Late last year, the U.S. Environmental Protection Agency (EPA) issued a final rulemaking intended to reduce air pollution from diesel engine-powered highway vehicles such as trucks and buses. The rule requires drastic reductions in the sulfur content of highway diesel fuel, which would in turn require significant investments by diesel-fuel refiners. The Energy Information Administration (EIA) was asked by a congressional committee to analyze the economic effects of the rulemaking and has published its analysis in The Transition to Ultra-Low-Sulfur Diesel Fuel: Effects on Prices and Supply.The current legal limit for sulfur in diesel fuel is 500 parts per million (ppm), while the new rulemaking imposes a limit of 15 ppm. However, pipeline owners are expected to require refiners to reduce sulfur content below 10 ppm to provide a tolerance for testing and to offset contamination from other sulfur-bearing products shipped by pipeline. The new fuel must be available at retail stations by September 1, 2006, although a phase-in option allows up to one-fifth of all diesel fuel produced to meet only the 500 ppm limit through early 2010. Because the sharply lower sulfur limit will entail new capital investment and higher operating costs for refiners, there are concerns that the transition to ultra-low-sulfur diesel (ULSD) fuel might constrain supplies of diesel fuel and raise prices. EIA's study looks at the supply issues in the short term during the transition to ULSD and at the mid-term issues, especially prices, through 2015.
Short-term effects. EIA developed several scenarios to encompass a plausible range of refiner responses to the new rulemaking. The scenarios vary in terms of the number of refiners likely to enter the market for ULSD and the consequent volume of ULSD produced. In the lowest-volume scenario, only those refiners that already hold diesel market share and are thought to be able to produce ULSD at a competitive cost are included. The highest-volume scenario assumed that a significant number of refiners currently producing no highway diesel fuel would make the investments required to maintain or enlarge their share of the diesel fuel market.
The uncertainty in the levels of ULSD actually needed in 2006 also prompted development of several demand estimates that varied depending on levels of imported diesel fuel and whether ULSD is used only to meet highway transportation demand.
The various combinations of production and demand scenarios yielded both surplus and shortfall outcomes. Coupling the most conservative production scenario with the highest likely demand estimate produced the largest shortfall, an estimated 264,000 barrels per day. Under conditions of lowest demand and highest production, a surplus of 517,000 barrels per day resulted. If supplies should in actuality fall short of demand, then price increases would be very likely. Higher prices would probably stimulate refiners to maximize ULSD production (perhaps by diverting streams of other petroleum products into ULSD) and might also encourage greater imports.
Mid-term effects. To assess ULSD effects on prices during the 2007-2015 period, EIA developed several modeling scenarios that differed according to the extent of refiner upgrades accomplished through retrofitting versus construction of new units, the availability of ULSD imports, rates of excessive sulfur content in the fuel, investors' rate of return, and other factors. The modeling runs using EPA assumptions projected increased prices compared with the projected price of 500-ppm diesel fuel, with premiums ranging from 6.5 to 7.2 cents per gallon between 2007 and 2011. (Under a variety of industry assumptions, the premiums range from 8.4 to 10.7 cents per gallon.) The greatest differences occurred in 2011, when all highway diesel fuel must conform to the ULSD standard. The differences decline after 2011, mainly because refinery upgrades are assumed to be completed.
Other uncertainties. Besides those discussed above, several additional factors add uncertainty to the prospects for the transition to ULSD. The new rule imposes stricter controls not only on diesel-fuel sulfur content but also on emissions from heavy-duty diesel engines. However, the equipment to meet the new emissions limits has not yet been developed. Further, pipeline operators will need to monitor ULSD streams for sulfur content, but no current technology is fast or accurate enough. And although it is understood that pipelines will need refiners to produce ULSD with lower sulfur content than the rule's nominal 10-ppm limit, the actual practical limit can only be established with experience. Finally, it is not clear that the manufacturing and construction capacity exists to produce the critical upgraded refinery hardware, such as thick-walled reactors and reciprocating compressors, in time to meet the desulfurization schedule set out in the rule.
The Transition to Ultra-Low-Sulfur Diesel Fuel: Effects on Prices and Supply, SR/OIAF/2001-01; 127 pages, 34 tables, 13 figures.
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File last modified: May 23, 2001