Clean-air rules fuel gas run-up

WASHINGTON -- Oil industry officials and others are blaming part of the run-up to $2-a-gallon gasoline on air pollution regulations that are forcing refiners to supply 18 different blends of gas around the country, including four in New England alone.

The proliferation of mandated ''boutique blends" of gas has snarled supply lines for gasoline and left regional suppliers vulnerable to sudden shortages, which has built in a permanent premium in gas prices even before recent Middle East turmoil and OPEC supply reductions began pushing prices higher still.

Instead of being able to shop around the country for the best deal on wholesale gasoline, local suppliers are required to buy blends of gas that may only be mandated for sale to just a few million Americans. Refiners, meanwhile, run much less efficient operations because they are producing the equivalent of a Friendly's menu of ice cream instead of just plain vanilla, industry executives say.

Today's situation can be traced back to a federal clean-air initiative unveiled nearly a decade ago that has inadvertently compelled many states to develop gasoline based on their own environmental standards, contributing to an oil supply crunch by effectively balkanizing the country's gas market.

At least 18 different grades of gas have evolved as a way to sidestep the program, launched in 1995, which required the country's most smog-choked areas to use a cleaner-burning gasoline known as reformulated gas.

''Twenty years ago we had leaded and unleaded, and that was it," said Rayola Dougher, senior policy analyst with the American Petroleum Institute. ''Now we have 18 different types of gasoline that are required to be sold around the country, including summer and winter formulations. It's a lot to juggle, and it's a real issue for refiners."

John Millett, a spokesman for the Environmental Protection Agency, said the direct costs associated with the reformulated gas program and the mushrooming of specialized fuels account for only a few extra pennies per gallon of gas. In response to concerns expressed by refiners and state regulators, said Millett, the EPA has issued several white papers aimed at avoiding ''a patchwork quilt of differing fuel programs" that has the potential to cause price or supply difficulties, according to one EPA study.

Refiners complain of indirect costs and potential dangers related to the boutique fuel trend they say are exacerbating an already perilous supply shortage.

''We're doing four different fuels in New England, and if you get into a situation where the supply is being disrupted, you can't just say, 'Let's take a ship that was going to Portland and put it into Chelsea,' " said Gary Kaneb, the president of Gulf Oil LP in Chelsea, which supplies gasoline for 1,800 Gulf stations and 650 Exxon stations in the Northeast and operates 12 fuel storage terminals from Delaware to Maine.

The challenge of having to supply multiple types of gasoline in different markets has added a structural premium to prices at the pump, according to Kaneb.

''It just gives you a lot less flexibility," he said, ''which adds to the ultimate cost for the consumer and adds to the volatility of prices and vulnerability of supply. Vulnerability and volatility in price go hand-in-hand."

All this translates into record gas prices as American motorists enter the peak driving season and brewing inflation levels cloud the nation's economic recovery. Oil prices closed in New York yesterday at $41.50, a 96-cent gain on the day that was enough to spoil a rally in share prices -- and a gallon of gas continued to cost more than $2 in much of the country.

Surging pump prices are becoming a hot political issue as Democrats, eyeing a potential weak spot on President Bush's campaign flank, are attacking White House energy policies. While campaigning in Oregon this week, John Kerry, the president's likely Democratic opponent, blamed Bush for failing to reign in energy costs while embracing policies that enrich wealthy Americans and corporations. Republicans countered by admonishing Democratic lawmakers for blocking an energy bill they say would lower fuel prices by allowing increased oil excavation in Alaska.

At a Cabinet meeting yesterday, Bush emphatically rejected Democratic calls that he release fuel stocks from the Strategic Petroleum Reserve to ease the supply crunch.

The demand for specialty gasoline blends stems from a congressional decision that reformulated gas include an oxygen agent to help reduce fuel emissions. The two most efficient agents, methyl tertiary butyl ether, or MTBE, and ethanol pose their own distinct problems. MTBE has been found in drinking water and has been declared by the EPA to be a potential human carcinogen when taken in high doses. Three states -- California, New York, and Connecticut have banned MTBE as a gasoline oxygenate. Ethanol cannot be transported by pipeline due to its instability and must be trucked instead to a blending plant near its destination. There, it is added to a gasoline base, known as ''blend-stock," that is specially suited to accommodate ethanol.

To compensate for the costs and inconvenience of gasoline oxygenates, state regulators have developed their own recipes. The New York-New England area alone uses three different blends of gasoline in addition to the conventional gas common in less polluted areas: so-called ''northern reformulated" sold in the Boston metropolitan area, Providence, Rhode Island, and Southern New Hampshire areas; a variant of northern reformulated that can be mixed with ethanol rather than MTBE in Connecticut and metropolitan New York; and a blend known as RVP used in Maine.

Oil specialists say the boutique gasoline phenomenon is particularly frustrating as advances in automobile engine technologies make oxygenates unnecessary. Partly as a result, states like New Hampshire are opting out of the reformulated gas program altogether and are working with refiners to develop a nonreformulated gas blend that would meet state and federal clean-air standards.

Yet David L. O'Connor, Massachusetts energy resources commissioner, said he is skeptical that the multiple formulations of gasoline are having any big long-term impact on gas prices here.

O'Connor also said that focusing on the wholesale market's economic impacts of requiring cleaner-burning gas in urban areas like Massachusetts overlooks the value of having less air pollution and smog. ''There's an awful lot of support among the public for cleaner air and cleaner-burning vehicles, which is important to take into account," O'Connor said.

Seth Kaplan, senior attorney with the Conservation Law Foundation in Boston, also supports the multiple blends of gasoline.

''The reformulated gas requirements are part of the overall program to improve air quality in the places in our country where the public health is put in peril by air pollution, much of which comes from cars," Kaplan said. ''The science is crystal clear -- any measure that reduces the summertime smog that comes from our cars saves lives."

Stephen J. Glain can be reached at glain@globe.com; Peter J. Howe at howe@globe.com.