A Loophole in the Duck Test – Winter RBOB

By Elizabeth Hilbourn and Robert Auers

Many people, particularly politicians, like to use the popular “duck test” when making a point about a particular issue or object – “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”  However, the duck test does not necessarily apply to winter-grade RBOB since there is not a physical difference between winter-grade RBOB and winter-grade CBOB.  Don’t get us wrong, immediately after RBOB production at the refinery, one knows that the gasoline is RBOB.  There are numerous regulations which make sure of this, including laboratory-testing, reporting, recordkeeping, product transfer documents, where it is sold, etc.  These regulations (and anti-dumping rules) keep the RBOB distinction separate from that of CBOB and contribute to the price difference which has continued though there is not a real physical distinction.

There are, however, real world impacts caused by the legal distinctions between reformulated and conventional gasoline.  Hurricane Harvey, and the relatively widespread gasoline shortages which lingered for several days in its aftermath, provides a recent example of these impacts.  Harvey, which made landfall on August 25 and proceeded to drench the upper Texas Gulf Coast with record amounts of rainfall, caused the temporary shutdown of as much as 3 million BPD of refining capacity, equal to about 20% of the U.S. total. . By Thursday August 31, gasoline lines in the Dallas Fort Worth area (which saw direct impacts of Harvey) stretched around the block in most cases and about one-half of the stations were totally out of gasoline.  The Clean Air Act allowed the EPA Administrator, in consultation with the Energy Secretary, to waive fuel requirements to address shortages that occur as a result of a natural disaster.  Waivers for reformulated gasoline were granted for PADDs 1, 2 and 3 on August 31, 2017.  Prior to that, Texas had been granted a reformulated gasoline waiver on August 25, 2017, and scope was expanded on August 26, 2017.  If a waiver would not have been granted, the gasoline shortage in the Dallas/ Fort Worth area would have been worse than it was.

History

The Clean Air Act Amendments of 1990 required reformulated gasoline (RFG) to be used in the nine major metropolitan areas in the U.S. with the worst ozone air pollution. The RFG Program is federally implemented year-round in these areas as an emission-reduction program.  RFG is designed to reduce air toxins and emissions of volatile organic compounds by decreasing the amount of toxic compounds, such as benzene, and lowering the evaporation rate of the fuel. The RFG Program began January 1, 1995.  A map of current RFG areas is shown below in green.

The regulations also prohibit conventional gasoline sold in the rest of the country from becoming any more polluting than it was in 1990. This “anti-dumping” requirement ensures that refiners do not blend fuel components into conventional gasoline that are restricted in reformulated gasoline and that cause environmentally harmful emissions. Compliance is measured by comparing emissions of a refiner’s conventional gasoline against that refiner’s individual baseline gasoline. An individual refinery baseline, consisting of fuel parameters and emissions, is developed for each refiner based on the quality of the gasoline it produced and sold in the U.S. in 1990. The antidumping requirements apply to all conventional gasoline producers and importers whether or not they also produce or import reformulated gasoline.  However, as time has passed and gasoline regulations have tightened, this portion of the law has become all but irrelevant due to the fact that compliance with modern US gasoline standards produces a fuel that meets anti-dumping regulations at any refinery.

The toxic air pollutants (TAP) and volatile organic compounds (VOC) emissions reduction targets were implemented in two phases. The Phase I regulations, effective from 1995 to 1999, required a reduction of at least 15% in VOC and TAP emissions compared with those from 1990 model-year automobiles burning a specified baseline motor gasoline (the “statutory baseline” fuel). The Phase II emission performance standards were effective January 1, 2000, and required additional reductions in TAP, VOC, and NOx. VOC emission reduction is primarily achieved by lowering RVP.  NOx reductions could be achieved through decreasing gasoline aromatics or sulfur content, but, in practice, were primarily achieved through decreasing sulfur content.  However, with the introduction of tier II gasoline this requirement became irrevelant.  TAP control typically required reduction in benzene or total aromatics.  This went away with MSAT II in 2012, which limited benzene to content in gasoline to 0.62 volume %.  Lastly, RFG was required to be oxygenated until 2006, when this requirement was finally removed.   Despite, all gasoline is currently oxygenated using ethanol – a result of the RFS.

Toward the start of the program, the U.S. Environmental Protection Agency expanded the RFG Program at the request of many state governors to allow areas with a history of ozone problems to voluntarily become part of the program.  However, this trend has since reversed as the environmental benefits once associated with RFG are now virtually non-existent.  Since 2014, the Atlanta metro area is no longer a RFG covered area.  Southeastern Wisconsin and Northern Kentucky are actively trying to eliminate the program.  The Northern Kentucky Chamber of Commerce’s President and CEO, Brent Cooper, has stated that there have been major advancements in conventional gasoline in the last 25 years and that the EPA recognizes that it is now essentially the same as RFG.  Conventional and reformulated gasoline have been consistently looking more and more similar, and have been essentially the same (except for summer RVP in some cases) since the introduction of MSAT II (benzene) regulations in 2012.   This rule reduced the benzene content of all gasoline and led to the removal of the toxics and NOx requirements for RFG.  In addition, advances in the design and performance of the internal combustion engines that burn gasoline have resulted in the continued decrease in emissions from vehicles.

The table below shows reformulated gasoline consumption by PADD.  PADD 5 has the greatest percentage use of reformulated gasoline while PADD 1 has the largest consumption.  Overall, the U.S. consumes 34% of its gasoline as reformulated gasoline.  This has not changed much over the years as shown in the following graph.  Even though the RFG area only applies to a small part of the U.S., since it is the major metropolitan areas, it affects one-third of the gasoline production in the U.S.Below is a chart of Chicago RBOB to CBOB price differentials.  The summer differential averages 15 cents per gallon, while the winter differential is mostly below 5 cents per gallon.  This differential also varies and can be quite significant as seen by monthly averages exceeding 25 cents per gallon.
TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry.   Many of these are associated with transportation fuels, affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining.  We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook and our various other studies. TM&C also assists clients involved in all aspects of the production of transportation fuel, blending activities, planning and compliance-monitoring.  Please contact us for our views on the latest developments and their potential impacts, or if we can assist in any way or answer any questions.

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