A Nice Overview of the Problem with Boutique Fuels
When I was an undergraduate, most of my research focused on the effects of boutique and reformulated fuels on the structure of the refining industry and pricing in retail markets. As it turns out, that research is pretty relevant to the current debate over Congress’ new energy bill. This is because boutique and reformulated gasolines have balkanized our nation’s gasoline markets, creating virtual islands of gasoline blends that are subject to more severe price spikes than the rest of the nation.
This came about when, as part of the Clean Air Act Amendments of 1990, Congress devised a plan to require a specific formulation of gasoline, known as reformulated, or RFG, in areas with severe ozone pollution problems. Congress gave other areas with lesser ozone problems more latitude in deciding how to address their problems; some adopted RFG, some addressed their probems through other means, and many chose to adopt other sets of fuel requirements, known collectively as “boutique” fuels. This resulted in the patchwork of fuel requirements addressed by James Hamilton at EconBrowser. This patchwork has resulted in higher fuel costs and abuses of market power in certain retail gasoline markets.Not only do I agree with Mr. Hamilton in supporting more uniform fuel standards, I think it’s worth noting that the new energy bill presently provides little relief– it removes the requirement for oxygenates from RFG, but does nothing to address the patchwork of boutique regulations. In the meantime, it adds an expensive and burdensome ethanol mandate [pdf] to the nation’s fuel supply and may actually cause more market divisions as bans on certain additives such as methyl tertiary butyl ether (MTBE) spread. It appears that Congress hasn’t learned their lesson: by allowing states to opt into or out of a nationwide ban, it will further segment the fuel supply, exacerbating the problems we already have.
The worst part about this, of course, is the liability protections built in for producers of MTBE and ethanol. MTBE is known to make water undrinkable due to a noxious odor when it leaks from underground storage tanks, and the majority of underground storage tanks are known to leak. As a result, MTBE contamination has imposed significant costs on many communities. These liability protections caused the first incarnation of this energy bill to stall in the Senate, so there is some hope that relief may be provided.
Worse yet is the ethanol liability protection– the ethanol lobby insists that use of ethanol in gasoline is completely safe and has convinced Congress to mandate a minimum use of it in our fuel supply (discussed in the paper linked above), yet the lobby wants liability protection. If this seems suspect, that’s because it is. As noted in this FAQ [pdf] from the American Petroleum Institute, the presence of ethanol in gasoline increases the size of benzene plumes in the event of a leak. This means that adding ethanol to gasoline is likely to increase the amount of groundwater contamination by benzene– a known human carcinogen.