Gasoline Markets: Special Gasoline Blends Reduce Emissions and Improve Air Quality, but Complicate Supply and Contribute to Higher Prices
Published: 2005-06-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Clean Air Act, as amended, requires some areas with especially poor air quality to use a "special gasoline blend" designed to reduce emissions of volatile organic compounds (VOC) and nitrogen oxides (NOx) and requiring the use of an oxygenate such as ethanol. In less severely polluted areas, the Act allows states, with EPA approval, to require the use of other special blends as part of their effort to meet air quality standards. GAO agreed to answer the following: (1) To what extent are special gasoline blends used in the United States and how, if at all, is this use expected to change in the future? (2) What effect has the use of these blends had on reducing vehicle emissions and improving overall air quality? (3) What is the effect of these blends on the gasoline supply? (4) How do these blends affect gasoline prices?
section_title: What GAO Found
paragraphs: Although there is no consensus on the total number of gasoline blends used in the United States, GAO found 11 distinct special blends in use during the summer of 2004. Further, when different octane grades and other factors are considered, there were at least 45 different kinds of gasoline produced in the United States during all of 2004. The 11 special blends GAO found are often used in isolated pockets in metropolitan areas, while surrounding areas use conventional gasoline. The use of special blends may expand because a new federal standard for ozone may induce more states to apply to use them. To date, the Environmental Protection Agency (EPA) has generally approved such applications and does not have authority to deny an application to use a specific special blend as long as that blend meets criteria established in the Clean Air Act. EPA staff told us that there had been recent congressional debate regarding EPA's authority with regard to approving special gasoline blends but that the bills had not passed. EPA models show that use of special gasoline blends reduces vehicle emissions by varying degrees. California's special blend reduces emissions the most--VOCs by 25-29 percent, NOx by 6 percent compared with conventional gasoline, while also reducing emissions of toxic chemicals. In contrast, the most common special gasoline blend (used largely in the Gulf Coast region) reduces VOCs by 12-16 percent and NOx by less than 1 percent compared with conventional gasoline. The extent of reductions remains uncertain, because they rely, at least in part, on data regarding how special blends affect emissions from older vehicles, and these estimates have not been comprehensively validated for newer vehicles and emissions controls. Regarding air quality, EPA and others have concluded that improvements are, in part, attributable to the use of special blends. The proliferation of special gasoline blends has put stress on the gasoline supply system and raised costs, affecting operations at refineries, pipelines, and storage terminals. Once produced, different blends must be kept separate throughout shipping and delivery, reducing the capacity of pipelines and storage terminal facilities, which were originally designed to handle fewer products. This reduces efficiency and raises costs. In the past, local supply disruptions could be addressed quickly by bringing fuel from nearby locations; now however, because the use of these fuels are isolated, additional supplies of special blends may be hundreds of miles away. GAO evaluated pretax wholesale gasoline price data for 100 cities and generally observed that the highest prices tended to be found in cities that use a special gasoline blend that is not widely available in the region, or that is significantly more costly to make than other blends. There is general consensus that increased complexity, and higher costs associated with supplying special blends, contribute to higher gasoline prices either because of more frequent or severe supply disruptions or because higher costs are likely passed on at least in part to consumers.

section_title: Letter
paragraphs: In 2004, consumers in the United States used approximately 140 billion  gallons of gasoline, an amount equivalent to approximately 10 percent of  the world’s total consumption of petroleum products. Despite significant  improvements in vehicle emissions and fuel efficiency technology, gasoline  use remains a major source of harmful pollutants such as volatile organic  compounds (VOC) and nitrogen oxides (NOx), both of which can  contribute to formation of ground-level ozone—a pollutant linked to a  variety of health problems including aggravated asthma, reduced lung  capacity, and increased susceptibility to respiratory illnesses like  pneumonia and bronchitis. Vehicle emissions also contribute to smog and  acid rain, which can reduce visibility and damage property. The Clean Air  Act (the Act), as amended, provides a federal and state framework to  address air pollution and its health consequences. Among other things, the  Clean Air Act has required improvements in emissions controls on  automobiles, power plants, and other significant contributors to pollution.  Under the Act, the federal government establishes air quality standards for  several pollutants, including ozone and carbon monoxide. States that do  not meet these standards must develop plans to improve air quality and  submit those plans to the Environmental Protection Agency (EPA) for  approval.
In 1990, the Clean Air Act was amended to require some areas with poor air  quality to use “special gasoline blends”—blends of gasoline, designed to be  cleaner burning. Specifically, the Act requires areas with the worst air  quality to use “reformulated” gasoline, a special blend of gasoline designed  to reduce emissions of VOCs and NOx. Reformulated gasoline also  includes additives such as ethanol, which reduce emissions of carbon  monoxide in some engines—these additives are called “oxygenates”  because they increase the oxygen content of the fuel. In less severely  polluted areas, the Act gives states the option of using reformulated  gasoline or seeking EPA approval to require the use of other special  gasoline blends as part of overall efforts to meet federal air quality  standards. States applying for EPA approval to require the use of a special  gasoline blend must demonstrate that even with the use of all reasonable  and practicable options, additional emission reductions are needed to  achieve federal air quality standards. States also must demonstrate that no  other measures that would bring about timely attainment exist or that  existing measures, such as state inspection and maintenance programs, are  unreasonable or impracticable. Once EPA has determined that these  criteria are met and has approved a state’s application to use a special  gasoline blend in a given location, that fuel becomes a requirement.
Gasoline is a mixture of multiple components. With the exception of  ethanol and some other additives, these components are produced from  crude oil through a set of processes collectively known as refining. The  types and amounts of components in gasoline can be adjusted for a number  of reasons, such as improving engine performance or reducing emissions.  As a general matter, special gasoline blends differ from conventional  gasoline in at least one of three ways: a reduced tendency to evaporate, the  addition of an oxygenate, or reduced levels of one or more  chemicals—such as sulfur. In this report, “conventional gasoline” refers to  the basic gasoline blend used everywhere that a special gasoline blend  (e.g., reformulated gasoline, state special blends, etc.) is not.
Whatever the blend, gasoline used in the United States is provided by some  combination of U.S. refineries and/or imports of gasoline or components.  Most gasoline produced in the United States is refined in one of four major  refining areas located along the East Coast, West Coast, Gulf Coast, and  Midwest. From a refining area or coastal terminal, gasoline is shipped  through a network of pipelines, water barges, or trucks to large storage  terminals, which may have tanks capable of holding hundreds of millions of  gallons of gasoline. From there, it is distributed to retail outlets such as  local gasoline stations by large over-the-road tanker trucks.
Over the past several years, gasoline prices in parts of the United States  have on several occasions experienced sudden, significant price increases.  Some areas with unique gasoline blends, such as California and parts of the  Midwest, have been especially hard hit. Some experts have attributed these  price increases, in part, to special gasoline blends and have suggested that  more uniform national gasoline standards could lead to lower or more  stable gasoline prices while meeting air quality goals. Others, including  some state governments, believe that special gasoline blends are an  important tool that has enabled them to meet federal air quality standards  at lower cost than other alternatives.
In this context, we agreed to answer the following questions:  1. To what extent are special gasoline blends used in the United States  and how, if at all, is this use expected to change in the future? 2. What have EPA and others determined regarding the role of special  gasoline blends in reducing vehicle emissions and improving overall air  quality?   3. What is the effect of these blends on the gasoline supply in the United  States? 4. How do these blends affect gasoline prices?
In answering these questions, we reviewed federal and state analyses of  gasoline markets and the environmental effects of various special gasoline  blends; examined the literature on gasoline supplies and prices; and  analyzed wholesale gasoline price data for 100 cities and the national  average. We interviewed a wide range of government officials and industry  experts including federal officials at the EPA and the Department of  Energy’s Energy Information Administration; staff at state environmental  offices; academic and industry experts; petroleum industry officials from  companies involved in refining, terminal operations, and pipeline  operations, as well as from large oil companies; and representatives of  trade associations. We also conducted detailed examinations of markets in  California, Louisiana, Texas, and New Jersey—states with large refining  sectors and experience with producing and using special gasoline blends.  Because many factors may affect gasoline prices at various times, only  some of which are readily and consistently observable through available  data, we agreed to report on prices and volatility but not to provide a  definitive causal link between specific gasoline blends and prices. We  conducted our work from June 2004 to May 2005 in accordance with  generally accepted government auditing standards. For a more detailed  discussion of the scope and methodology of our reiew, see  appendix I.
subsections: section_title: Background
paragraphs: The Clean Air Act, as amended, provides the basic statutory framework for  the role of the federal government and the states in managing air quality in  the United States. Among other things, the Act authorizes EPA to set and  enforce standards, referred to as National Ambient Air Quality Standards  (NAAQS), for pollutants. EPA has subsequently set standards for six  pollutants—ozone, particulate matter, carbon monoxide, nitrogen dioxide,  sulfur dioxide, and lead. While carbon monoxide is directly emitted when  various fuels are burned, ground-level ozone is formed when VOCs and  NOx mix in the presence of heat and sunlight. As a result, emissions of  VOCs and NOx are considered by EPA and the states in their efforts to  reduce concentrations of ground-level ozone.  Because heat and sunlight  act as catalysts in the formation of ground-level ozone, high ozone levels  are most prevalent in spring and summer.
EPA sets and enforces the NAAQS to, among other things, reduce the  negative health effects of air pollution. Each of the six pollutants covered  by the NAAQS is known to cause a variety of adverse health and other  consequences.  For example, at certain concentrations ground-level ozone  and carbon monoxide can, among other things, cause lung damage, eye  irritation, asthma attacks, chest pain, nausea, headaches, and premature  death. To enforce the standards, EPA evaluates monitoring data on air  quality to determine whether local air quality meets federal  standards—designating areas as in either attainment (if they meet the  federal standards) or nonattainment (if they do not meet the federal  standards) with each of the NAAQS.
Under the Act, states that contain areas in nonattainment with the NAAQS  are required to identify how they will reduce emissions and improve air  quality to meet them. For each pollutant, states are required to prepare a  state implementation plan (SIP) and have the plan approved by EPA.  States have choices in determining how to reduce emissions and meet air  quality standards, determining, among other things, how much to reduce  emissions from mobile sources such as automobiles compared with other  sources of similar emissions such as power plants. Because use of gasoline  in automobiles emits several chemicals, including carbon monoxide,  nitrogen oxides, and VOCs, and because emissions from automobiles are  often an important contributor to local air quality problems, the federal  government and the states often focus on reducing automobile emissions.  Whatever the planned reductions, states must identify an inventory of air  emissions and demonstrate in their SIPs how they will achieve attainment  in a specific time frame. States typically demonstrate this through modeling  analysis that estimates how the various efforts in their SIPs will reduce  emissions and improve air quality.
The Act also provides authority to set standards and establish requirements  for some programs specifically designed to reduce vehicle emissions. For  example, using authority provided under the Act, EPA has required newer  cars to meet more stringent emissions standards, and vehicle  manufacturers have incorporated emissions-control devices such as  catalytic converters and oxygen sensors to meet them. Further, the Act  requires cars to have under-the-hood systems and dashboard warning lights  that check whether emissions control devices are working properly. In  addition, the Act requires that some areas—generally highly populated  metropolitan areas—have programs for periodic inspection and  maintenance of vehicles. These programs identify high-emitting vehicles,  which sometimes have malfunctioning emissions control devices, and  require vehicle owners to make repairs before the vehicles can be  registered.
subsections: section_title: Federal and State Actions Regulate Gasoline
paragraphs: The Act gives the federal government, through the EPA, primary authority  for regulating the environmental impacts of gasoline use. For example, the  Act sets minimum national standards for conventional gasoline, as well as  requiring that certain gasoline blends formulated to reduce emissions be  used in some areas with especially poor air quality. Specifically, for certain  areas with long-standing and especially poor air quality, the federal  government requires the use of special reformulated gasoline, commonly  referred to as RFG. The amendments also require other areas to use special  gasoline blends designed to reduce summertime ozone pollution and  wintertime carbon monoxide pollution.
The Act allows states or regions not required to use RFG to seek EPA  approval to require use of other special gasoline blends to aid in improving  air quality, provided that they do not violate minimum federal standards. In  2001, EPA studied the proliferation of gasoline blends and reported that  several states had chosen special blends other than RFG for one or more of  three reasons: (1) the states were not eligible to require RFG because their  air quality was not bad enough, (2) the states wanted to avoid the RFG  requirement to use an oxygenate and its added cost, (3) fuel suppliers and  states believed that the other special blend would be less costly than RFG  while meeting their need to reduce emissions. States seeking to use a  special gasoline blend must obtain formal approval from EPA, generally the  regional office with authority to review their SIPs. Specifically, under the  Clean Air Act, section 211(c)(4)(C), EPA may approve applications by  states to use special gasoline blends if the states demonstrate that the fuel  is needed to reach attainment with federal air quality standards.
In guidance issued in August 1997—after several of the special gasoline  blends were approved—EPA clarified that they can approve a state  gasoline requirement only if “no other measures that would bring about  timely attainment exist,” or if other measures are “unreasonable or  impracticable.” The guidance requires that states do four things in their  application for approval of a new or revised SIP: (1) quantify the estimated  emissions reductions required to reach attainment with the federal NAAQS  for ozone; (2) identify possible control measures that could be used in  place of special gasoline blends and provide emissions reduction estimates  for those measures; (3) explain why those measures are “unreasonable or  impracticable”; and (4) show that, even with use of all “reasonable and  practicable” measures, additional emissions reductions are needed. As is  the case with other new or revised SIPs, these applications are open for  public comment, and EPA must consider those comments before making a  decision. Once approved, states’ special gasoline blends become federally  enforceable requirements.
Under some circumstances, EPA may temporarily waive special gasoline  blend requirements, referred to as granting enforcement discretion, if, for  example, the required special gasoline blend is not available due to a  supply disruption. Over the past several years, EPA has waived the  requirement to use these special gasoline blends on several occasions  when it determined that overall supplies might become tight. We found that  EPA has granted enforcement discretion on at least 23 occasions, allowing  gasoline that did not comply with local requirements to be sold there. The  causes of these supply disruptions included the 2003 blackout in the  Northeast, the series of hurricanes in Florida and the Gulf Coast in 2004, as  well as refinery fires, pipeline breaks, and other infrastructure problems.  Although there was one short waiver that applied nationwide following the  terrorist attacks of September 11, 2001, several of the other waivers were  provided to local areas with particularly stringent gasoline formulations  including St. Louis, Chicago/Milwaukee, Atlanta, Las Vegas, and Phoenix  when there were supply shortages in these areas.
section_title: All Gasoline Is a Blended Mix of Components Derived Primarily from Crude Oil
paragraphs: All gasoline is a blend of different components that are predominantly  produced in refineries. The simplest refineries primarily separate the  components already present in crude oil. More complex refineries also  have the ability to chemically change less valuable components of crude oil  into more valuable ones. Because of their ability to chemically alter  components, complex refineries can increase the amount of gasoline  yielded from a given amount of crude oil and reduce the amount of less  valuable products. Although most refineries can process many types of  crude oil, refineries are generally configured to run most efficiently when  refining a specific type of crude oil into a specific group of products.
Absent specific regulatory requirements, refiners blend several  components derived from crude oil to produce a gasoline that achieves  acceptable engine performance at the lowest cost. Two key aspects of  gasoline affect engine performance:   Reid vapor pressure is a measure of gasoline’s tendency to evaporate  and also reflects the ease with which it ignites when the spark plug fires  in a cold engine. To maintain engine performance, RVP must vary by  season and region. Higher RVP is required in colder climates and  seasons to allow an engine to start.
Octane number is a measurement of gasoline’s tendency to ignite  without a spark, commonly known as “knocking” in a running engine.  Some high-performance and other vehicles require gasoline with a  higher octane number. To satisfy these requirements and consumer  demand, retailers in the United States typically sell three different  octane grades of gasoline.
Special gasoline blends developed to reduce pollution are generally  adjusted in at least one of the following ways:   RVP is reduced during the summertime to reduce VOC emissions.
Reducing the RVP of gasoline requires reducing the amount of very light  compounds, such as butanes and pentanes, blended into the gasoline.
Toxics, their precursors, or other chemicals are limited so they are not  released into the air when the gasoline is burned. Some of these, such as  sulfur, naturally occur in crude oil while others, such as benzene, result  from gasoline refining.
Oxygenates, chemical compounds containing oxygen to aide in  combustion, are added to gasoline to improve environmental  performance when the gasoline is burned, including reducing carbon  monoxide (CO) emissions. The most commonly used oxygenates are  MTBE and ethanol. Several states have banned MTBE as a result of  concerns about groundwater pollution and have switched to using  ethanol as an oxygenate where required.
section_title: Gasoline Is Moved from Refineries to Consumers through a Complex, Shared Distribution System
paragraphs: Gasoline is shipped from U.S. refineries to consumers by some  combination of pipelines, water barges, rail, and trucks to retail gasoline  stations. Most of the country’s refining capacity is located in the Gulf Coast,  West Coast, East Coast, or Midwest with only a small amount in the Rocky  Mountain states. As shown in figure 1, the Gulf Coast region supplies  gasoline to all the other regions—of these, the Midwest and the East Coast  are the most dependent on gasoline from the Gulf Coast. The East and West  Coast markets have also imported gasoline from other parts of the world  such as Canada, Europe, and the Caribbean.
Several large pipelines travel inland from refineries in the Gulf Coast, East  Coast, and West Coast, connecting these key supply centers to areas where  gasoline is used. In general, these large pipelines provide the cheapest  method for transporting large volumes of gasoline, and pipelines account  for more than half of the gasoline shipments in the United States. Several of  the major U.S. pipeline systems, such as the ones serving the Midwest and  the East Coast, deliver gasoline and other fuels used in multiple states.  Figure 2 shows the pipeline system and the major refineries in the  continental United States. The largest concentration of pipeline capacity  links the Gulf Coast refining region to the large consumer markets in the  Midwest and East Coast, while fewer and smaller pipelines connect  refining regions to the more sparsely populated states in the Rockies and  parts of the West Coast region.
At various points between refining and final retail consumption, gasoline is  stored in large tanks, some holding hundreds of millions of gallons of fuel.  In many cases, gasoline is stored in tanks at the refinery itself while  awaiting shipping. In other cases, fuel is stored at terminal stations located  along the pipeline that generally include multiple large tanks. A terminal  station serves as a storage facility for gasoline and other petroleum  products at places throughout the petroleum refining and transportation  process. Some terminals are affiliated with pipelines and used as part of  pipeline operations, such as for withdrawals or when pipelines converge.  Other terminals are used to allow gasoline and other products to be loaded  or off-loaded from barges or tankers. Still other terminals are used to hold  gasoline before it is distributed, generally by trucks, to retail gasoline  stations.  In all of these locations, different gasoline blends must be stored  separately, with only one fuel per tank at any given time.
Ethanol that is added to gasoline cannot be shipped in pipelines with other  petroleum products because of ethanol’s tendency to absorb water.  Instead, ethanol is shipped primarily by rail or trucks to terminal stations  where it is “splash” blended—mixed in specific proportions as the fuel is  added to the storage tank or tanker truck. The federal government and  some states have considered requiring or expanding the use of ethanol to  reduce consumption of oil and increase demand for agricultural products  used to produce it, such as corn.
section_title: Special Gasoline Blends Are Widely Used and Use May Increase in the Future
paragraphs: There were 12 distinct gasoline blends in use in the United States during  the summer of 2004: 11 special gasoline blends and the conventional  gasoline used everywhere a special blend is not used. When different  grades of gasoline, special blends used in winter, and other factors are  considered, the number of gasoline blends rises to at least 45.  New ozone  standards and other factors may further increase the number or the use of  special gasoline blends in the future, in part because EPA must approve any  state’s application to require use of a special gasoline blend as long as the  proposed fuel meets EPA’s environmental standards.
subsections: section_title: Eleven Special Summer Gasoline Blends Were Used Mostly in Large Cities Creating Isolated Markets
paragraphs: Eleven special gasoline blends were used in the United States during the  summer of 2004 in addition to conventional gasoline. The use of special  gasoline blends is most prominent during the summer because special fuels  are used predominantly to reduce summer ozone levels, and gasoline use is  generally the highest during the summer. The requirement to use these  fuels requires that all the fuel sold at terminals meet certain specifications  at a certain date, which generally requires terminal operators to draw down  their inventory of non-summer fuels in advance of filling their tanks with  summer fuels. Special gasoline blends are primarily used in highly  populated urban areas, and 34 states use a special gasoline blend in one or  more areas.  The 11 special gasoline blends in use during the summer of  2004 fell into the following categories:  Three different types of RFG used year-round, the federally required fuel  used in areas with the worst air quality. RFG has very low RVP; reduced  levels of benzene and other toxics; and contains an oxygenate. The type  of RFG blend depends on the area of the country where the gasoline is  used and the oxygenate selected. These blends are identified in figure 3  as “RFG North,” “RFG North with ethanol,” and “RFG South.”
Two types of California Cleaner Burning Gasoline (CBG) used  year-round, also referred to as CARB. California CBG is formulated to  meet the most stringent gasoline standard in the United States, including  very low RVP and reduced levels of sulfur, benzene, and other  chemicals. In general, the state of California does not require the  addition of an oxygenate in areas not subject to federal RFG  standards—identified in figure 3 as “CA CBG.” Gasoline sold in areas  also subject to the federal RFG standard must contain an oxygenate,  identified as “RFG/CA CBG.”
In the summer, Arizona allows the use of either a gasoline blend very  similar to RFG or a blend similar to CBG. The blend required in Arizona  is identified as “AZ CBG.”
Three summer blends with various reductions in RVP. The federal  government requires some areas to use 7.8 RVP gasoline and, in other  areas, states have mandated the use of this blend.  The other two  low-RVP blends are state requirements. These blends are identified in  figure 3 as “7.8 RVP,” “7.2 RVP,” and “7.0 RVP.”
One blend with reduced RVP and reduced sulfur content. The state of  Georgia requires this blend for use in the Atlanta area, and it is identified  in figure 3 as “7.0 RVP, 30 ppm sulfur.”
One blend of conventional gasoline with a minimum of 10 percent  ethanol by volume, used year-round. The state of Minnesota requires  this blend, which is identified in figure 3 as “Ethanol Mandate.”
As figure 3 shows, many areas using special gasoline blends are surrounded  by regions that use conventional gasoline. In some cases, these areas are  relatively large, as is the case for the state of California, where nearly all of  the state uses the same fuel—RFG/CA CBG. In other cases, “islands” of  special gasoline use can divide otherwise regional gasoline markets. For  example, the St. Louis metropolitan area, which includes parts of two  states—Missouri and Illinois—uses three different fuels: one special  gasoline blend required on the Missouri side, a different special gasoline  blend required on the Illinois side, and conventional gasoline is allowed in  the surrounding area. In some cases, special gasoline blends are used in  only one area of the country. For example, California CBG, Arizona CBG,  and the special blend used in Atlanta, Georgia, are not used anywhere else  in the United States. Even relatively common special gasoline blends can  create isolated markets if they are not used in nearby areas. For example,  although 7.8 RVP is a relatively widely used blend, Pittsburgh,  Pennsylvania, is the only city in its region that uses it. Similarly, the  Chicago/Milwaukee area uses RFG North with ethanol, a gasoline blend  used in the Northeast but not used elsewhere in the Midwest.
Special gasoline blends accounted for more than half the gasoline  consumed in the United States during the summer of 2001—the last year  for which we had complete data. Figure 4 shows the relative consumption  of the different gasoline blends then in use. Of the special fuel blends, RFG  and 7.8 RVP blends together accounted for about 33 percent of the national  gasoline market. California CBG and Arizona gasoline blends accounted for  roughly 13 percent of total U.S. gasoline consumption. The remaining 6  percent of gasoline use was divided among four separate blends.
California gasoline   AZ CBG (3%)   CA CBG (3%)   RFG/CA CBG (7%)
RFG blends   RFG North w/ethanol (3%)   RFG North (8%)   RFG South (10%)
section_title: Other Factors Raise the Number of Gasoline Blends Carried by Pipelines and Other Means to at Least 45
paragraphs: While we have reported that there are 11 special blends used or handled  during the summer of 2004, additional factors increase the total number of  gasoline blends sold in the United States throughout the year to at least 45.  First, although this report focuses on summer gasoline blends, at least 3  special winter-only gasoline blends are required to be used in areas of eight  states. Use of these fuels requires that fuel terminals in these areas  transition from the fuel that they use in the non-winter season to the  required winter fuel. These blends contain an oxygenate to address winter  carbon monoxide pollution. Second, because of consumer demand, many  gasoline stations sell gasoline in three octane grades—both premium and  regular grades are refined and shipped to terminals, where they are  blended together to make a midgrade gasoline. Therefore, each gasoline  blend is effectively two fuels from the perspective of pipelines and  terminals. As a result, pipelines, fuel terminals, and retail gasoline stations  carry multiple variations of the gasoline blends previously discussed. Third,  gasoline blends differ regionally and seasonally because differences in  outside temperatures require different blends to maintain vehicle  performance. The primary difference among these blends is RVP. Refiners  produce gasoline with higher RVP in cold conditions to allow cars to start  and gasoline with lower RVP during warm conditions to improve vehicle  operation, even in areas that use conventional gasoline. As a result of these  differences, refiners routinely ship different fuels to different regions and  also ship different gasoline blends seasonally, but special blends tend to  compound these variations. One official with a major petroleum company  reported that there were at least 45 different grades of gasoline used in the  United States.
section_title: New Ozone Standard and Other Factors May Further Increase the Number and/or Use of Special Gasoline Blends
paragraphs: A new ozone standard and deteriorating air quality may lead to an  increased number of special gasoline blends and/or more use of these  blends in the future. In 2004, EPA issued a final rule implementing a new,  more stringent federal air quality standard for ozone that led to the  identification of 138 additional counties in nonattainment or maintenance  as seen in figure 5. EPA officials that we spoke with did not have any  indications that states were planning to submit applications to use special  blends in these areas but acknowledged that gasoline is viewed as an  effective emissions control strategy and said that they expect some states  to consider doing so. Oil company officials told us that officials from some  states had approached them to discuss using special gasoline blends.  Because states must begin preparing SIPs for the recently designated  nonattainment areas, and because several of those states already have  chosen to use special gasoline blends, it appears likely that states may seek  approval to use such blends in more areas.
Several other factors could also affect the number or use of special  gasoline blends. State MTBE bans could force more areas of the country to  shift from their current blend to an ethanol blend. In June 2004, EPA  identified 19 states that had bans on the use of MTBE either in place or scheduled to phase in, though some of these states did not use MTBE.  Worsening air quality in areas such as Atlanta and Baton Rouge may require  the gasoline used in these cities to shift from a special blend to RFG,  reducing the number of fuels. In addition, a new federal standard for all  gasoline—including special blends—that mandates reduced sulfur,  promises to improve the effectiveness of catalytic converters already  present in most vehicles and could aid some areas in meeting federal air  quality standards, potentially reducing the need for these fuels in some  areas.
section_title: EPA Lacks Authority to Deny Requests to Use Special Gasoline Blends Due to Effects on Supply
paragraphs: During the course of our work, staff from EPA’s Office of the General  Counsel stated that EPA could not deny an application to require the use of  a special gasoline blend that addressed the four elements outlined in EPA’s  1997 guidance. They explained that EPA’s determinations often deferred to  states’ evaluations in their applications that, under the Clean Air Act,  section 211 (c)(4)(C), no other measures that would bring about timely  attainment exist, or that existing measures, such as vehicle inspection and  maintenance programs, are unreasonable or impracticable. Further, staff  with EPA’s Office of the General Counsel staff told us EPA could not reject  an application on the basis of the potential impacts on gasoline supply or  other regional effects on the gasoline market because such a rejection  would be outside of EPA’s current authority. Several of the special fuels in  use during 2004 were approved prior to the issuance of the 1997 guidance,  and EPA officials reported that a variety of standards were used to evaluate  applications.
EPA’s most recent effort to examine special gasoline blends is consistent  with EPA’s view that the agency does not have authority to reject a state’s  application based on regional supply impacts or costs. In 2001, EPA  released a staff white paper, in response to a presidential directive,  examining whether there were options to maintain or improve  environmental benefits while also improving the supply of fuels, such as  gasoline. In that report, EPA examined a number of options to reduce the  number of fuels available for states to choose from—similar to a gasoline  menu. That report concluded that these options were beyond EPA’s   statutory authority and would require legislative action to implement. The  white paper also noted that it represented a first step in EPA’s response to  the directive, but that significant additional analysis and study were  required. EPA staff told us that there had been congressional debate  regarding EPA’s authority during consideration of recent energy legislation,  but that its authority had not changed as of May 2005. In the study, EPA  identified a number of changes that it would make to ease the seasonal  transition between gasoline blends used during different parts of the year.  Staff also said that little, if any, additional work had been done since the  2001 study, in part because of EPA’s lack of authority to implement some of  the actions outlined in the study.
section_title: Special Gasoline Blends Reduce Emissions and Contribute to Improved Air Quality
paragraphs: Special gasoline blends reduce emissions—particularly those involved in  the formation of harmful ground-level ozone—by varying degrees,  depending on the blend. The extent of reductions remains unclear,  however, because the estimates have not been comprehensively validated  through testing on current vehicles and emissions controls. According to  EPA and others, these special gasoline blends have contributed to  improvements in air quality seen in some parts of the country. The extent of  their contribution to improvements relative to that of other contributing  factors, such as reductions in power plant emissions, is somewhat  uncertain because of the difficulties in isolating the effects of individual  emissions reduction efforts, such as special gasoline blends, from other  factors that may affect air quality.
subsections: section_title: Special Gasoline Blends Reduce Emissions, but the Extent of Reduction Remains Uncertain
paragraphs: Over the past 15 years, a wide range of studies by EPA and others have  concluded that changes to the properties of gasoline can substantially  reduce emissions from automobiles. For example, in 1996, EPA concluded  that RFG and low-RVP blends can both significantly reduce VOCs but that  RFG offers greater promise in reducing NOx, CO, and toxics. The Air  Quality Improvement Research Program (AQIRP), funded by the auto and  oil industries, analyzed gasoline properties in detail and comprehensively  tested a variety of gasoline blends in a range of vehicles between 1989 and  1992. This effort produced data regarding how the use of various gasoline  blends affect emissions from then-current vehicles and concluded that  changing certain properties of gasoline, in particular reducing RVP and  sulfur, was effective in reducing emissions of pollutants such as NOx, CO,  and also hydrocarbons such as unburned fuel. According to EPA officials,  using special gasoline blends is attractive to states because the blends can  offer immediate emissions reductions from vehicles already on the road.
EPA and others have used the results of these studies to develop models  that provide detailed emissions estimates for several of the special gasoline  blends currently in use. These models have been used by states in their  SIPs to estimate the expected emissions from requiring the use of special  gasoline blends instead of conventional gasoline. As shown in table 1, the  models estimate that special gasoline blends reduce emissions by varying  degrees. California’s gasoline—the blend formulated to reduce emissions  the most—is estimated to provide the greatest level of emissions  reductions, about 25-29 percent for VOCs and about 5.7 percent for NOx.  RFG is estimated to provide about the same level of VOC reduction, a lower  NOx reduction of about 0.7 percent, but also a 10-20 percent reduction in  CO. The special gasoline blend most commonly used in areas not using  conventional gasoline—gasoline with an RVP of 7.8—is estimated to  reduce VOC emissions by 12-16 percent and NOx by about 0.7 percent.  In  addition to the pollutants listed in table 1, RFG and California’s cleaner  burning gasoline also reduces emissions of some toxics such as benzene.
However, the extent of emissions reductions associated with various  gasoline blends remains somewhat uncertain. GAO, the National  Research Council, and others have identified concerns about the overall  accuracy of emissions estimates. EPA has addressed some of the concerns  about emissions estimates. In one effort to address concerns about the  validity of emissions estimates, EPA sponsored a study that compared  emissions estimates to measured emission data obtained between 1992 and  2001. The study looked at pollutant concentration data from tunnels and  vehicle exhaust data collected from vehicles on roadways using special  remote sensing devices at a limited number of sites using a limited range of  gasoline blends. As a result, EPA found that the observed emissions data  conflicted with emissions estimates; in some cases the testing data were  higher than predicted, while in other cases it was lower.
Despite this effort, EPA has not comprehensively studied how various  gasoline blends affect vehicle emissions since the early 1990s—when the  AQIRP comprehensively tested a variety of gasoline blends in a range of  vehicles. Since then, there have been advances in emissions control  technology. Consequently, to the extent that emissions from vehicles with  newer emissions control technology differ from those of older vehicles,  emission estimates may become less certain, especially as vehicles with the  newer technology compose a growing portion of the U.S. fleet. EPA  officials acknowledge that their efforts since the early 1990s to validate  emissions estimates have not allowed them to fully validate how special  fuel blends operate in a full range of vehicles of varying vintages and  designs over their operating lifetimes. EPA officials told us that they  believe such a detailed analysis would improve their understanding of how  special gasoline blends affect emissions, but said that they have not had  sufficient budgetary resources to collect the needed data to support such  an analysis.
In addition to these broad concerns, there is also controversy over the  emissions benefits associated with special blends containing oxygenates,  which were initially added to gasoline to reduce the emissions of carbon  monoxide and other pollutants. However, although there appears to be  agreement that oxygenated fuels help reduce emissions of CO from older  vehicles, recent studies indicate that the emissions benefits for newer  vehicles are questionable. For example, AQIRP, the National Science and  Technology Council, and others have reported that improvements in  emissions controls on newer vehicles, such as oxygen sensors and  computer-controlled emissions systems, may now automatically reduce  emissions of CO and other pollutants and may negate many benefits of  adding oxygenates. Further, some experts have concluded that adding  oxygenates to gasoline may increase emissions of NOx and VOCs and may  contribute to increased levels of ozone. As a result, some states, including  California, New York, and Georgia have requested waivers from EPA to  allow them to use fuel that does not contain an oxygenate. The state of  California stipulated in its waiver application that its fuel reduces  emissions to a greater extent than federal RFG and that the oxygenate  requirement has impeded its efforts to reduce ozone. To date, EPA has not  granted any of these waivers. Recently, Congress and others have  considered expanding the use of ethanol in gasoline for other reasons,  including to benefit U.S. farmers and to reduce the country’s reliance on  foreign oil.
section_title: Reduced Vehicle Emissions Have Led to Air Quality Improvements, but the Extent of Benefits Attributable to Special Gasoline Blends Is Uncertain
paragraphs: EPA and other experts have concluded that improvements in air quality in  some parts of the country are at least partly attributable to the use of  special gasoline blends. In 2004, EPA reported that ground-level ozone has  decreased over the past 10 to 25 years and that these reductions resulted, at  least in part, from emissions control programs that include requirements to  use special gasoline blends. Further, EPA and other experts concluded that  special gasoline blends, such as RFG and low-RVP blends, are effective  strategies for states to use to reduce ozone pollution.  In addition, a  research effort funded by AQIRP found that reducing RVP decreased peak  ozone in several cities and would continue to provide benefits for years to  come. In addition, the National Research Council reviewed EPA data and  found that average ozone levels dropped by about 1 percent coincident  with reduced emissions of VOCs, NOx, and CO from on-road vehicles,  which fell by 31 percent, 2 percent, and 20 percent, respectively. Based on  these and other data, the National Research Council concluded that  improvement in air quality is likely attributable, at least in part, to recent  improvements in gasoline properties.
Despite the conclusions that special gasoline blends have contributed to  improved air quality, findings specifically linking air quality improvement to  the use of special gasoline blends are limited and incomplete because of  the inherent difficulties in isolating the effects of special gasoline blends  from other efforts to improve air quality.  Studies examining the effect of  special gasoline blends on air quality noted that attributing a change in  ozone levels to the use of a special gasoline blend would be difficult. In  particular, experts from EPA, the National Science and Technology  Council, and the National Research Council have determined that relating  trends in the levels of ground-level ozone to trends in emissions and to  emissions-control policies can be challenging because of the confounding  effects of other variables, including the effects of other control efforts and  meteorological fluctuations. For example, the National Research Council  noted that since the 1990s—when special gasoline blends became widely  used—several other efforts to reduce emissions from vehicles have been  made that could also explain changes in air quality, such as the addition of  enhanced emissions-control systems and improvements in inspection and  maintenance programs in some areas. During this time, EPA and the states  have also undertaken efforts to reduce emissions from electric utilities,  chemical manufacturing, and other stationary sources that could have  contributed to the improvements. Further, because ozone is more readily  created when VOCs, NOx, and CO react in sunny and hot weather,  meteorological fluctuations affect the relationship between emissions and  ozone levels. For example, EPA has identified cases where air quality  improved, but the improvement was largely due to better weather (more air  circulation, lower amounts of heat and sunlight, and other factors).  According to the National Research Council and others, determining how  much air quality improvement is specifically attributable to any specific  emissions control program, including special gasoline blends, would  require the collection of high-quality, long-term data on air pollution, on  other control measures, and on weather.
section_title: Use of Special Gasoline Blends Has Made It More Complicated and Costly to Supply Gasoline
paragraphs: The increasing numbers of special gasoline blends have made it more  complicated and costly to supply gasoline, elevating the risk of localized  supply disruptions. Producing special gasoline blends can require changes  at refineries, making it more complicated and costly to produce gasoline.  Special blends also add to the number of fuels shipped through pipelines,  reducing the efficiency of the pipelines and raising costs. In addition,  because the tanks at the fuel terminals were often built before the  proliferation of blends, they are often too large and too few to efficiently  handle the increased number and smaller size batches of special gasoline  blends and, as a result, total storage capacity has fallen. Further, in some  cases, the proliferation of blends has reduced the supply options available  to some retailers, making them more susceptible to supply disruptions.
subsections: section_title: Making Special Gasoline Blends Has Added Complexity and Costs at Refineries
paragraphs: Producing some special gasoline blends sometimes requires refineries to  invest in additional refinery units, making their refineries more complex, or  reducing their capacity to make gasoline. For example, producing  cleaner-burning fuel with lower levels of toxic and other emissions, such as  RFG or CBG, has required some refiners to install specialized units that  remove sulfur and benzene during the refining process. Similarly,  production of low-RVP gasoline requires that refiners leave out the lightest  components typically included in conventional gasoline. Separating these  components or converting them to ones that can be used in these blends  may require additional refinery units. If the components are not  immediately used in gasoline at that refinery, they may be stored, may be  used in less valuable fuels such as diesel or jet fuel, or shipped to other  refineries that can use these components. The removal and additional  processing of these components can decrease the amount of gasoline a  refinery can produce. For example, officials from one California refinery  told us that their refinery could produce 12 percent more volume if it  produced conventional gasoline rather than California gasoline because  conventional gasoline uses more of the components that are typically  generated in the refining process.
Adding refinery units and losing refinery capacity can increase the overall  costs of refining gasoline. Manufacturing low-RVP fuel generally involved  reducing the use of some components and, as a result, was less costly than  the more significant changes needed to make the cleanest burning blends.  Specifically, in 1996, EPA estimated that low-RVP blends cost 1-2 cents per  gallon more to make than the conventional gasoline at the time. In contrast,  in 2003, the Energy Information Administration (EIA), within the  Department of Energy, estimated that blends formulated to meet the most  stringent standards, such as oxygenated California gasoline, cost 5-15 cents  more per gallon to make than the conventional gasoline required at the  time and that RFG generally costs 2.5-4 cents more per gallon to make.
In addition, the use of oxygenates in blends such as RFG further increases  the complexity and cost of the refining process because refiners must  either invest in equipment to produce oxygenates from crude oil (in the  case of MTBE) or they must purchase these components from other  sources. MTBE is generally less expensive than ethanol as an oxygenate  but has raised water quality concerns. As described earlier, ethanol is  generally shipped by truck or rail, stored separately from other gasoline  components, and blended just before gasoline is sent to retail stations. The  higher cost of purchasing ethanol during the period of our analysis,  together with these separate handling procedures, adds to the total cost of  making ethanol-blended gasoline. Additionally, because ethanol has a high  RVP, more components must be removed from ethanol-blended gasoline  than from MTBE-blended gasoline to meet specifications for RVP.  Removing these components and reprocessing them or diverting them to  other products increases the cost of making ethanol-blended gasoline.
section_title: Shipping More Special Gasoline Blends Reduces Pipeline Capacity and Raises Costs
paragraphs: Shipping gasoline on a pipeline requires a great deal of coordination  between refineries, pipelines, and terminal stations to maintain pipeline  flows while fuels are being added and withdrawn. Pipeline operators told  us that they develop schedules of when individual shipments (called  batches) will occur at least 1 month in advance; however, some changes to  this schedule may occur up to the date when a product is placed on the  pipeline to adjust for, among other things, the need for more of a specific  gasoline blend in some locations. On the day of shipment, pipeline  operators precisely coordinate when refineries or other shippers add or  “inject” fuel to the pipeline and when fuel is taken off of the pipeline along  with other aspects of operating the system. Companies shipping fuel on the  pipeline, may request to keep their products isolated from others (a  segregated batch) or may choose to combine their product on the pipeline  with other blends meeting similar or identical product specifications (a  fungible batch). Because of the large number of gasoline blends and,  because some shippers require segregated batches, the number of fuels  shipped in pipelines has increased dramatically in recent years. For  example, one pipeline company noted that in 1970 they shipped 10 different  products on their system over the entire year, whereas in 2004 they shipped  128 (including distinct blends and segregated products).
The increased number of special gasoline blends has reduced the effective  capacity of the nation’s petroleum products pipeline infrastructure because  the pipelines are generally operated at slower speeds to accommodate  more and smaller batches of gasoline while keeping the different blends  separate. The speed at which centrally controlled pumps move product  along pipelines—typically between 3 and 8 miles per hour—can be affected  by a number of factors, including the volume of product relative to the  pipeline capacity being shipped, the size of batches, and the availability of  terminal storage along the pipeline route. Several pipeline operators told us  that, prior to the introduction of special gasoline blends, they shipped many  fewer products and much larger batches than they do now. Further, they  said that shipping smaller volumes can require them to slow or stop the  pipeline to allow shippers to inject or withdraw individual fuels at fuel  terminals or other locations. Lost opportunities associated with reductions  in the amount of fuel that the pipeline can transport serve to raise the  average cost of moving gasoline.
The increased number of fuels and fuel types shipped on pipelines has also  increased losses and costs associated with mixing of fuels. Two types of  fuel mixtures occur at the interface between batches on pipelines:  downgrading and transmix. Downgrading occurs when two similar fuels  mix, but the resulting mix no longer meets the more valuable product  specification. For example, if a high- and regular-octane gasoline are  mixed, then the downgraded gasoline may be sold only as lower-priced,  regular gasoline. Transmix results when two dissimilar fuels mix and the  fuel cannot be used without reprocessing. For example, if diesel fuel and  gasoline mix, the transmix must be processed to separate the fuels into  usable products. Similarly, because MTBE is banned in some areas, if  gasoline blends containing MTBE come in contact with other fuels, the  mixed fuel is considered transmix and must be reprocessed to remove the  MTBE before it can be used. To minimize losses associated with  downgrades and transmix and still maintain efficiency, pipelines generally  set a minimum batch size. Several pipeline operators reported that they  have witnessed increased losses and costs due to downgrades and because  more fuel requires reprocessing as the number of special gasoline blends  has increased.
In addition, according to some pipeline company officials, because some  gasoline blends are only used in one city or only in some areas served by a  pipeline, shippers incur additional costs if these gasoline blends are not  taken off the pipeline at the right location. For example, one pipeline  operator told us that RFG with MTBE shipped in Midwest pipelines cannot  be used without costly reprocessing if it is shipped past certain points on  these pipelines because no regions beyond these points allow the use of  RFG with MTBE. In some instances, the pipeline may need to be slowed, or  even stopped, to allow a special gasoline blend to be taken out of the  pipeline.
section_title: Increased Numbers of Gasoline Blends Reduce Terminal Storage
paragraphs: The increased number of petroleum products generally, including special  gasoline blends, and the need to keep them separated, has reduced the  storage capacity of some gasoline terminals which can create difficulties  during periods when gasoline supplies are disrupted.  To ensure product  quality, special gasoline blends must be stored in separate tanks. Several  terminal operators told us that their terminals were built before the  proliferation of special gasoline blends and were designed to handle fewer,  but larger, batches of gasoline. Terminal operators told us that, because  many of the special gasoline blends are shipped in smaller batches, the  tanks used for these blends are often not filled to capacity. One terminal  operator told us that some new storage tanks had been built in recent  years. This operator went on to say that adding new storage capacity at  existing terminals is often either prohibitively expensive or extremely  difficult because of space limitations and the need to obtain federal, state,  and local regulatory approvals. One terminal operator told us that the  company has chosen not to carry one or more gasoline blends used in its  area because the company’s existing tanks were insufficient and building  additional tank capacity was too costly. For these same reasons, it is often  difficult to build new terminals. In addition to the complexity of these  factors, terminal operators told us that the proliferation of special gasoline  blends also raised their costs by reducing their ability to fully utilize their  existing tanks, which cost them the opportunity to store additional fuels, or  by forcing them to make additional investment to build more tanks, or  both.
In addition, terminal operators told us that reduced storage capacity at  their facilities, combined with the increased number of fuels in the pipeline  system, has made it more difficult to maintain adequate stockpiles of some  gasoline blends. Several pipeline operators said that the interval between  when a fuel is available from the pipeline may be 10 days or longer if  capacity is not available on the pipeline—requiring that many days’ worth  of fuel to be stored at the terminal. Increasing demand for gasoline  combined with this longer period between shipments, and limited terminal  storage, increases the likelihood that some areas will run out of gasoline  while waiting for a shipment. One pipeline operator said that the terminals  that they served did not run out of gasoline from 1995-1996, but that now  one terminal per month runs out of fuel. One terminal operator explained  that running out of gasoline can be very harmful to their business because  terminal operators rely on retailers and independent gasoline tanker trucks  to regularly visit their stations—visits that may not occur if their supplies  are inconsistent. In addition, the operator told us that, when tanks are  pumped dry and later refilled, they can release up to 1 ton of VOCs, which  contributes to pollution. While the terminal operators we spoke with said  they are generally able to maintain sufficient gasoline storage, they can run  short of some fuels when demand is high or pipeline deliveries are delayed  or interrupted. One operator noted that they increase their wholesale  gasoline prices as their available supplies fall in an effort to reduce their  sales and retain some gasoline for sale and avoid running out. The terminal  operators we interviewed did not provide us data on the number of  instances when they ran out of gasoline, but they said that the number has  significantly increased in recent years.
section_title: Special Blends Limit Supply Options in Wholesale Markets When Local Supply Disruptions Occur
paragraphs: According to operators of independent retail gasoline stations that buy  from the wholesale markets, they have more limited supply options as a  result of the presence of special gasoline blends. According to an industry  representative, some gasoline retailers affiliated with, or owned by, large  oil companies (so-called “integrated” oil companies, such as ExxonMobil  and ChevronTexaco) receive their gasoline—referred to as branded  gasoline—only from these companies, generally paying slightly more for it.  However, other companies that are not affiliated with these integrated oil  companies, referred to as independent retailers, typically purchase  gasoline from a variety of suppliers including, but not limited to, integrated  oil companies and typically purchase gasoline at the lowest price available  from nearby fuel terminals. As a result of this and other factors,  independent retailers said that they generally sell gasoline at a lower price  than branded gasoline stations. According to some, the introduction of  special gasoline blends may increase the market power of some refiners. In  its 2001 white paper, EPA noted that the development of special blends  limits competition in the refining sector because some blends are small,  and only a few refiners may choose to make some blends. Consistent with  this view, independent retailers told us that they have had fewer choices in  some markets near where special gasoline blends are required because  some refineries and fuel terminals no longer sell gasoline for those  markets, and that they have tended to pay higher prices in those areas. For  example, one large independent retailer operating retail gas stations on the  East Coast told us that the number of refineries producing gasoline for the  market they serve fell from 12 to 3 after the introduction of special gasoline  blends—leaving the retailer with fewer options to identify the lowest cost  supplies. Special gasoline blends have also complicated the ability of some  large entities to enter local gasoline markets. Officials with a large  company that has entered several local gasoline markets across the  country as an independent retailer told us that obtaining sufficient supplies  at reasonable prices is more difficult in markets where special gasoline  blends are used and that limited supply options have reduced the  company’s ability to enter and compete in some of these markets.
The plight of independent retailers is particularly pressing when traditional  supplies are disrupted. The independent retailers that we spoke with said  that their prices generally increase first and that they may not have access  to fuel supplies provided to branded retailers if supplies are disrupted.  Before special gasoline blends, these independent retailers were able to  truck fuel in from nearby cities or neighboring states, however, because  some gasoline blends may not be used anywhere else, or they may only be  used hundreds of miles away, this is a more difficult and costly option  today. For example, several industry officials noted that, if supplies of  California gasoline are disrupted, they would expect prices to rise and that  it could take weeks for additional supplies to arrive. They said that nearby  suppliers capable of blending California’s gasoline blend are generally  operating close to their full capacity. In the event that these supplies are  disrupted, additional supplies generally come from Western Canada, the  Gulf Coast, the Caribbean, or farther away, because there are only a few  refineries capable of making this special gasoline blend and, as a result,  supplies could take 3 weeks or more to arrive.
section_title: Areas That Use Uncommon Special Gasoline Blends Tend to Have Higher and More Volatile Gasoline Prices
paragraphs: Among the 100 cities we examined, the highest wholesale gasoline prices  tended to be found in cities that used a special gasoline blend not widely  available in the region or that is more costly to make than other blends.  Cities that are far away from major refining centers or other sources of  gasoline also tended to have high prices. Prices also tended to be more  volatile in cities having one or more of these characteristics. Other studies  have also found higher and/or more volatile prices in some cities that use  special gasoline blends. Greater complexity and higher refining,  transportation, and storage costs associated with supplying special  gasoline blends have likely contributed to increased gasoline prices overall,  and for specific special blends, but it is not possible to conclusively  determine the extent to which special gasoline blends have caused the  higher prices and greater volatility found in specific cities.
subsections: section_title: We Found Higher and More Volatile Gasoline Prices in Cities That Use Special Blends
paragraphs: We examined data from 100 selected cities to determine how prices varied  across areas that use special gasoline blends versus conventional gasoline  and found that, with some exceptions, the highest and most volatile  gasoline prices tended to be found in cities that used special gasoline  blends that are uncommon or particularly expensive to make, or in cities  that are long distances from major refining areas. Each of these factors  tends to isolate a city from the overall gasoline market by limiting the  available supplies of gasoline from other areas in the event there is a supply  shortfall in that city.
With regard to special gasoline blends, the data show that most of the 20  cities with the highest average prices over about the past 4 years  (December 2000 through October 2004) used special gasoline blends, most  of them formulated to meet stringent emissions standards.  In many cases,  these cities used a fuel that is not widely used outside their area, or in some  cases is unique to that city or state. For example, the five California cities in  the data set are all in the top 20 cities with respect to gasoline prices.  California’s gasoline is the cleanest-burning gasoline and, in order to make  it, California’s refineries have invested substantial capital in new refining  processes. Further, only a few refineries outside of California routinely  make California gasoline, the closest of which is in Northern Washington.  The uniqueness of California’s gasoline has been noted by many sources as  likely contributing to California’s high gasoline prices relative to the rest of  the country. For the period we examined, the five cities we looked at in  California had average prices ranging from about 24 to 26 cents per gallon  more than the city with the lowest price (Meridian, Mississippi), which uses  conventional gasoline and is located near the large refining center in the  Gulf Coast. The table in appendix II shows the price data and gasoline  blend types for each of the 100 cities we evaluated. Some of the cities with  the highest prices used conventional gasoline year-round, but most of these  are far from major refining areas or are located on or near a single smaller  pipeline. Average prices in these top 20 cities were between 14 and 41 cents  per gallon more than in the city with the lowest price.
Using ethanol as an additive to gasoline is associated with higher wholesale  gasoline prices. To evaluate this, we examined national average prices for  gasoline blends containing ethanol. For example, for the nation as a whole,  average prices for conventional gasoline with ethanol were about 4 cents  per gallon higher than conventional without ethanol over the time period  we analyzed. The switch to using ethanol, as opposed to MTBE, was also  associated with higher gasoline prices. For example, in the years  2001-2003, during which California phased out MTBE and phased in  ethanol, the average summer price of gasoline with ethanol was between  about 4 and 8 cents per gallon more than the price of gasoline with MTBE.  Similarly, over the period 2001-2004, the average summer price for federal  reformulated gasoline with ethanol was between about 6 and 13 cents per  gallon more than for federal reformulated gasoline with MTBE.
In contrast to the highest-priced cities, the 20 cities with the lowest average  wholesale gasoline prices over the period typically used common gasoline  blends and/or were located near a major refining center—most often near  the Gulf Coast, the largest refining center in the country in terms of both  numbers of refineries and total refining capacity. For example, among the  20 cities with the lowest prices, 8 used conventional gasoline—the most  widely available gasoline blend. Conventional gasoline is used extensively  across the United States, and most cities that use it are surrounded by  areas using the same gasoline. Another 9 cities with the lowest prices used  7.8 RVP gasoline—the most widely used of the special blends and the one  formulated according to the least stringent emissions standards. Most of  the 7.8 RVP gasoline is used in areas close to the Gulf Coast refining center.  In addition, refiners told us that making 7.8 RVP gasoline is simpler and less  costly than some of the other blends, so it may be more available from  refineries in the event of a local supply shortfall. The other 3 cities with the  lowest prices used less common special blends but are all close to the  largest refining center, the Gulf Coast and, therefore, have many more  potential supply options than more isolated cities do.
We found similar results with regard to the volatility of gasoline prices.  For example, 18 of the 20 cities with the most volatile prices used special  blends of gasoline, and many of these cities were also among the  highest-price cities. In contrast to the cities with relatively high price  volatility, 17 of 20 cities with the lowest volatility use either conventional or  7.8 RVP gasoline. However, while prices for special blends tend to be  higher and more volatile than prices for conventional gasoline, available  data did not allow us to attempt to isolate the effects of specific special  gasoline blends on gasoline prices or to definitively establish a causal link  between specific special blends and price volatility. Specifically, we did not  have sufficient data to control for all other potential contributing  factors—such as the distance from cities to the sources of gasoline supply,  or other specific features of these cities that might influence prices  regardless of the blend of gasoline used.
section_title: Other Studies Have Found Similar Results
paragraphs: We reviewed the literature associated with special gasoline blends and  gasoline prices and found a number of studies done by government,  academic, and private entities. The results and conclusions of these studies  were largely consistent with our findings. For example, a recent EPA study  found that high prices and price volatility are most acute in isolated  markets, particularly those using special gasoline blends. The study also  pointed out that some states had adopted specific gasoline blends in an  attempt to use a blend that had a lower refining cost than federal  reformulated gasoline. EIA also studied these blends and concluded,  among other things, that the increasing number of distinct gasoline blends  has reduced the flexibility of the supply and distribution system to respond  to unexpected changes in supply and demand for gasoline. EIA further  pointed out that, in some cases, states have chosen low RVP gasoline  blends in an attempt to achieve lower gasoline prices than if they had used  federal reformulated gasoline, and they inadvertently may have added  strain to the distribution system, leading to greater potential for price  volatility. A number of other academic and private studies found similar  results.
section_title: Special Gasoline Blends Contribute to Higher and More Volatile Prices, but Available Data Are Insufficient to Control for all Other Factors
paragraphs: There is a broad consensus among the experts and others we spoke with  that the proliferation of special gasoline blends have contributed to  increased and more volatile gasoline prices. The studies we reviewed also  came to similar conclusions. Further, the greater complexity and higher  refining, transportation, and storage costs associated with supplying  special gasoline blends have almost certainly resulted in increased prices  or volatility, either because of more frequent or severe supply disruptions,  or because higher costs are likely passed on, at least in part, to consumers.   For example, depending on the pipeline company, costs associated with  downgrades or transmix are recovered from customers. At least part of  these costs are, in turn, likely to be passed down the supply chain and  eventually to consumers of gasoline. Similarly, the costs incurred to install  new processes to make special gasoline blends are likely passed on, at least  in part, to consumers because refining companies would not make these  investments without a reasonable expectation of a return on their money.
While it is, therefore, almost certain that special gasoline blends have been  a contributing factor to higher gasoline prices, it is not possible with the  data available to us to conclusively determine the extent to which these  blends have caused the higher prices and greater volatility found in specific  cities or to rule out other potentially contributing factors. Such other  factors may include specific supply infrastructure problems in or around  these cities that would impact gasoline prices regardless of the blend. For  example, state and industry officials in California told us that marine  terminals for off-loading gasoline and other petroleum products are in  short supply in California, which constrains the ability of suppliers in the  state to receive these products from outside the state in the event of a local  supply shortfall. These constraints would potentially contribute to higher  gasoline prices regardless of which blend is used. Another potential factor  that might influence gasoline prices independently of gasoline blends is the  level of competition in the petroleum products industry. For example, in a  recent GAO report, we found that oil company mergers had contributed to  a 1 to 2 cent per gallon increase in conventional gasoline prices in the 1990s  and as high an increase as 7 cents per gallon for California’s special  gasoline blend. In addition, there may be other such factors at play that we  do not observe, so we cannot definitively determine the precise extent to  which observed prices are the result of the proliferation of special gasoline  blends.
section_title: Conclusions
paragraphs: Special gasoline blends have reduced emissions and helped contribute to  improved air quality in some parts of the country. Using special gasoline  blends to achieve air quality standards is attractive to states; the blends  offer immediate reductions in emissions from all vehicles already on the  road by varying degrees. Unfortunately, EPA’s knowledge about the  emissions generated when special gasoline blends are burned is outdated.  Much has changed regarding vehicle and emissions control technologies  since special gasoline blends, including those with ethanol, were last  comprehensively tested in automobile engines. However, EPA and the  states continue to rely on models built largely around these dated findings  when evaluating whether to allow states to use special blends as a  component in their efforts to improve air quality.  Given the significant  changes in vehicles and fuels, EPA should have better information about  how the current fuels affect the vehicles currently on the road. In addition,  Congress should have better information regarding the effectiveness of  these blends, particularly those containing oxygenates such as ethanol, to  aid in setting policy on fuel blends and the use of oxygenates.
Although special blends have helped reduce emissions and improve air  quality, the introduction of these blends appears also to have divided the  gasoline market, converting what had been closer to a single national  commodity market, into islands of smaller and more local markets for  blends of gasoline that are typically not interchangeable. Because of  octane, seasonal, and other differences, each additional special blend that  is added can require pipelines and fuel terminals to handle several  additional blends. Overall, this transformation of the gasoline market has  complicated the supply infrastructure, increased production and delivery  costs, and reduced the availability of gasoline, in some cases. The impacts  of the proliferation of special gasoline blends are most evident when there  is a disruption in the supply chain, such as when a refinery or pipeline is  shut down. In these instances, localities using a blend different from the  gasoline used in nearby areas must seek replacement supplies from farther  away, leading to delays that likely cause higher and longer price spikes  until these supplies arrive. Overall, it is likely that gasoline prices are higher  now than they would be if gasoline were closer to a single commodity.
In light of the opposing effects of environmental benefits and negative  market implications, an ideal policy for approving the use of special  gasoline blends would balance these effects. However, each decision  involves trade-offs that all stakeholders may not value equally. Specifically,  different stakeholders may attach varying degrees of importance to the  environmental benefits or the impacts on gasoline supply infrastructure.  Further, individual state actions that impact the entire regional supply  infrastructure may not fully take those impacts into account or, in some  cases, even accurately predict the impact on their own gasoline supply.  With the 8-hour ozone rule and other regulatory changes likely to lead to  more applications to use special gasoline blends, balancing the emissions  effects of specific gasoline blends against the implications for supply and  price will be even more important in the coming years. While EPA is  currently authorized to approve state applications to use special gasoline  blends, the agency cannot effectively weigh environmental and supply  considerations because it does not have authority to deny state requests to  use these blends on the basis of regional supply or price considerations and  because its information on the environmental benefits is dated.
section_title: Recommendation for Executive Action
paragraphs: To provide a better understanding of the emissions impacts of using special  gasoline blends and these blends’ impacts on the gasoline supply  infrastructure, we recommend that the EPA Administrator direct the  agency to take the following four actions: (1) work with states and other  stakeholders to comprehensively analyze how various gasoline blends  affect the emissions of vehicles that comprise today's fleet, including how  overall emissions are affected by the use of ethanol and other oxygenates;  (2) use this updated information to revise the emissions models that states  use to estimate the emissions and air quality benefits of these fuels and  provide this information to Congress; (3) work with states, the Department  of Energy, and other stakeholders to develop a plan to balance the  environmental benefits of using special gasoline blends with the impacts on  gasoline supply infrastructure and prices, and report the results of this  effort to Congress; and (4) work with the states, the Department of Energy,  and any other appropriate federal agencies to identify what statutory or  other changes are needed to achieve this balance and report these findings  to Congress and request that Congress provide these authorities to the  appropriate federal agency or agencies.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a copy of our draft report to EPA for comment. The agency did  not comment on our findings or recommendations but did provide  technical comments that we have adopted, as appropriate.
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 other appropriate  congressional committees and the Administrator of EPA. We also will make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or wellsj@gao.gov. Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who contributed to this report are listed in  appendix II.
section_title: Scope and Methodology
paragraphs: To determine the extent to which special gasoline blends are used in the  United States and how, if at all, this use is expected to change in the future,  we reviewed related literature, reviewed data on the use of these fuels, and  interviewed government and other officials.  Specifically, we reviewed  reports on the presence and use of special gasoline blends by the  Environmental Protection Agency (EPA), the Energy Information  Administration (EIA), and others.  We also examined data on the use of  special gasoline blends provided by EPA, ExxonMobil (a commonly  mentioned source of information on use of special gasoline blends), the Oil  Pipeline Information Service, state environmental agencies and others.  In  addition, we interviewed federal and state government officials, academic  and industry experts, and industry officials.  Specifically, we interviewed  officials with the EIA and EPA in Washington, D.C., as well as officials with  EPA’s Office of Transportation and Air Quality in Ann Arbor, Michigan, and  officials in each of the 10 EPA regional offices.   We also interviewed  representatives from industry trade associations including the American  Petroleum Institute, the Renewable Fuels Association, the National  Petrochemical Refiners Association, the Association of Oil Pipelines, the  National Association of Convenience Stores, the Alliance of Automobile  Manufacturers, and the Society of Independent Gasoline Marketers and  with representatives from the National Governors Association.  In addition,  we interviewed academic and industry experts, and industry officials from  companies involved in refining, terminal operations, and pipeline  operations, as well as from large oil companies. We also conducted site  visits in California, Louisiana, New Jersey, Pennsylvania, and Texas—states  with large refining sectors and/or organizations with experience with  producing and using special gasoline blends.
To document what EPA and others have determined regarding the role of  special gasoline blends in reducing vehicle emissions and improving overall  air quality we reviewed related literature, interviewed federal, state, and  other officials, and examined emissions estimates provided by EPA.   Specifically, we examined reports on the emissions impacts of special  gasoline blends done by EPA, the Auto/Oil Air Quality Improvement  Research Program (AQIRP), National Research Council, state  environmental agencies, and others.  In addition, we interviewed federal  and state government officials, academic and industry experts, and  industry officials.  Specifically, we interviewed federal officials at EPA and  EIA, staff at state environmental offices, researchers associated with the  National Academies of Science and the National Research Council,  representatives from industry trade and health advocacy associations,  including the American Petroleum Institute, the Renewable Fuels  Association, the National Petrochemical Refiners Association, the  Association of Oil Pipelines, the National Association of Convenience  Stores, the Alliance of Automobile Manufacturers, the Society of  Independent Gasoline Marketers, and the American Lung Association.  In  addition, we interviewed academic and industry experts, and industry  officials from companies involved in refining, terminal operations, and  pipeline operations, as well as from large oil companies.  To assess the  reliability of emissions analyses, we reviewed the analyses’ overall design  and methodologies, including assumptions and inputs to modeling.   Automobiles emit a number of harmful pollutants; however, some have  been identified as potentially more significant than others.  The Clean Air  Act authorizes EPA to mitigate potentially harmful concentrations of major  criteria pollutants, including carbon monoxide (CO), nitrogen dioxide  (NO2), sulfur dioxide (SO2), ozone (O3), particulate matter (PM) and lead  (Pb).  GAO focused its analysis on VOC, NOX—important precursors to  ozone—and CO emissions because the transportation sector is responsible  for a large fraction of VOC, NOx, and CO emissions in the United States  and, as a result, the Clean Air Act and EPA have specified the reduction of  these pollutants through fuel control programs.
To identify what effects, if any, special gasoline blends have on gasoline  supply in the United States, we examined literature reporting on the effects  of special gasoline blends on gasoline supply, interviewed government  officials and a wide cross section of industry participants.  Specifically, we  interviewed agency officials with EPA, EIA, the Federal Trade Commission,  and state regulatory agencies.  In addition, we interviewed representatives  from industry trade associations, including the American Petroleum  Institute, the Renewable Fuels Association, the National Petrochemical  Refiners Association, the Association of Oil Pipelines, the National  Association of Convenience Stores, the Alliance of Automobile  Manufacturers, and the Society of Independent Gasoline Marketers.  We  also interviewed petroleum industry officials from companies involved in  refining, terminal and pipeline operations, and marketing, including  interviews with senior industry officials from several integrated oil  companies such as ExxonMobil, ChevronTexaco, five operators of large  pipeline systems that carry multiple gasoline blends, several operators of  terminals, and three large independent marketers of gasoline that buy  wholesale gasoline and sell it to retail customers.  We also conducted site  visits in California, Louisiana, New Jersey, Pennsylvania, and Texas—states  with large refining sectors and/or organizations with experience with  producing and using special gasoline blends.
To determine how these blends affect gasoline prices, we examined the  literature on gasoline prices, interviewed industry officials and experts, and  analyzed wholesale gasoline price data.  We reviewed reports on the use of  specials gasoline blends and gasoline prices done by EPA, EIA, and others.   We also interviewed government officials and industry experts including  federal officials at EPA and EIA; staff at state environmental offices;  academic and industry experts; petroleum industry officials from  companies involved in refining, terminal operations, and pipeline  operations, as well as from large oil companies; and representatives of  trade associations.
In addition, we evaluated data on wholesale gasoline prices in 100 cities  provided by the Oil Price Information Service (OPIS), as well as data on  national average prices from the same source—these national data  covered all the terminals in the country for which OPIS collects data.  The  data were weekly average prices from terminals selling gasoline at  wholesale and covered the period from December 2000 through October  2004.  In choosing which cities to evaluate, we first selected all cities on  major pipelines.  Then we selected the largest cities in each state and in  each contiguous area that used a special gasoline blend.  In so doing, we  chose at least one such city from each contiguous area in the United States  that we determined used a special blend of gasoline.  Then, we chose cities  in areas that use conventional gasoline, using similar criteria—every  conventional-gasoline city chosen was the largest city in its respective state  that was on a major pipeline.  We did not estimate an econometric model to  try to isolate the effects of specific special blends because we felt we  lacked sufficient data to control for all other potential contributing  factors—such as specific features of these cities that might influence prices  regardless of the blend of gasoline used or the degree of competitiveness in  the gasoline supply industry.  Instead, we ranked the 100 cities according to  the mean of their gasoline prices to determine if there were consistent  patterns with respect to areas that use special gasoline blends versus areas  that use conventional gasoline.  To calculate the mean, we first created  price differentials between each week’s price in each city and the price per  gallon of West Texas Intermediate crude oil—a commonly used benchmark  for world crude oil prices.  These crude oil prices came from Platts, a  common source for crude oil and petroleum product prices.  For each city,  we performed a statistical test comparing the average prices between each  city and two comparison cities in Texas.
We also ranked the cities according to the standard deviations of their  prices over time and looked for similar patterns.  To calculate the standard  deviations, we again created price differentials between each week’s price  in each city and the price per gallon of West Texas Intermediate crude oil.   Creating a differential between gasoline and crude oil prices controls for  some volatility in gasoline prices that is caused by changes in the price of  crude oil, the fundamental raw material input in gasoline.  Then, we  calculated the standard deviation over time for each city for these price  differentials.  The standard deviation is a common measure of the  variability of data and, in this case, is a measure of how much the prices in  each of the cities varied over time, controlling for crude oil prices.  For  each city, we performed a standard test for statistical significance of the  difference of the variability between that city and the city with the lowest  standard deviation.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Mark Bondo, Jon Ludwigson,  Kristen Massey, John Mingus, Cynthia Norris, Frank Rusco, Barbara  Timmerman, and Kim Wheeler-Raheb made key contributions to this  report.  In addition, important contributions were made by Diane Lund,  Dawn Shorey, and Mary Welch.