA-0383(2013) (Washington, D.C.: April 2013); 

Department of Energy, Energy Information Administration, Annual Energy Outlook 2014 

with Projections to 2040, Early Release, DOE/EIA-0383ER(2014) (Washington, D.C.: 

December 2013); International Energy Agency, World Energy Outlook 2013 (Paris, 

France: November 2013); IHS, US Energy Outlook 2013 (Englewood, CO: November 

2013). 
Appendix I: Scope and Methodology

Page 55 GAO-14-249 Petroleum Refining

While forecasts are subject to inherent uncertainties, we found these 

forecasts to be reasonable for describing a range of views about potential 

conditions of the domestic refining industry and major factors that will help 

determine these conditions. We reviewed and compiled data from 

relevant scenarios and compared them where appropriate. Specifically, 

we reviewed all 27 scenarios in EIA’s 2013 forecast, the reference 

scenario in EIA’s 2014 initial forecast,2 and IHS’s forecast, and, in 

particular, highlight the scenarios representing the highest and lowest 

projection of gasoline, diesel, and jet fuel consumption; petroleum product 

exports; and crude oil production.3 We identified some differences in the 

metrics reported in the four forecasts and did not make direct 

comparisons in these instances.

We conducted this performance audit from November 2012 to March 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

 

2

EIA’s 2014 Annual Energy Outlook Early Release contains reference scenario 

projections only. Other scenarios were not available at the time of this report’s publication.

3

We highlight the following scenarios in the report: reference (2014), low or no net 

imports, high net imports, high economic growth, low oil and gas resource, greenhouse 

gas $25 and low gas prices, and greenhouse gas $10 and low gas prices. 
Appendix II: List of Stakeholders

Page 56 GAO-14-249 Petroleum Refining

1. Department of Energy1

2. Department of Transportation

3. Environmental Protection Agency

4. Chevron

5. CVR Refining

6. HollyFrontier Corporation

7. Marathon Petroleum Corporation

8. Monroe Energy

9. PBF Energy

10. Philadelphia Energy Solutions

11. Phillips 66

12. Shell

13. Tesoro Corporation

14. Valero Energy Corporation

15. American Fuel and Petrochemical Manufacturers

16. American Petroleum Institute

17. Baker & O’Brien Incorporated

18. Prof. Severin Borenstein, University of California Energy Institute

19. California Air Resource Board

20. California Energy Commission

21. Citigroup Global Markets Inc.

22. Energy Policy Research Foundation (EPRINC)

23. Environmental Integrity Project

24. IHS

25. Prof. Christopher Knittel, Massachusetts Institute of Technology

 

1

We also obtained views from officials at the Energy Information Administration within the 

Department of Energy. 

Appendix II: List of Stakeholders

Federal Agencies

Refiners

Other
Appendix II: List of Stakeholders

Page 57 GAO-14-249 Petroleum Refining

26. Prof. Erich Muehlegger, Harvard Kennedy School

27. Muse Stancil

28. National Association of Clean Air Agencies

29. Natural Resources Defense Council

30. Sierra Club

31. Stillwater Associates

32. Turner, Mason & Company
Appendix III: Further Information Regarding 

the Renewable Fuel Standard, Compliance 

Credits, and the Blend Wall

Page 58 GAO-14-249 Petroleum Refining

To demonstrate compliance with the Environmental Protection Agency’s 

(EPA) annual blending requirements under the Renewable Fuel Standard 

(RFS), refiners use renewable identification numbers (RIN), which we 

refer to in this report as credits. A RIN is a unique 38-character code that 

renewable fuel producers and importers assign to each gallon of 

renewable fuel produced or imported. To demonstrate compliance with 

the RFS, refiners and importers must provide sufficient RINs for the 

volume of gasoline and diesel they produce for use in the contiguous 

United States and Hawaii. For example, to comply with the 2013 total 

renewable fuels standard requiring that renewable fuels compose at least 

9.74 percent of gasoline and diesel, a refiner selling 100 million gallons of 

gasoline would have to provide 9.74 million total RINs to EPA. Refiners 

can obtain RINs by purchasing and blending renewable fuels themselves, 

or they can purchase RINs from renewable fuel producers, importers, 

blenders, other refiners, or other RIN-holding entities. RINs are valid for 

the calendar year in which they were generated, and up to 20 percent of a 

year’s standard can be met with RINs from the previous year. Refiners 

and other obligated parties with more RINs than needed to meet the 

year’s blending standard can hold them for use in the following year or 

sell them to another party that needs additional RINs to comply with the 

blending standard.

Prices for RINs reflect the cost of renewable fuels compared with the 

petroleum fuels they displace, the stringency of annual blending 

percentage standards, and other factors, and have varied over time. 

According to the Energy Information Administration (EIA), between 2006 

and much of 2012, corn-based ethanol RIN prices were low—between 

$0.01 and $0.05 per gallon—because it was generally economical to 

blend up to or above the level required by the RFS. However, RIN prices 

for corn-based ethanol increased to over $1.40 per gallon in July 2013. 

Several stakeholders told us this increase in RIN prices was primarily due 

to RFS requirements exceeding the capability of the transportation fuel 

infrastructure to distribute and the fleet of vehicles to use renewable fuels, 

referred to as the “blend wall.” EPA officials told us that high corn prices, 

which made ethanol more expensive relative to gasoline, also contributed 

to higher RIN prices during this period. These RIN prices have since 

come down to about $0.20 per gallon as of mid-November 2013. A refiner 

attributed this decline to EPA’s statements expressing its desire to 

address the blend wall.

Appendix III: Further Information Regarding 

the Renewable Fuel Standard, Compliance 

Credits, and the Blend Wall
Appendix III: Further Information Regarding 

the Renewable Fuel Standard, Compliance 

Credits, and the Blend Wall

Page 59 GAO-14-249 Petroleum Refining

The blend wall exists because blending more than 10 percent ethanol 

with gasoline (called E10) is affected by constraints such as the limited 

availability of vehicles that can use higher ethanol blends.1 In addition, 

higher ethanol blends are less widely available than E10 and must be 

priced at a discount to encourage greater consumption, according to EIA. 

EPA officials recently said the blend wall would be reached in 2014 when 

about 13.2 billion gallons of E10 could be consumed.2 Blending additional 

renewable fuels can be difficult and costly once the blend wall is reached 

because significant volumes of non-ethanol renewable fuels must be 

available, consumers must be encouraged to purchase additional higher 

blends of ethanol, and other market participants must develop the 

infrastructure to deliver those fuels.

Compliance with the RFS has recently increased costs for some refiners, 

according to information we reviewed and several stakeholders we 

contacted. While the RFS applies to all refiners in the same way, effects 

of rising or falling RIN prices may vary depending on each refiner’s 

situation. For example, those refiners that have incorporated renewable 

fuel blending into their operations may have benefited from the rising 

prices relative to those refiners that are less well positioned. According to 

several stakeholders, RFS compliance has been most difficult for refiners 

with less of a retail presence, known as merchant refiners, because they 

do not blend their own fuel and must purchase RINs from others, 

increasing their cost of compliance. On the other hand, some industry 

participants may be relatively advantaged when the price of RINs rises. 

For example, an ExxonMobil official said that RIN costs did not have a 

significant impact on the company’s financial performance during the 

second quarter of 2013 because ExxonMobil meets the majority of its 

obligation by blending its renewable fuels itself. 

EPA officials told us, however, that the RFS program affects all refiners 

equally because obligations are the same regardless of whether refiners 

blend renewable fuels themselves or purchase RINs. In particular, EPA 

stated that refiners experience the same costs. If a company generates 

 

1

We have previously reported on various aspects of the blend wall and other challenges to 

the increased use of renewable fuels. See GAO-11-513 and GAO-09-446. 

2

The RFS requirements are “nested” in that renewable fuels other than ethanol could be 

used to meet the total renewable fuels requirement. 
Appendix III: Further Information Regarding 

the Renewable Fuel Standard, Compliance 

Credits, and the Blend Wall

Page 60 GAO-14-249 Petroleum Refining

its own RINs, there is a cost associated with doing so, namely the cost for 

the renewable fuel compared to the petroleum fuel it displaces.
Appendix IV: Comments from the 

Environmental Protection Agency

Page 61 GAO-14-249 Petroleum Refining

Appendix IV: Comments from the 

Environmental Protection Agency
Appendix IV: Comments from the 

Environmental Protection Agency

Page 62 GAO-14-249 Petroleum Refining
Appendix IV: Comments from the 

Environmental Protection Agency

Page 63 GAO-14-249 Petroleum Refining
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 64 GAO-14-249 Petroleum Refining

Frank Rusco, (202) 512-3841 or ruscof@gao.gov

In addition to the individual named above, Christine Kehr (Assistant 

Director), Elizabeth Beardsley, Catherine Bombico, Keya Chateauneuf, 

Nirmal Chaudhary, Quindi Franco, Cindy Gilbert, Katharine Kairys, 

Michael Kendix, Armetha Liles, and Alison O’Neill made key contributions 

to this report.

Appendix V: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
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Page 65 GAO-14-249 Petroleum Refining

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Environmental and Public Health Risks. GAO-12-732. Washington, D.C.: 

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Biofuels: Challenges to the Transportation, Sale, and Use of Intermediate 

Ethanol Blends. GAO-11-513. Washington, D.C.: June 3, 2011.

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GAO-10-116. Washington, D.C.: November 30, 2009.

Energy Markets: Estimates of the Effects of Mergers and Market 

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Biofuels: Potential Effects and Challenges of Required Increases in 

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Federal Rulemaking: Improvements Needed to Monitoring and Evaluation 

of Rules Development as Well as to the Transparency of OMB Regulatory 

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Energy Markets: Refinery Outages Can Impact Petroleum Product Prices, 

but No Federal Requirements to Report Outages Exist. GAO-09-87. 

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Have Implications for U.S. Energy Supply, Prices, and Price Volatility.

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Vehicle Fuel Economy: Reforming Fuel Economy Standards Could Help 

Reduce Oil Consumption by Cars and Light Trucks, and Other Options 

Could Complement These Standards. GAO-07-921. Washington, D.C.: 

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Motor Fuels: Understanding the Factors That Influence the Retail Price of 

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