Drivers Get Cleaner Air, Added Costs as Taxes, Premium Gas Rise

(Bloomberg) -- For BMW and Audi drivers, the start of 2017 brings both good news and bad.

A new federal rule cuts the amount of sulfur in gasoline by two-thirds, part of a seven-year push to remove a pollutant that dirties the air and damages public health. But it also means drivers of high performance cars will pay more for premium, since added blending components are needed to boost octane after the sulfur is removed, according to Tamra Johnson, a spokeswoman for AAA, the nation’s largest motoring organization.

While most other car owners won’t be affected by the sulfur curb, it doesn’t mean they’re unscathed as 2017 begins: At least seven states have boosted their gasoline taxes, potentially driving the national average cost for gasoline above $2.40 per gallon, according to Johnson.

The changes are “a hard pill to swallow for drivers who already saw pump prices jump 15 cents since December 1," Johnson said in an e-mail.

States that raised taxes in 2017 include Pennsylvania, Michigan, Nebraska, North Carolina, Georgia, Indiana and Florida, Johnson said. New Jersey increased its taxes by 23 cents a gallon in November.

The higher taxes arrive as the price of gasoline has jumped by more than 35 cents a gallon since a year ago, according to AAA daily national averages, an increase largely tied to the rising price of oil.

The so-called Tier 3 curbs for sulfur were first proposed in 2010, when the U.S. Environmental Protection Agency estimated more than 150 million Americans were exposed to unhealthy air pollution. They follow Tier 2 limits that brought sulfur content levels down by 90 percent in 2004. The programs were spawned by the Clean Air Act of 1990, which established emission controls.

The latest reduction came with a grace period that gave most major refiners time to switch over before the rule took effect. At the same time, 38 smaller refiners were allowed exemptions from the law until 2020.

40 Refiners

About 40 refiners were ready to meet the 2017 standards as early as three years ago.
Refiners who upgraded their facilities to produce low-sulfur gasoline gained credits, which they now can sell to refiners who continue to produce higher-sulfur fuel past the January deadline.

The current market value translates to a 1.6 cent-a-gallon penalty per parts per million for companies that import higher-sulfur gasoline from abroad. That cost equates to about 1/10th of the per-gallon cost of renewable fuel credits associated with petroleum-fuel imports, said Phil Verleger, president of the economic-consulting company PKVerleger LLC by phone from Colorado.

Under the Renewable Fuel Standard, U.S. refiners importing gasoline end up paying a fee of 8-to-10 cents a gallon. The higher cost is linked to rising prices of Renewable Identification Numbers, or RINs.

Well-Supplied

Unlike the renewable fuel credit market, which at times gets short squeezed in buying frenzies, the Tier 3 market is seen well-supplied for years to come. It’s also less prone to speculative trade -- the credits may only change hands twice before the EPA retires them. About 650 billion credits were generated in 2015 because gasoline sulfur averaged 25ppm even though the legal requirement was 30ppm, the EPA’s Chris McKenna said in an online presentation.

Even though the Tier 3 cost is relatively small, it won’t go unnoticed, said Paul Niznik, a downstream strategic consultant at Argus Media Consulting Services.

"Every drop counts in the refining business. Importers are very conscious of these little bumps in the road," Niznik said by phone from Houston. "They are very conscious of that penny and a half."

To contact the reporter on this story: Laura Blewitt in Houston at lblewitt@bloomberg.net. To contact the editors responsible for this story: Margot Habiby at mhabiby@bloomberg.net, Reg Gale