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6. Mid-Term Analysis of ULSD
Regulations
Assumptions
The National Energy Modeling System (NEMS) was used to perform petroleum
market analysis of the impact of new requirements for ultra-low-sulfur
diesel fuel (ULSD) from 2007 through 2015. The Petroleum Market Module
(PMM) of NEMS were modified to produce a ULSD Regulation case. Analysis
of the Regulation case focuses on changes relative to a reference case
using the oil price and macroeconomic assumptions of the Annual Energy
Outlook 2001 (AEO2001) reference case but including some adjustments to
provide a more accurate reflection of the diesel fuel market. The differences
between the reference case for this study and the AEO2001 reference case
are discussed in Appendix B.
The projected investment costs and average marginal prices resulting from
the NEMS analysis represent the investment and price levels necessary to
meet all demand requirements under the new ULSD Rule. As discussed in Chapter
5, some refiners may choose to drop out of the highway diesel market or
even close down instead of investing for compliance with the Rule. ULSD
supply could be inadequate in the short term if enough refineries chose
to forgo investment. The NEMS analysis does not capture this uncertainty
of supply, because NEMS is a long-run equilibrium model. By definition,
the NEMS analysis projects the level of domestic production and imports
necessary to meet all demand requirements. As a result, the NEMS analysis
reflects more aggressive investment behavior than that portrayed for individual
refiners in the short-term analysis.
The NEMS analysis reflects the “80/20” rule, which requires the production
of 80 percent ULSD and 20 percent 500 ppm highway diesel between June 2006
and June 2010, and a 100 percent requirement for ULSD after June 2010.
Because each model region acts as a single unit, the provision of the ULSD
Rule allowing small refiners, which account for about 5 percent of current
highway diesel production, to delay investment until June 2010 is not modeled
explicitly. However, the production requirements are adjusted downward
by 4 percent to reflect an assumption that most small refiners will choose
to delay investment.113
The requirement for 80 percent ULSD is not phased in and begins on June
1, 2006. Therefore, the full market impact of the requirement can be expected
to occur at that time. Because NEMS is an annual average model, the full
economic impact of the 80/20 rule cannot be seen until 2007. In the same
manner, projections for 2011 represent the first full year of 100 percent
ULSD compliance. The results for 2010 reflect a partial year at the 80
percent requirement and a partial year at the 100 percent requirement.
For the purpose of assessing the market impacts of the new ULSD requirements,
2007 will be discussed as the first full year of the 80/20 requirement,
and 2011 will be discussed as the 100 percent requirement.
The House Committee on Science requested that, if practical, the EIA analysis
use the same assumptions as those used by the U.S. Environmental Protection
Agency (EPA) in its Regulatory Impact Analysis (RIA). The assumptions are
compared in Table 13. The Regulation case for this study is based on the
following assumptions:
- Highway diesel at the refinery gate will contain a maximum of 7 parts per
million (ppm) sulfur. Although sulfur content is limited to 15 ppm at the
pump, there is a general consensus that refineries will need to produce
diesel somewhat below 10 ppm in order to allow for contamination during
the distribution process. The EPA assumed in its RIA that refineries would
produce highway diesel at 7 ppm.
- The capital costs for the distillate hydrotreaters reflected in NEMS are
$1,331 per barrel per day for a notional 25,000 barrel per day unit that
processes low-sulfur feed streams with incidental dearomatization, and
$1,849 per barrel per day for a second, 10,000 barrel per day unit that
processes higher sulfur feed streams with greater aromatics improvement.
A range of capital costs from a number of other studies is provided in
Chapter 7. Because of differences in methodology, the sets of capital costs
are not directly comparable. For instance, the EPA estimated the capital
cost for a new distillate hydrotreater to range from $1,240 per barrel
per day to $1,680 per barrel per day, but those estimates are associated with units processing 100 percent straight-run distillate
and 100 percent light cycle oil, respectively.114
- Revamping (retrofitting) existing units to produce ULSD will be undertaken
by refineries representing 80 percent of highway diesel production; the
remaining refineries will build new units. Other analyses have assumed
60 percent revamps and 40 percent new builds, but the assumption of 80
percent revamps and 20 percent new units was used in the EPA’s RIA. The
capital cost of a revamp is assumed to be 50 percent of the cost of new
equipment, which is consistent with the EPA analysis.
- The total amount of ULSD downgraded to a lower value product because of
sulfur contamination in the distribution system is assumed to be 4.4 percent,
an increase of 2.2 percent from the reference case. This assumption is
based on the EPA’s assessment that 2.2 percent of diesel fuel is currently
downgraded and its assumption that the amount of downgrade will double
with the new Rule. This downgrade assumption is associated with considerable
uncertainty, because EPA’s estimate of current downgrade was not based
on a scientific survey. The EPA’s estimation methodology was based on a
survey by the Association of Oil Pipelines, in which six respondents provided
estimates of the current diesel fuel downgrade, ranging from 0.2 percent
to 10.2 percent.
- The costs associated with ULSD distribution are based in part on EPA assumptions
and in part on NEMS results. This analysis uses the EPA’s capital cost
estimate of 0.7 cents per gallon for additional storage tanks to handle
ULSD during the transition period. The capital expenditures are assumed
to be fully amortized during the transition period. The ULSD Rule is assumed
to increase the operating costs for distribution by 0.2 cents per gallon
over the entire period. In addition, the EPA estimated a revenue loss of
0.2 to 0.3 cents per gallon for all highway diesel as a result of product
downgrades. For this analysis, the revenue loss estimate is based on NEMS
model results, at 0.3 cents per gallon of ULSD during the transition period
and 0.2 cents per gallon after 2010.
- A cost of 0.2 cents per gallon is assumed for the addition of lubricity
additives, consistent with estimates by the EPA and with industry analyses.
Lubricity additives are needed to compensate for the reduction of aromatics
and high-molecular-weight hydrocarbons stripped away by the severe hydrotreating
used in the desulfurization process.
- The energy content of ULSD is assumed to decline by 0.5 percent, because
undercutting and severe desulfurization will result in a lighter stream
composition than that for 500 ppm diesel. The EPA’s analysis made no explicit
adjustment to the energy content of diesel fuel but estimated a cost associated
with a 1.3-percent (by weight) loss of yield. In the NEMS analysis, the
yield loss is a variable model result (generally around 1.5 percent by
volume). The National Petrochemical and Refining Association (NPRA) quoted
a range of 1 to 4 percent energy loss in comments to the rulemaking docket.
NPRA also estimated a yield loss of 1 to 5 percent.
- In accordance with the EPA’s RIA, changes to engine after-treatment devices
are assumed to result in no loss of fuel efficiency. Discussions with some
engine and emission control technology manufacturers indicated considerable
uncertainty about this assumption.
- No change in the sulfur level of non-road diesel is assumed. The EPA analysis
of ULSD reflects no change in non-road standards, although the EPA is in
the process of promulgating “Tier 3” non-road engine emission limits around
2005 or 2006, which are expected to be linked to sulfur reduction for non-road
diesel fuel.115 The level of sulfur reduction required for Tier 3 vehicles
is highly uncertain because of the diversity of the non-road market.
- No changes to other highway diesel specifications, such as aromatics or
cetane, are assumed. Some refiners anticipate changes to these parameters
in the future because of their relationship to emissions of particulate
matter (PM). The State of California already limits aromatics to 10 percent
by volume, which is reflected in this analysis. Proposals for similar requirements
in other States are not included.
- Imports of diesel meeting the new ULSD standard are assumed to be available
to U.S. markets, but the level of imports relative to the level of product
supplied by refineries in the United States is a model result. Refineries
in Canada, Northern Europe, and the Caribbean Basin (including Venezuela)
are assumed to make upgrades to produce diesel fuel meeting the 15 ppm
sulfur cap for 2006. Canada is moving forward with plans to harmonize with
diesel regulations in the United States. European refiners will reduce
diesel sulfur to 50 ppm for a new European standard in 2005. Some isolated
European production of diesel meeting the ULSD standard is assumed, due
to tax incentives for 10 ppm diesel in some markets.116 In order to divert
ULSD from European markets, prices in the United States would have to exceed
the tax incentives plus shipping costs. In 2000 less than 5 percent of
U.S. imports of highway diesel came from Europe.
- In accordance with the EPA’s RIA, the before-tax rate of return on investment
is assumed to be 7 percent. Between 1977 and 1999 the combined before-tax
return on investment for refiners and marketers averaged 7 percent, which
is equivalent to a 5.2-percent after-tax rate.117 Because NEMS operates
on an after-tax basis, the 5.2-percent rate is used in the model. Most
of the studies compared in Chapter 7 assumed a 10-percent after-tax return
on investment.
The Committee indicated that this analysis was to be as consistent as possible
with the assumptions underlying the EPA’s RIA, and that sensitivity analysis
should be provided for assumptions that diverge significantly from those
in other studies or from expectations of industry experts.118 In addition
to the Regulation case, this report provides sensitivity analyses for five
assumptions associated with a greater uncertainty, for a Severe case that
combines the assumptions of the five individual sensitivities, for a No
Imports case, and for a 10% Return on Investment case:
- In the Higher Capital Cost case, the capital cost of the first notional
hydrotreater is 24 percent higher than in the Regulation case, and the
capital cost of the second notional unit is 33 percent higher.119
- In the 2/3 Revamp case, two-thirds of upgrades at refineries are assumed
to be accomplished by retrofitting existing equipment and one-third by
construction of new units. With the exception of the EPA, all other cost analyses for ULSD have used an assumption of 60 percent
revamps and 40 percent new units. The two-thirds revamp assumption was
developed from EIA’s individual refinery analysis (see Chapter 5 and Appendix
D).
- In the 10% Downgrade case, a total of 10 percent of the 15 ppm diesel is
assumed to be downgraded to a lower value product because of contamination
with higher sulfur products in the distribution system. Before 2010 the
contaminated product is assumed to be downgraded to 500 ppm highway diesel
and does not result in additional production of 15 ppm highway diesel.
After 2010, when all highway diesel must meet the 15 ppm sulfur standard,
refineries must produce an extra 7.8 percent of highway diesel above the
reference case level, which will be sold as non-road diesel or heating
oil. The EPA assumption of 4.4 percent total downgrade after the ULSD Rule
takes effect in June 2006 (2.2 percent higher than in the reference case)
is on the low end of downgrade estimates, which range up to 17.5 percent
by Turner Mason.
- In the 4% Efficiency Loss case, manufacturers are assumed to meet the emissions
requirements by installing after-treatment technology on new vehicles beginning
in 2010, resulting in a 4-percent loss of fuel efficiency. The loss in
new vehicle efficiency is assumed to be fully phased out by 2015 as a result
of technological improvements.120
- In the 1.8% Energy Loss case, a greater loss of energy content is assumed
than in the Regulation case, which assumed a 0.5-percent loss. The loss
of energy content is associated with more severe undercutting and desulfurization
due to heavier crude oil inputs.121
- The Severe case combines the assumptions of the four sensitivity cases
above. This scenario is more in line with the assumptions used by alternative
studies related to ULSD than with the EPA’s RIA.
- The No Imports case assumes that no foreign imports of ULSD will be available.
This assumption is not included in the Severe case because it is considered
to be relatively unlikely. The greatest uncertainty for import availability
is likely to occur in the early years of the program because foreign refiners
may delay investment until the market outlook for ULSD is more certain.
Thus far, only Canada has announced its intent to align with the final
U.S. level and timing for reducing sulfur in highway diesel fuel.122 Environment
Canada expects to launch a public consultation process in the next few
months to facilitate the rulemaking, which is similar to the U.S. ULSD
Rule while taking into account issues unique to the Canadian market.123
- The 10% Return on Investment case uses the after-tax rate of return assumed
by most other studies (10 percent), which is higher than the 5.2-percent
after-tax rate used in the Regulation and other sensitivities, consistent
with the EPA’s assumption.
Although the assumption of non-road diesel sulfur content is also highly
uncertain, a sensitivity analysis would have required significant changes
to the model structure and was not within the scope of this study. Sensitivity
analysis of other diesel properties was also beyond the scope of the study.
Results
Discussions of all results are framed in terms of changes from the reference
case. In the Regulation case and in all the sensitivity cases, projections
for 2007 reflect the first full year of the program at 80 percent ULSD
and 20 percent 500 ppm highway diesel, and 2011 reflects the first full
year of 100 percent ULSD. During the years requiring 80 percent ULSD, the
reference case and sensitivity cases project that the greatest price increase
will occur in 2007, because all investment for compliance with the “80/20”
provision of the ULSD Rule must be met by that time. Similarly, a second
peak in marginal prices is projected in 2011, because all investment for
full compliance with the Rule must be in place by that time. Year-to-year
variations in marginal prices can reflect differences in levels of demand
for diesel and other products, oil price projections, the economics of
domestic production versus imports, and other factors.
In the reference case, demand for transportation distillate (highway diesel)
is projected to increase by 2.5 percent per year from 1999 to 2015. In
the Regulation case, highway diesel demand is projected to grow at a slightly
higher rate of 2.6 percent per year for the same period, largely due to
the 2.2 percent additional (4.4 percent total) downgrades of highway diesel
in the distribution system. In other words, the additional downgrades must
be offset by more ULSD production after 2010. The effect of downgrades
is more pronounced in the 10% Downgrade case and the Severe case, where
highway diesel demand is projected to increase by 2.9 percent and 3.1 percent
per year, respectively, from 1999 to 2015.
Regulation Case
In the Regulation case, cumulative investment in distillate hydrotreating
and hydrogen units is projected to be $4.2 billion higher than projected
in the reference case in 2007 and $6.3 billion higher in 2011, when upgrades
for meeting full compliance with the ULSD Rule will be complete (Table
14). In the early part of the transition period, upgrades for making ULSD
may be constrained by specialized workforce and manufacturing limitations
and access to capital, all of which will be in competition with projects
for meeting the requirements for low-sulfur gasoline (see Chapter 3). The
projected $2.1 billion in investment between 2007 and 2011 reflects expenditures
for meeting expectations of growing demand for highway diesel, in addition
to full compliance with the Rule. After 2011, incremental upgrades to meet
future distillate demand are projected to continue, resulting in another
$0.5 billion of investment in desulfurization equipment by 2015.
The Regulation case results in an increase in the marginal annual pump
price for ULSD of 6.5 to 7.2 cents per gallon between 2007 and 2011 (Table
15). The peak differential is projected to occur in 2011, when all refiners
must produce 100 percent ULSD. The projected differential declines after
2011, reaching 5.1 cents per gallon in 2015. About 0.7 cents of this decline
is the result of no longer needing to include EPA’s estimate of additional
capital investments for distribution and storage of a second highway diesel
fuel during the transition period. A drop in capital expenses for distribution
systems occurs after 2010 as a reflection of the EPA’s assumption that
these investments will be fully amortized during the transition period.
The remainder of the drop in the post-2011 differential occurs because
refineries are expected to have completed the upgrades necessary for full
compliance, and to be making incremental improvements that will make ULSD
production less challenging. A similar decline in the price differential
also occurs in all the sensitivity cases.
Through 2010, the Regulation case projections for highway diesel consumption
exceed the reference case levels by up to 10,000 barrels per day, which
can be attributed to the assumption of 0.5 percent loss in energy content.
In 2011, the differential in consumption increases to 83,000 barrels per
day, due mostly to the downgrade of 2.2 percent of ULSD to lower value
non-road markets.
In a refinery, the impact of a change in the makeup or production level
of a product can filter through to other products, because it changes the
mix of total refinery production. The ULSD Rule is projected to result
in slightly lower yields of higher sulfur distillate used for non-road
and heating purposes, because its production is replaced by ULSD that is
produced by refineries but is downgraded to higher sulfur products in the
distribution system. The availability of the downgraded ULSD reduces the
projected prices for high-sulfur distillate by about 1 cent per gallon
relative to the reference case. The analysis revealed no clear trends for
other distillate products as a result of the ULSD Rule.
Higher Capital Cost Case
Because of limited experience in producing diesel containing less than
10 ppm sulfur, the capital costs for hydrotreaters able to mass produce
ULSD are uncertain. The Higher Capital Cost case results in refinery investment
for hydrogen and distillate hydrotreating units totaling $5.4 billion in
2007, which is $1.2 billion above the Regulation case level. By 2011 the
Higher Capital Cost case is projected to require $7.8 billion of investment,
$1.5 billion more than in the Regulation case. The higher investment costs
translate to a higher projected price path for ULSD. Relative to the reference
case, price differentials are projected to range from 7.5 to 7.8 cents
per gallon between 2007 to 2010, peaking at 8.1 cents per gallon in 2011,
the first full year of full compliance. These prices are 0.8 cents per
gallon higher on average than those in the Regulation case.
2/3 Revamp Case
The 2/3 Revamp case results in a higher projected price path for ULSD,
with price differentials ranging from 6.9 to 7.6 cents per gallon higher
than in the reference case from 2007 to 2011. Prices are generally higher
than in the Regulation case, with the differential between the two cases
at its widest in 2011 at 0.4 cents per gallon. The 2/3 Revamp case reflects
greater reliance on new equipment than in the Regulation case, resulting
in an additional $600 million of investment for full compliance in 2011.
10% Downgrade Case
The 10% Downgrade case reflects a net downgrade increase of 7.8 percent
over the reference case and 5.6 percent over the Regulation case. Total
highway diesel consumption increases by up to 10,000 barrels per day in
the transition period in both the 10% Downgrade case and the Regulation
case. After 2010, the 10% Downgrade case results in an additional 289,000
barrels per day of highway diesel consumption, compared with an additional
83,000 barrels per day in the Regulation case. The greatest impact from
downgrade in either the 10% Downgrade or Regulation case on refiners and
consumers occurs after 2011, because until that time the contaminated product
can be downgraded to 500 ppm highway diesel with no net increase in highway
diesel production. Because all highway diesel supplied must meet the 15
ppm sulfur cap in June 2010, ULSD exceeding 15 ppm sulfur at some point
in the distribution system must be downgraded to non-road markets and must
be offset by additional ULSD production after 2010. This means that refiners must produce
212,000 barrels per day more ULSD after 2010 than in the Regulation case,
which translates to an additional $500 million of investment by 2015.
Aside from the impacts on ULSD on demand and refinery investment, the 10%
Downgrade case has implications for the economics of pipelines and marketers,
because they incur a revenue loss when a portion of the ULSD going into
the system comes out of the system as a lower value product. Table 16 shows
the costs associated with ULSD distribution in the Regulation and 10% Downgrade
cases. The capital costs, which are assumed to be the same in both cases,
reflect additional infrastructure required for carrying a second highway
diesel product during the transition period. The estimate for capital expenditures
was taken from the EPA’s RIA and is fully amortized over the transition
period. The additional annual diesel fuel distribution costs in the Regulation
case differ slightly from the EPA estimates (see Table 26 in Chapter 7),
because different revenue losses associated with product downgrade are
assumed.
4% Efficiency Loss Case
The 4% Efficiency Loss case reflects an expectation, by some engine and
emission technology manufacturers, that emission requirements for new heavy-duty
vehicles in 2010 will be met by installing after-treatment technology,
which could result in a 4-percent loss of fuel efficiency. Technological
improvements are assumed to fully offset the loss in fuel efficiency of
new vehicles by 2015.124 The combined impact of the ULSD requirement and
less efficient new vehicles results in 19,000 barrels per day of additional
highway diesel consumption in 2010 and 107,000 barrels per day in 2011
through 2015. The introduction of less fuel-efficient vehicles accounts
for 11,000 barrels per day of the additional demand in 2010 and 24,000
barrels per day of demand after 2010. Refiners are projected to invest
an additional $100 million dollars through 2015 relative to the Regulation
case to provide for the slightly higher diesel demand.
The additional demand for highway diesel results in prices that are 5.7
cents per gallon above reference case prices on average between 2011 and
2015. This differential is 0.3 cents higher than when no fuel efficiency
loss is assumed. Owners of vehicles purchased between 2010 and 2015 would
see the greatest impact under this case, because diesel vehicles of that
vintage would consume relatively more diesel fuel.
1.8% Energy Loss Case
Due to changes in refinery processing, ULSD is expected to have slightly
less energy content than 500 ppm diesel. The 1.8% Energy Loss case reflects
a greater loss of energy content than the Regulation case, which assumes
a 0.5-percent loss per barrel. This case results in an average increase
in ULSD consumption of 42,000 barrels per day between 2007 and 2010. Due
to the 100 percent ULSD requirement, the impact of the lower energy content
is greatest after 2010 when it widens to 128,000 barrels per day. Relative
to the Regulation case, the 1.8% Energy Loss case results in an average
of 33,000 barrels per day of additional demand through 2010 and 45,000
barrels per day after full compliance. This additional demand does not
change refinery investment patterns relative to the Regulation case, because
it can be provided through higher utilization rates.
The price differentials from the reference case average 7.0 cents per gallon
between 2007 and 2010 and 5.5 cents per gallon between 2011 and 2015. In
anticipation of higher demand, refineries are expected to build slightly
more capacity in the transition period than they would in the Regulation
case. Because of the slightly different investment pattern, prices in the
1.8% Energy Loss case are 0.2 cents per gallon higher than in the Regulation
case on average through 2010 and comparable to Regulation case prices after
2010.
Severe Case
In the Severe case, the ULSD requirement in combination with the five sensitivity
assumptions results in an average of 44,000 barrels per day of additional
highway diesel consumption between 2007 and 2010 and an average of 366,000
barrels per day of additional demand between 2011 and 2015. The ULSD regulation
by itself accounts for about 9,000 barrels per day of the additional consumption
through 2010 and about 83,000 barrels per day after 2010. The combined effect
of the five assumptions raises demand beyond that in the Regulation case
by about 35,000 barrels per day through 2010 and by about 283,000 barrels
per day after 2010. The higher downgrade assumption accounts for about
212,000 barrels of the additional demand after 2010. The Severe case results
in a projected increase in refinery investments for hydrogen and distillate
hydrotreating totaling $9.3 billion in 2011, $3.0 billion more than in
the Regulation case. Higher demand in the Severe case results in marginal
prices 1.7 to 3.5 cents per gallon above those in the Regulation case.
No Imports Case
In 1999, 87 percent of all imports of highway diesel went to PADD I (the
East Coast), which is less self-sufficient than other regions in terms
of refinery production. The East Coast is expected to continue to be the
major market for imported highway diesel; however, a slight reduction in
imports is projected under the ULSD Rule, because it is more economical
for domestic refiners to provide the last barrel supplied. The No Imports
case assumes that imports of highway diesel fuel are zero and, therefore,
120,000 to 125,000 barrels per day lower than projected in the reference
case. The lack of imports means that domestic refineries must produce that
much more ULSD. During the transition years, prices in the No Imports case
are only slightly lower than in the Severe case, indicating the sensitivity
of the market to imports. The requirement for more production results in
marginal prices 1.1 to 1.6 cents per gallon higher than in the Regulation
case. The higher prices in the No Imports case result in a slight dampening
of demand, by up to 2,000 barrels on average when compared to the Regulation
case. When imports of ULSD are not available, refineries are projected
to meet the additional ULSD requirement by investing an additional $200
million in desulfurization equipment through 2015, and by reducing jet
fuel production and importing more jet fuel. More ULSD is also shipped
from PADDs II-IV to PADD I to compensate for the lack of imports.
10% Return On Investment Case
This case assumes that refiners will realize a higher rate of return than
is assumed in the Regulation case and in all the other sensitivity cases
for this analysis, which assume a 5.2-percent after-tax return on investment.
Because the 10% Return on Investment case must be compared with an alternative
reference case that uses a consistent rate of return, the projected price
differentials are presented separately from those for the cases that are
compared with the reference case (with a 5.2-percent after-tax rate (Table
17). The resulting price differentials range from 7.5 to 8.0 cents per
gallon between 2007 and 2011 and are 0.9 cents per gallon higher on average
than when the 5.2-percent after-tax rate is assumed. The different return
on investment affects the payback of investment but does not affect the
level of investment.
Regional Variations in Refining Costs
Differences between regional refinery gate prices in the analysis cases
relative to those in the reference case reflect variations in the marginal
costs of producing ULSD between regions (Table 18). The cost curve analysis
described in Chapter 5 indicates that PADD IV, which contains relatively
small refineries, can be expected to be the highest cost region; however,
these costs are obscured by the aggregate model representation in NEMS.
The Petroleum Market Module provides refining costs for three separate
regions: PADD I (the East Coast), PADDs II-IV aggregated (mid-U.S.), and
PADD V (the West Coast). In the transition years of the Regulation case,
regional refining costs (excluding distribution costs) range from an average
of 4.8 cents per gallon in PADD V to 5.3 cents per gallon in the other
regions, with an average U.S. cost of 5.2 cents per gallon.
The relative patterns of regional costs during the transition period are
similar in all the sensitivity cases, with PADD I as the highest cost region
of the three NEMS regions, PADD V as the lowest cost region, and PADDs
II-IV (and the U.S. average) falling in between. The relatively high ULSD
production cost in PADD IV is masked in the mid-term analysis, because
PADD IV is aggregated both with PADD II and with the largest and lowest
cost refining region, PADD III. Average marginal refining costs generally
are expected to fall by about 0.5 to 0.8 cents per gallon after 2011, as
refineries make incremental improvements to meet incremental increases
in demand more efficiently.
Conclusion
The ULSD Rule is projected to require total refinery investments ranging
from $6.3 billion in the Regulation case to $9.3 billion in the Severe
case, resulting in highway diesel fuel price increases that range from
6.5 to 10.7 cents per gallon between 2007 and 2011. Because this analysis
is based on results from a long-run equilibrium model, it does not capture
the uncertainty of supply discussed in Chapter 5. The NEMS analysis reflects
more aggressive investment than is portrayed for individual refiners in
the short-term analysis. In the Regulation case, which uses many of the
EPA’s assumptions, prices are projected to increase by 6.5 to 7.2 cents
per gallon between 2007 and 2011. The widest price differential—10.7 cents
per gallon in 2011—is projected in the Severe case, which is based on assumptions
more consistent with industry views. This peak price differential is associated with a requirement for additional ULSD supplies of 272,000 barrels
per day above demand levels in the Regulation case, of which 206,000 barrels
per day results from the 10-percent downgrade assumption.
Because NEMS is a long-run equilibrium model, it cannot address short-term
supply issues; however, the No Imports case does provide some implications
for short-term supply. When no availability of ULSD grade imports is assumed,
the marginal price of ULSD is projected to exceed prices reflecting access
to imports by about 1.2 to 1.6 cents per gallon between 2007 and 2011.
Notes |