Opinion: No Game Plan for Energy

By Roger Simons

resident

imons Petroleum

Last month while driving to Dallas, I had my radio tuned to a sports call-in program. A prominent football coach was fielding questions from local fans, and toward the end of the show an elderly woman phoned in. Sounding for all the world like everyone’s vision of the prototypical grandma, she identified herself as “Dixie from Dallas,” and meekly offered that she was “honored” to be talking with the coach. Having established this, Dixie then launched into a blistering post mortem of last week’s game, culminating in the piercing question: “Coach, don’t you realize that when they go to eight men in the box, you’ve just got to stretch the defense vertically?”

I relate this story because Dixie understood that no matter what you’re doing, in order to succeed you must have a strategy.

Sadly, the secretary of energy in Washington, D.C., doesn’t have a call-in show. If he did, maybe Dixie could set him straight, because the lack of a national energy strategy is killing us. Domestic production of oil and gas is at an all-time low, and we are importing a greater percentage of crude than during the energy crisis caused by the Arab embargo. Indeed, some officials say that we are in the midst of a second energy crisis. Certainly the oil market’s volatility suggests that. Official U.S. policy has discouraged drilling in some areas like Alaska and forbidden exploration on both the East and West coasts. As a result, we have become more and more reliant on foreign producers and refiners to supply our energy demands. Unfortunately, those guys do have a strategy. About two years ago, they got together and decided to leverage increased world consumption against marginally decreased production. That strategy worked for them, and today, Americans are paying more than twice as much for diesel and gasoline.

American refiners are currently and consistently operating at or near capacity, and spot shortages in virtually every region of the U.S. over the past year suggest that they are straining to keep up. But don’t look for new U.S. refinery construction anytime soon. There hasn’t been a new major refinery built in this country in more than 25 years. In fact, since 1990 the number of refineries has actually declined by 22%, from 205 to 159. Refiners have been a favorite target of the Environmental Protection Agency for years. That’s bad news for the economy because it costs jobs and money and limits downstream supply.

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To be frank, it seems that the EPA’s enforcement strategy is aimed at discouraging any proposed increase in capacity. In response to a 1998 crackdown on air emissions, the Department of Energy characterized the EPA’s refinery rule as achieving “high costs and few benefits.”

This brings us to lower-sulfur diesel fuel. Currently, the EPA is planning to mandate ultra-low-sulfur diesel beginning in mid-2006. This fuel will contain 97% less sulfur (15 parts per million) than today’s low sulfur diesel (500 ppm). In doing so, the EPA is following its normal dictum of establishing standards first and expecting technology to follow behind. The EPA admits that the cost of upgrading refineries to produce the new product will be so great that some refiners will simply choose not to play, reducing downstream supply. There is even agreement that the technology for desulfurizing certain types of crude does not yet exist. The American Petroleum Institute has expressed serious doubts about the supply and availability of the new fuel: “The industry has no experience producing fuel at this level.”

The cost of producing the new fuel will be staggering. It is estimated that $4 billion in capital investment will be necessary to upgrade refineries. This translates into an API increased cost of $0.14 per gallon, or about $2,500 per year per vehicle. Trucks will cost more as well. Equipment installed to meet mandated emissions requirements will add approximately $8,500 per vehicle. Not surprisingly, the API opposes the proposed fuel, saying that the sulfur level goes “beyond what is practical, necessary or affordable.” Instead, the API offers a plan of its own: Reduce sulfur 90% to 50 ppm. Equipment and technology to accomplish this are available. Sulfur would be cut almost as much as the EPA mandate at about half the cost.

As strange as it sounds, come 2007, after all of the requirements and refinery capital expenditures, the EPA ultra-low-sulfur diesel may not be the only mandated fuel out there. In 1993, the EPA established the current low-sulfur diesel as its standard. California, however, opted to establish its own fuel mandate, the so-called “CARB” diesel. There is nothing to stop California — or any other state — from following suit with sulfur mandates that are lower than the EPA’s. In fact, the California Air Resources Board classified diesel exhaust as a carcinogen and came within an eyelash of outlawing the use of diesel as a fuel. A regional agency, the South Coast Air Quality Management District, has also considered developing yet another set of standards for ultra-low-sulfur diesel in Southern California, different from either the EPA or CARB mandates. These varying standards are rife with unfairness and have crippled California carriers. If California is truly serious about compliance with its stricter fuel mandate perhaps it should offer fuel-tax relief to regional truckers to offset increased product cost.

I have never met a person who wasn’t for clean air; it’s everybody’s issue. However, there are ways of achieving a cleaner environment and cleaner fuels without traumatizing the refining and transportation industries. Sen. Jim Inhofe (R-Okla.), chairman of the Clean Air, Wetlands, Private Property and Nuclear Safety Subcommittee, has complained that “almost once a year for the last seven years, the EPA has proposed some new regulation which would raise the costs of fuel anywhere from 2-to-8 cents per gallon per regulation.” Believe me, senator, we know. But it doesn’t have to be this way. All you need is some sound strategy.

Simons Petroleum, Oklahoma City, is a petroleum marketing and fuel management company that serves trucking as well as other industries. It also operates truck stops, restaurants, convenience stores and lube and chemical distribution facilities.