Gasoline Markets: Special Gasoline Blends Reduce Emissions and	 
Improve Air Quality, but Complicate Supply and Contribute to	 
Higher Prices (17-JUN-05, GAO-05-421).				 
                                                                 
The Clean Air Act, as amended, requires some areas with 	 
especially poor air quality to use a "special gasoline blend"	 
designed to reduce emissions of volatile organic compounds (VOC) 
and nitrogen oxides (NOx) and requiring the use of an oxygenate  
such as ethanol. In less severely polluted areas, the Act allows 
states, with EPA approval, to require the use of other special	 
blends as part of their effort to meet air quality standards. GAO
agreed to answer the following: (1) To what extent are special	 
gasoline blends used in the United States and how, if at all, is 
this use expected to change in the future? (2) What effect has	 
the use of these blends had on reducing vehicle emissions and	 
improving overall air quality? (3) What is the effect of these	 
blends on the gasoline supply? (4) How do these blends affect	 
gasoline prices?						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-421 					        
    ACCNO:   A26939						        
  TITLE:     Gasoline Markets: Special Gasoline Blends Reduce	      
Emissions and Improve Air Quality, but Complicate Supply and	 
Contribute to Higher Prices					 
     DATE:   06/17/2005 
  SUBJECT:   Air pollution control				 
	     Environmental monitoring				 
	     Fuel prices					 
	     Fuels						 
	     Gasoline						 
	     Motor vehicle pollution control			 
	     Standards and standardization			 
	     Environmental protection				 

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GAO-05-421

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

June 2005

GASOLINE MARKETS

Special Gasoline Blends Reduce Emissions and Improve Air Quality, but Complicate
                     Supply and Contribute to Higher Prices

                                       a

GAO-05-421

[IMG]

June 2005

GASOLINE MARKETS

Special Gasoline Blends Reduce Emissions and Improve Air Quality, but Complicate
Supply and Contribute to Higher Prices

  What GAO Found

Although there is no consensus on the total number of gasoline blends used
in the United States, GAO found 11 distinct special blends in use during
the summer of 2004. Further, when different octane grades and other
factors are considered, there were at least 45 different kinds of gasoline
produced in the United States during all of 2004. The 11 special blends
GAO found are often used in isolated pockets in metropolitan areas, while
surrounding areas use conventional gasoline. The use of special blends may
expand because a new federal standard for ozone may induce more states to
apply to use them. To date, the Environmental Protection Agency (EPA) has
generally approved such applications and does not have authority to deny
an application to use a specific special blend as long as that blend meets
criteria established in the Clean Air Act. EPA staff told us that there
had been recent congressional debate regarding EPA's authority with regard
to approving special gasoline blends but that the bills had not passed.

EPA models show that use of special gasoline blends reduces vehicle
emissions by varying degrees. California's special blend reduces emissions
the most-VOCs by 25-29 percent, NOx by 6 percent compared with
conventional gasoline, while also reducing emissions of toxic chemicals.
In contrast, the most common special gasoline blend (used largely in the
Gulf Coast region) reduces VOCs by 12-16 percent and NOx by less than 1
percent compared with conventional gasoline. The extent of reductions
remains uncertain, because they rely, at least in part, on data regarding
how special blends affect emissions from older vehicles, and these
estimates have not been comprehensively validated for newer vehicles and
emissions controls. Regarding air quality, EPA and others have concluded
that improvements are, in part, attributable to the use of special blends.

The proliferation of special gasoline blends has put stress on the
gasoline supply system and raised costs, affecting operations at
refineries, pipelines, and storage terminals. Once produced, different
blends must be kept separate throughout shipping and delivery, reducing
the capacity of pipelines and storage terminal facilities, which were
originally designed to handle fewer products. This reduces efficiency and
raises costs. In the past, local supply disruptions could be addressed
quickly by bringing fuel from nearby locations; now however, because the
use of these fuels are isolated, additional supplies of special blends may
be hundreds of miles away.

GAO evaluated pretax wholesale gasoline price data for 100 cities and
generally observed that the highest prices tended to be found in cities
that use a special gasoline blend that is not widely available in the
region, or that is significantly more costly to make than other blends.
There is general consensus that increased complexity, and higher costs
associated with supplying special blends, contribute to higher gasoline
prices either because of more frequent or severe supply disruptions or
because higher costs are likely passed on at least in part to consumers.

United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Special Gasoline Blends Are Widely Used and Use May Increase in

the Future Special Gasoline Blends Reduce Emissions and Contribute to
Improved Air Quality Use of Special Gasoline Blends Has Made It More
Complicated and Costly to Supply Gasoline Areas That Use Uncommon Special
Gasoline Blends Tend to Have

Higher and More Volatile Gasoline Prices Conclusions Recommendation for
Executive Action Agency Comments and Our Evaluation

1 4 8

15

23

28

34 38 40 40

Appendixes                                                           
               Appendix I:            Scope and Methodology                42 
              Appendix II:    GAO Contact and Staff Acknowledgments        46 
                             Table 1: Projected Emissions Reductions    
     Table                           Resulting from Low-RVP,            
                                   RFG, and CBG Gasoline Blends         
                              Figure 1: Gasoline Supply and Demand,           
    Figures                    September 2004 Figure 2: Map of Key      
                                  Pipelines and Refineries, 2004        13 14
                             Figure 3: Special Gasoline Blends-Summer      18 
                                               2004                     
                             Figure 4: Market Shares for the Various    
                                     Gasoline Blends Used in            
                                               2001                        19 
                              Figure 5: Map of Areas Not Meeting New    
                                        8-Hour and Former               
                                   1-Hour Ozone Standard, 2004             21 

Contents

Abbreviations

AQIRP Air Quality Improvement Research Program
CBG Cleaner Burning Gasoline
CO carbon monoxide
DOE Department of Energy
EIA Energy Information Administration
EPA Environmental Protection Agency
FIP federal implementation plan
MTBE methyl tertiary-butyl ether
NAAQS National Ambient Air Quality Standards
NOx nitrogen oxides
OPIS Oil Price Information Service
RFG reformulated gasoline
RVP reid vapor pressure
SIP state implementation plan
VOCs volatile organic compounds

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

June 17, 2005

The Honorable James Jeffords
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable Barbara Boxer
United States Senate

In 2004, consumers in the United States used approximately 140 billion
gallons of gasoline, an amount equivalent to approximately 10 percent of
the world's total consumption of petroleum products. Despite significant
improvements in vehicle emissions and fuel efficiency technology, gasoline
use remains a major source of harmful pollutants such as volatile organic
compounds (VOC) and nitrogen oxides (NOx), both of which can
contribute to formation of ground-level ozone-a pollutant linked to a
variety of health problems including aggravated asthma, reduced lung
capacity, and increased susceptibility to respiratory illnesses like
pneumonia and bronchitis.1 Vehicle emissions also contribute to smog and
acid rain, which can reduce visibility and damage property. The Clean Air
Act (the Act), as amended, provides a federal and state framework to
address air pollution and its health consequences. Among other things, the
Clean Air Act has required improvements in emissions controls on
automobiles, power plants, and other significant contributors to
pollution.
Under the Act, the federal government establishes air quality standards
for
several pollutants, including ozone and carbon monoxide. States that do
not meet these standards must develop plans to improve air quality and
submit those plans to the Environmental Protection Agency (EPA) for
approval.

In 1990, the Clean Air Act was amended to require some areas with poor air
quality to use "special gasoline blends"-blends of gasoline, designed to
be
cleaner burning. Specifically, the Act requires areas with the worst air
quality to use "reformulated" gasoline, a special blend of gasoline
designed
to reduce emissions of VOCs and NOx. Reformulated gasoline also

1Research by EPA and others has shown that high levels of air pollution
are correlated with these and other health effects. However, there is
insufficient research linking health effects to the use of specific
special gasoline blends and, as a result, this report does not address the
health effects of special gasoline blends.

includes additives such as ethanol, which reduce emissions of carbon
monoxide in some engines-these additives are called "oxygenates" because
they increase the oxygen content of the fuel.2 In less severely polluted
areas, the Act gives states the option of using reformulated gasoline or
seeking EPA approval to require the use of other special gasoline blends
as part of overall efforts to meet federal air quality standards. States
applying for EPA approval to require the use of a special gasoline blend
must demonstrate that even with the use of all reasonable and practicable
options, additional emission reductions are needed to achieve federal air
quality standards. States also must demonstrate that no other measures
that would bring about timely attainment exist or that existing measures,
such as state inspection and maintenance programs, are unreasonable or
impracticable. Once EPA has determined that these criteria are met and has
approved a state's application to use a special gasoline blend in a given
location, that fuel becomes a requirement.

Gasoline is a mixture of multiple components. With the exception of
ethanol and some other additives, these components are produced from crude
oil through a set of processes collectively known as refining. The types
and amounts of components in gasoline can be adjusted for a number of
reasons, such as improving engine performance or reducing emissions. As a
general matter, special gasoline blends differ from conventional gasoline
in at least one of three ways: a reduced tendency to evaporate, the
addition of an oxygenate, or reduced levels of one or more chemicals-such
as sulfur. In this report, "conventional gasoline" refers to the basic
gasoline blend used everywhere that a special gasoline blend (e.g.,
reformulated gasoline, state special blends, etc.) is not.

Whatever the blend, gasoline used in the United States is provided by some
combination of U.S. refineries and/or imports of gasoline or components.
Most gasoline produced in the United States is refined in one of four
major refining areas located along the East Coast, West Coast, Gulf Coast,
and Midwest. From a refining area or coastal terminal, gasoline is shipped
through a network of pipelines, water barges, or trucks to large storage
terminals, which may have tanks capable of holding hundreds of millions of

2There are two oxygenates commonly in use. Methyl tertiary-butyl ether
(MTBE) is derived from crude oil and was the most common oxygenate
additive until recent years, when it was found to contaminate ground water
supplies, and has since been banned in a number of states. In its place,
ethanol has increasingly been used as an oxygenate.

gallons of gasoline. From there, it is distributed to retail outlets such
as local gasoline stations by large over-the-road tanker trucks.

Over the past several years, gasoline prices in parts of the United States
have on several occasions experienced sudden, significant price increases.
Some areas with unique gasoline blends, such as California and parts of
the Midwest, have been especially hard hit. Some experts have attributed
these price increases, in part, to special gasoline blends and have
suggested that more uniform national gasoline standards could lead to
lower or more stable gasoline prices while meeting air quality goals.
Others, including some state governments, believe that special gasoline
blends are an important tool that has enabled them to meet federal air
quality standards at lower cost than other alternatives.

In this context, we agreed to answer the following questions:

1.	To what extent are special gasoline blends used in the United States
and how, if at all, is this use expected to change in the future?

2.	What have EPA and others determined regarding the role of special
gasoline blends in reducing vehicle emissions and improving overall air
quality?

3.	What is the effect of these blends on the gasoline supply in the United
States?

4. How do these blends affect gasoline prices?

In answering these questions, we reviewed federal and state analyses of
gasoline markets and the environmental effects of various special gasoline
blends; examined the literature on gasoline supplies and prices; and
analyzed wholesale gasoline price data for 100 cities and the national
average. We interviewed a wide range of government officials and industry
experts including federal officials at the EPA and the Department of
Energy's Energy Information Administration; staff at state environmental
offices; academic and industry experts; petroleum industry officials from
companies involved in refining, terminal operations, and pipeline
operations, as well as from large oil companies; and representatives of
trade associations. We also conducted detailed examinations of markets in
California, Louisiana, Texas, and New Jersey-states with large refining
sectors and experience with producing and using special gasoline blends.
Because many factors may affect gasoline prices at various times, only

some of which are readily and consistently observable through available
data, we agreed to report on prices and volatility but not to provide a
definitive causal link between specific gasoline blends and prices. We
conducted our work from June 2004 to May 2005 in accordance with generally
accepted government auditing standards. For a more detailed discussion of
the scope and methodology of our reiew, see appendix I.

Results in Brief	Although there is no consensus on the total number of
special gasoline blends used in the United States, we found that, in
addition to conventional gasoline, at least 11 fundamentally distinct
special gasoline blends were used during the summer of 2004 in parts of 34
states and covering approximately one-sixth of all the counties in the
United States. In the summer of 2001-the last year for which we had
data-special gasoline blends accounted for slightly more than half of the
total gasoline volume consumed in the United States, with the rest
accounted for by conventional gasoline. When different octane grades and
other factors are considered, there were at least 45 different blends of
gasoline produced and handled by pipelines in the United States during the
entirety of 2004. Special gasoline blends are often used in isolated
pockets because these blends have generally been adopted in large
metropolitan areas in response to severe air quality problems, while
surrounding areas have generally continued to use conventional gasoline.
Further, EPA's approvals of individual states' applications to adopt
special gasoline blends have been made independently over time without
consideration of the other fuels already in use in the region. For
example, East St. Louis, Illinois, and St. Louis, Missouri (two cities in
the same metropolitan area, which straddles two states and two EPA
regions) separately applied to EPA and received approval for different
gasoline blends. The use of special gasoline blends may continue to expand
given that EPA recently finalized a more stringent federal standard for
ozone and, as a result, another 138 counties across the United States are
now out of compliance with the national air quality standard. To meet the
new standard, it is likely that many more locations will apply to use
special gasoline blends. To date, EPA has generally approved such
applications and does not have authority to deny an application to use a
specific special gasoline blend as long as that blend meets the
environmental criteria established in the 1990 amendments to the Clean Air
Act. EPA staff told us that there had been congressional debate regarding
EPA's authority during consideration of recent energy legislation, but
that its authority had not changed as of May 2005.

Use of these special gasoline blends reduces vehicle emissions by varying
degrees. California's special gasoline blend-the fuel formulated to reduce
emissions the most-offers the greatest reductions. Specifically, EPA
models how different gasoline blends affect emissions and estimates that
California's blend reduces VOCs by 25-29 percent and NOx by about 6
percent compared with conventional gasoline, while also reducing emissions
of toxic chemicals and other substances. In contrast, the most commonly
used special gasoline blend-one of the least stringent blends and used
primarily in the Gulf Coast region-is estimated to reduce VOCs by about
12-16 percent and NOx by less than 1 percent compared with conventional
gasoline. The extent of reductions remains unclear, however, because these
estimates are based, in part, on data regarding how special gasoline
blends affect emissions from older vehicles, and these data have not been
comprehensively validated through testing on current vehicle types with
newer emissions controls. In the case of oxygenates, there appears to be
agreement that the addition of oxygenates reduces emissions from older
vehicles. However, improvements in automobile technology in newer vehicles
now automatically reduce emissions of carbon monoxide and other pollutants
and, for these vehicles, may have negated many of the benefits of adding
oxygenates to gasoline. Some studies have also found that use of ethanol
can increase emissions of pollutants that can increase ozone levels.
Regarding air quality, EPA and other experts have concluded that
improvements in air quality seen in some parts of the country are at least
partly attributable to the use of special gasoline blends. However,
studies on the impact of individual emissions reduction efforts-such as
special gasoline blends-are limited and incomplete, in part because of
difficulty isolating the effect of gasoline blends from other factors that
affect air quality such as weather and emissions from other sources.

The proliferation of special gasoline blends has made it more complicated
to supply gasoline and has raised costs, significantly affecting
operations at refineries, pipelines, and storage terminals. At refineries,
making these blends can require additional investment such as installing
new processing equipment and the use of larger amounts of valuable
components in the blending process-making it more costly to produce
special gasoline blends. Once produced, different blends of gasoline must
be kept separate throughout the shipping and delivery process, and the
increased number of gasoline blends has reduced the capacity of pipelines
and storage terminal facilities, which were originally designed to handle
fewer products. For example, several pipeline companies reported that the
capacity of their systems has been reduced because they have had to slow
the speed of products through the pipelines in order to off-load special
blends at

specific locations, which raises the average cost of shipping gasoline.
Similarly, storage terminals have not been able to fully utilize the
volume of their storage tanks because the tanks were designed to handle
fewer types of fuel and are often larger in size and fewer in number than
necessary for handling smaller batches of special gasoline blends.
Further, the proliferation of special blends has, according to several
buyers from these wholesale markets, limited the number of suppliers of
some of these fuels, posing challenges when traditional supplies are
disrupted, such as during a refinery outage or pipeline delay. In the
past, local supply disruptions could be addressed relatively quickly by
bringing fuel from nearby locations; now, however, additional supplies of
special gasoline blends may be hundreds of miles away.

We evaluated pretax, wholesale gasoline price data for 100 cities and
generally observed that the highest prices tended to be found in cities
that use a special gasoline blend that is not widely available in the
region or that costs significantly more to make than other blends. We also
found high prices in cities that are far away from major refining areas or
other sources of gasoline. For example, of the 100 cities we examined,
most of the 20 cities with the highest prices used special blends of
gasoline. The other cities with the highest prices used conventional
gasoline year-round, but these are long distances from major refining
centers or are located on or near a single smaller pipeline. For the
period, December 2000 through October 2004, average prices in the 20
highest-price cities were between 14 and 41 cents per gallon higher than
in the city with the lowest price. Further, 5 of the 10 cities with the
highest average prices were in California, which uses a unique gasoline
that only a few refiners outside of the state make and is expensive to
refine. In contrast, the lowest prices were typically found in cities that
are close to major refining centers or that used gasoline widely available
in their region. For example, among the 20 cities with the lowest prices,
8 used conventional gasoline-the most widely available gasoline blend-and
9 used 7.8 reid vapor pressure (RVP) gasoline-the most widely used special
blend, largely used in areas close to the Gulf Coast refining center. The
other three cities with the lowest prices-Houston, Birmingham, and
Atlanta-used less common special blends but are all close to the largest
refining area, the Gulf Coast and, therefore, have many more potential
supply options than more isolated cities do. In addition, we found that
prices tended to be more volatile in cities that used special gasoline
blends. Specifically, 18 of the 20 cities with the most volatile prices
used special blends of gasoline, while 17 of 20 cities with the lowest
volatility used either conventional or 7.8 RVP gasoline.

While prices for special blends tend to be higher than for conventional
gasoline, available data did not allow us to attempt to isolate the
effects of specific special gasoline blends on gasoline prices or to
definitively establish a causal link between specific special blends and
price volatility. Specifically, we did not have sufficient data to control
for all other potential contributing factors-such as the distance from
cities to the sources of gasoline supply, or specific features of these
cities that might influence prices regardless of the blend of gasoline
used. However, there is a general consensus among the studies we reviewed
and the experts we spoke with that the increased complexity, and higher
refining, transportation, and storage costs associated with supplying
special gasoline blends, have contributed to higher gasoline prices
overall and for specific special blends either because of more frequent or
severe supply disruptions or because higher costs are likely passed on at
least in part to consumers. Moreover, our findings are generally
consistent with results of government, academic, and private studies,
which found that the gasoline supply system is increasingly stressed and
also found isolated pockets of higher and/or more volatile prices in
cities that use special gasoline blends that are not widely used.

To provide better information about the emissions and air quality impacts
of using special gasoline blends, we recommend that the EPA Administrator
direct the agency to comprehensively study how special gasoline blends
affect the emissions from the vehicles that comprise today's fleet and use
the results of this work to make appropriate modifications to the models
that states use to estimate the emissions and air quality benefits of
using them. In order to identify how to balance the environmental benefits
of using special gasoline blends with the impacts that the use of these
fuels have on the supply infrastructure and prices, we are recommending
that EPA work with the states, the Department of Energy, and other
stakeholders to develop a plan to balance these factors. If warranted by
the results of this study, we are further recommending that EPA work with
the Department of Energy and others to identify what statutory and other
changes are required to achieve this balance and report these to Congress
and to request that Congress provide the needed authority to the
appropriate federal agency or agencies.

We provided a copy of our draft report to EPA for comment. The agency did
not comment on our findings or recommendations but did provide technical
comments that we have adopted, as appropriate.

Background	The Clean Air Act, as amended, provides the basic statutory
framework for the role of the federal government and the states in
managing air quality in the United States. Among other things, the Act
authorizes EPA to set and enforce standards, referred to as National
Ambient Air Quality Standards (NAAQS), for pollutants. EPA has
subsequently set standards for six pollutants-ozone, particulate matter,
carbon monoxide, nitrogen dioxide, sulfur dioxide, and lead. While carbon
monoxide is directly emitted when various fuels are burned, ground-level
ozone is formed when VOCs and NOx mix in the presence of heat and
sunlight. As a result, emissions of VOCs and NOx are considered by EPA and
the states in their efforts to reduce concentrations of ground-level
ozone. Because heat and sunlight act as catalysts in the formation of
ground-level ozone, high ozone levels are most prevalent in spring and
summer.

EPA sets and enforces the NAAQS to, among other things, reduce the
negative health effects of air pollution. Each of the six pollutants
covered by the NAAQS is known to cause a variety of adverse health and
other consequences. For example, at certain concentrations ground-level
ozone and carbon monoxide can, among other things, cause lung damage, eye
irritation, asthma attacks, chest pain, nausea, headaches, and premature
death. To enforce the standards, EPA evaluates monitoring data on air
quality to determine whether local air quality meets federal
standards-designating areas as in either attainment (if they meet the
federal standards) or nonattainment (if they do not meet the federal
standards) with each of the NAAQS.3

Under the Act, states that contain areas in nonattainment with the NAAQS
are required to identify how they will reduce emissions and improve air
quality to meet them. For each pollutant, states are required to prepare a
state implementation plan (SIP) and have the plan approved by EPA.4 States
have choices in determining how to reduce emissions and meet air quality
standards, determining, among other things, how much to reduce emissions
from mobile sources such as automobiles compared with other sources of
similar emissions such as power plants. Because use of gasoline

3In some cases, such as when air quality data are insufficient, EPA may
not be able to designate an area as being in attainment or nonattainment.
In these cases, EPA designates the area as "unclassifiable."

4In the event that a state does not develop an EPA-approved SIP, EPA may
develop a federal implementation plan (FIP).

in automobiles emits several chemicals, including carbon monoxide,
nitrogen oxides, and VOCs, and because emissions from automobiles are
often an important contributor to local air quality problems, the federal
government and the states often focus on reducing automobile emissions.
Whatever the planned reductions, states must identify an inventory of air
emissions and demonstrate in their SIPs how they will achieve attainment
in a specific time frame. States typically demonstrate this through
modeling analysis that estimates how the various efforts in their SIPs
will reduce emissions and improve air quality.

The Act also provides authority to set standards and establish
requirements for some programs specifically designed to reduce vehicle
emissions. For example, using authority provided under the Act, EPA has
required newer cars to meet more stringent emissions standards, and
vehicle manufacturers have incorporated emissions-control devices such as
catalytic converters and oxygen sensors to meet them. Further, the Act
requires cars to have under-the-hood systems and dashboard warning lights
that check whether emissions control devices are working properly. In
addition, the Act requires that some areas-generally highly populated
metropolitan areas-have programs for periodic inspection and maintenance
of vehicles. These programs identify high-emitting vehicles, which
sometimes have malfunctioning emissions control devices, and require
vehicle owners to make repairs before the vehicles can be registered.

    Federal and State Actions Regulate Gasoline

The Act gives the federal government, through the EPA, primary authority
for regulating the environmental impacts of gasoline use.5 For example,
the Act sets minimum national standards for conventional gasoline, as well
as requiring that certain gasoline blends formulated to reduce emissions
be used in some areas with especially poor air quality. Specifically, for
certain areas with long-standing and especially poor air quality, the
federal government requires the use of special reformulated gasoline,
commonly referred to as RFG. The amendments also require other areas to
use special

5Before 1990, fuel requirements were much simpler, with only limits on
volatility in the summer months to control ozone formation. The state of
California chose to more stringently regulate gasoline formulations before
the federal government. Because California regulated gasoline formulations
prior to the specific authority provided to the EPA, California may
continue to require more stringent fuel formulation requirements without
EPA approval, but must at least meet (or exceed) the other federal
requirements.

gasoline blends designed to reduce summertime ozone pollution and
wintertime carbon monoxide pollution.

The Act allows states or regions not required to use RFG to seek EPA
approval to require use of other special gasoline blends to aid in
improving air quality, provided that they do not violate minimum federal
standards. In 2001, EPA studied the proliferation of gasoline blends and
reported that several states had chosen special blends other than RFG for
one or more of three reasons: (1) the states were not eligible to require
RFG because their air quality was not bad enough, (2) the states wanted to
avoid the RFG requirement to use an oxygenate and its added cost, (3) fuel
suppliers and states believed that the other special blend would be less
costly than RFG while meeting their need to reduce emissions. States
seeking to use a special gasoline blend must obtain formal approval from
EPA, generally the regional office with authority to review their SIPs.
Specifically, under the Clean Air Act, section 211(c)(4)(C), EPA may
approve applications by states to use special gasoline blends if the
states demonstrate that the fuel is needed to reach attainment with
federal air quality standards.

In guidance issued in August 1997-after several of the special gasoline
blends were approved-EPA clarified that they can approve a state gasoline
requirement only if "no other measures that would bring about timely
attainment exist," or if other measures are "unreasonable or
impracticable." The guidance requires that states do four things in their
application for approval of a new or revised SIP: (1) quantify the
estimated emissions reductions required to reach attainment with the
federal NAAQS for ozone; (2) identify possible control measures that could
be used in place of special gasoline blends and provide emissions
reduction estimates for those measures; (3) explain why those measures are
"unreasonable or impracticable"; and (4) show that, even with use of all
"reasonable and practicable" measures, additional emissions reductions are
needed. As is the case with other new or revised SIPs, these applications
are open for public comment, and EPA must consider those comments before
making a decision. Once approved, states' special gasoline blends become
federally enforceable requirements.

Under some circumstances, EPA may temporarily waive special gasoline blend
requirements, referred to as granting enforcement discretion, if, for
example, the required special gasoline blend is not available due to a
supply disruption. Over the past several years, EPA has waived the
requirement to use these special gasoline blends on several occasions when
it determined that overall supplies might become tight. We found that

EPA has granted enforcement discretion on at least 23 occasions, allowing
gasoline that did not comply with local requirements to be sold there. The
causes of these supply disruptions included the 2003 blackout in the
Northeast, the series of hurricanes in Florida and the Gulf Coast in 2004,
as well as refinery fires, pipeline breaks, and other infrastructure
problems. Although there was one short waiver that applied nationwide
following the terrorist attacks of September 11, 2001, several of the
other waivers were provided to local areas with particularly stringent
gasoline formulations including St. Louis, Chicago/Milwaukee, Atlanta, Las
Vegas, and Phoenix when there were supply shortages in these areas.

    All Gasoline Is a Blended Mix of Components Derived Primarily from Crude Oil

All gasoline is a blend of different components that are predominantly
produced in refineries. The simplest refineries primarily separate the
components already present in crude oil. More complex refineries also have
the ability to chemically change less valuable components of crude oil
into more valuable ones. Because of their ability to chemically alter
components, complex refineries can increase the amount of gasoline yielded
from a given amount of crude oil and reduce the amount of less valuable
products. Although most refineries can process many types of crude oil,
refineries are generally configured to run most efficiently when refining
a specific type of crude oil into a specific group of products.

Absent specific regulatory requirements, refiners blend several components
derived from crude oil to produce a gasoline that achieves acceptable
engine performance at the lowest cost. Two key aspects of gasoline affect
engine performance:

o 	Reid vapor pressure is a measure of gasoline's tendency to evaporate
and also reflects the ease with which it ignites when the spark plug fires
in a cold engine. To maintain engine performance, RVP must vary by season
and region. Higher RVP is required in colder climates and seasons to allow
an engine to start.

o 	Octane number is a measurement of gasoline's tendency to ignite without
a spark, commonly known as "knocking" in a running engine. Some
high-performance and other vehicles require gasoline with a higher octane
number. To satisfy these requirements and consumer demand, retailers in
the United States typically sell three different octane grades of
gasoline.

Special gasoline blends developed to reduce pollution are generally
adjusted in at least one of the following ways:

o RVP is reduced during the summertime to reduce VOC emissions. Reducing
the RVP of gasoline requires reducing the amount of very light compounds,
such as butanes and pentanes, blended into the gasoline.

o 	Toxics, their precursors, or other chemicals are limited so they are
not released into the air when the gasoline is burned. Some of these, such
as sulfur, naturally occur in crude oil while others, such as benzene,
result from gasoline refining.

o 	Oxygenates, chemical compounds containing oxygen to aide in combustion,
are added to gasoline to improve environmental performance when the
gasoline is burned, including reducing carbon monoxide (CO) emissions. The
most commonly used oxygenates are MTBE and ethanol. Several states have
banned MTBE as a result of concerns about groundwater pollution and have
switched to using ethanol as an oxygenate where required.

    Gasoline Is Moved from Refineries to Consumers through a Complex, Shared
    Distribution System

Gasoline is shipped from U.S. refineries to consumers by some combination
of pipelines, water barges, rail, and trucks to retail gasoline stations.
Most of the country's refining capacity is located in the Gulf Coast, West
Coast, East Coast, or Midwest with only a small amount in the Rocky
Mountain states. As shown in figure 1, the Gulf Coast region supplies
gasoline to all the other regions-of these, the Midwest and the East Coast
are the most dependent on gasoline from the Gulf Coast. The East and West
Coast markets have also imported gasoline from other parts of the world
such as Canada, Europe, and the Caribbean.

gasoline before it is distributed, generally by trucks, to retail gasoline
stations. In all of these locations, different gasoline blends must be
stored separately, with only one fuel per tank at any given time.

Ethanol that is added to gasoline cannot be shipped in pipelines with
other petroleum products because of ethanol's tendency to absorb water.
Instead, ethanol is shipped primarily by rail or trucks to terminal
stations where it is "splash" blended-mixed in specific proportions as the
fuel is added to the storage tank or tanker truck. The federal government
and some states have considered requiring or expanding the use of ethanol
to reduce consumption of oil and increase demand for agricultural products
used to produce it, such as corn.

  Special Gasoline Blends Are Widely Used and Use May Increase in the Future

There were 12 distinct gasoline blends in use in the United States during
the summer of 2004: 11 special gasoline blends and the conventional
gasoline used everywhere a special blend is not used. When different
grades of gasoline, special blends used in winter, and other factors are
considered, the number of gasoline blends rises to at least 45. New ozone
standards and other factors may further increase the number or the use of
special gasoline blends in the future, in part because EPA must approve
any state's application to require use of a special gasoline blend as long
as the proposed fuel meets EPA's environmental standards.

    Eleven Special Summer Gasoline Blends Were Used Mostly in Large Cities
    Creating Isolated Markets

Eleven special gasoline blends were used in the United States during the
summer of 2004 in addition to conventional gasoline. The use of special
gasoline blends is most prominent during the summer because special fuels
are used predominantly to reduce summer ozone levels, and gasoline use is
generally the highest during the summer. The requirement to use these
fuels requires that all the fuel sold at terminals meet certain
specifications at a certain date, which generally requires terminal
operators to draw down their inventory of non-summer fuels in advance of
filling their tanks with summer fuels. Special gasoline blends are
primarily used in highly populated urban areas, and 34 states use a
special gasoline blend in one or more areas. The 11 special gasoline
blends in use during the summer of 2004 fell into the following
categories:

o 	Three different types of RFG used year-round, the federally required
fuel used in areas with the worst air quality. RFG has very low RVP;
reduced levels of benzene and other toxics; and contains an oxygenate. The
type

of RFG blend depends on the area of the country where the gasoline is used
and the oxygenate selected. These blends are identified in figure 3 as
"RFG North," "RFG North with ethanol," and "RFG South."

o 	Two types of California Cleaner Burning Gasoline (CBG) used year-round,
also referred to as CARB. California CBG is formulated to meet the most
stringent gasoline standard in the United States, including very low RVP
and reduced levels of sulfur, benzene, and other chemicals. In general,
the state of California does not require the addition of an oxygenate in
areas not subject to federal RFG standards-identified in figure 3 as "CA
CBG." Gasoline sold in areas also subject to the federal RFG standard must
contain an oxygenate, identified as "RFG/CA CBG."

o 	In the summer, Arizona allows the use of either a gasoline blend very
similar to RFG or a blend similar to CBG. The blend required in Arizona is
identified as "AZ CBG."

o 	Three summer blends with various reductions in RVP. The federal
government requires some areas to use 7.8 RVP gasoline6 and, in other
areas, states have mandated the use of this blend. The other two low-RVP
blends are state requirements. These blends are identified in figure 3 as
"7.8 RVP," "7.2 RVP," and "7.0 RVP."

o 	One blend with reduced RVP and reduced sulfur content. The state of
Georgia requires this blend for use in the Atlanta area, and it is
identified in figure 3 as "7.0 RVP, 30 ppm sulfur."

o 	One blend of conventional gasoline with a minimum of 10 percent ethanol
by volume, used year-round. The state of Minnesota requires this blend,
which is identified in figure 3 as "Ethanol Mandate."

As figure 3 shows, many areas using special gasoline blends are surrounded
by regions that use conventional gasoline. In some cases, these areas are
relatively large, as is the case for the state of California, where nearly
all of the state uses the same fuel-RFG/CA CBG. In other cases, "islands"
of special gasoline use can divide otherwise regional gasoline markets.
For example, the St. Louis metropolitan area, which includes parts of two

6RVP values throughout this report are measured in pounds per square inch
at 100-oF, the standard industry measure.

states7-Missouri and Illinois-uses three different fuels: one special
gasoline blend required on the Missouri side, a different special gasoline
blend required on the Illinois side, and conventional gasoline is allowed
in the surrounding area. In some cases, special gasoline blends are used
in only one area of the country. For example, California CBG, Arizona CBG,
and the special blend used in Atlanta, Georgia, are not used anywhere else
in the United States. Even relatively common special gasoline blends can
create isolated markets if they are not used in nearby areas. For example,
although 7.8 RVP is a relatively widely used blend, Pittsburgh,
Pennsylvania, is the only city in its region that uses it. Similarly, the
Chicago/Milwaukee area uses RFG North with ethanol, a gasoline blend used
in the Northeast but not used elsewhere in the Midwest.

7Each state is overseen by a separate EPA regional office; Missouri is
overseen by EPA region 7 and Illinois is overseen by EPA region 5.

Figure 4: Market Shares for the Various Gasoline Blends Used in 2001

While we have reported that there are 11 special blends used or handled
during the summer of 2004, additional factors increase the total number of
gasoline blends sold in the United States throughout the year to at least
45. First, although this report focuses on summer gasoline blends, at
least 3 special winter-only gasoline blends are required to be used in
areas of eight states. Use of these fuels requires that fuel terminals in
these areas transition from the fuel that they use in the non-winter
season to the required winter fuel. These blends contain an oxygenate to
address winter carbon monoxide pollution. Second, because of consumer
demand, many gasoline stations sell gasoline in three octane grades-both
premium and regular grades are refined and shipped to terminals, where
they are blended together to make a midgrade gasoline. Therefore, each
gasoline blend is effectively two fuels from the perspective of pipelines
and terminals. As a result, pipelines, fuel terminals, and retail gasoline
stations

1%

7.0 RVP

1%

7.2 RVP

2%

Ethanol mandate

2%

7.0 RVP, 30 ppm sulfur

California gasoline AZ CBG (3%) CA CBG (3%) RFG/CA CBG (7%)

RFG blends RFG North w/ethanol (3%) RFG North (8%) RFG South (10%)

7.8 RVP

Conventional

                       Source: GAO analysis of EPA data.

    Other Factors Raise the Number of Gasoline Blends Carried by Pipelines and
    Other Means to at Least 45

carry multiple variations of the gasoline blends previously discussed.
Third, gasoline blends differ regionally and seasonally because
differences in outside temperatures require different blends to maintain
vehicle performance. The primary difference among these blends is RVP.
Refiners produce gasoline with higher RVP in cold conditions to allow cars
to start and gasoline with lower RVP during warm conditions to improve
vehicle operation, even in areas that use conventional gasoline. As a
result of these differences, refiners routinely ship different fuels to
different regions and also ship different gasoline blends seasonally, but
special blends tend to compound these variations. One official with a
major petroleum company reported that there were at least 45 different
grades of gasoline used in the United States.

    New Ozone Standard and Other Factors May Further Increase the Number and/or
    Use of Special Gasoline Blends

A new ozone standard and deteriorating air quality may lead to an
increased number of special gasoline blends and/or more use of these
blends in the future. In 2004, EPA issued a final rule implementing a new,
more stringent federal air quality standard for ozone that led to the
identification of 138 additional counties in nonattainment or maintenance
as seen in figure 5.8 EPA officials that we spoke with did not have any
indications that states were planning to submit applications to use
special blends in these areas but acknowledged that gasoline is viewed as
an effective emissions control strategy and said that they expect some
states to consider doing so. Oil company officials told us that officials
from some states had approached them to discuss using special gasoline
blends. Because states must begin preparing SIPs for the recently
designated nonattainment areas, and because several of those states
already have chosen to use special gasoline blends, it appears likely that
states may seek approval to use such blends in more areas.

8The new standard measures ozone levels averaged over 8 hours, while the
prior standard measures these levels over 1 hour.

scheduled to phase in, though some of these states did not use MTBE.9
Worsening air quality in areas such as Atlanta and Baton Rouge may require
the gasoline used in these cities to shift from a special blend to RFG,
reducing the number of fuels.10 In addition, a new federal standard for
all gasoline-including special blends-that mandates reduced sulfur,
promises to improve the effectiveness of catalytic converters already
present in most vehicles and could aid some areas in meeting federal air
quality standards, potentially reducing the need for these fuels in some
areas.

    EPA Lacks Authority to Deny Requests to Use Special Gasoline Blends Due to
    Effects on Supply

During the course of our work, staff from EPA's Office of the General
Counsel stated that EPA could not deny an application to require the use
of a special gasoline blend that addressed the four elements outlined in
EPA's 1997 guidance. They explained that EPA's determinations often
deferred to states' evaluations in their applications that, under the
Clean Air Act, section 211 (c)(4)(C), no other measures that would bring
about timely attainment exist, or that existing measures, such as vehicle
inspection and maintenance programs, are unreasonable or impracticable.
Further, staff with EPA's Office of the General Counsel staff told us EPA
could not reject an application on the basis of the potential impacts on
gasoline supply or other regional effects on the gasoline market because
such a rejection would be outside of EPA's current authority. Several of
the special fuels in use during 2004 were approved prior to the issuance
of the 1997 guidance, and EPA officials reported that a variety of
standards were used to evaluate applications.

EPA's most recent effort to examine special gasoline blends is consistent
with EPA's view that the agency does not have authority to reject a
state's application based on regional supply impacts or costs. In 2001,
EPA released a staff white paper, in response to a presidential directive,
examining whether there were options to maintain or improve environmental
benefits while also improving the supply of fuels, such as

9These states are, with phase-in year in parentheses, California (2003),
Colorado (2002), Connecticut (2000), Illinois (2004), Indiana (2004), Iowa
(2000), Kansas (2004), Kentucky (2006), Maine (2007), Michigan (2003),
Minnesota (2000), Missouri (2005), Nebraska (2000), New Hampshire (2007),
New York (2004), Ohio (2005), South Dakota (2001), Washington (2004), and
Wisconsin (2004).

10EPA determined that these cities are required to use RFG; however, the
states sued, and the lawsuit was in the courts as of April 2005.

gasoline.11 In that report, EPA examined a number of options to reduce the
number of fuels available for states to choose from-similar to a gasoline
menu. That report concluded that these options were beyond EPA's statutory
authority and would require legislative action to implement.12 The white
paper also noted that it represented a first step in EPA's response to the
directive, but that significant additional analysis and study were
required. EPA staff told us that there had been congressional debate
regarding EPA's authority during consideration of recent energy
legislation, but that its authority had not changed as of May 2005.13 In
the study, EPA identified a number of changes that it would make to ease
the seasonal transition between gasoline blends used during different
parts of the year. Staff also said that little, if any, additional work
had been done since the 2001 study, in part because of EPA's lack of
authority to implement some of the actions outlined in the study.

  Special Gasoline Blends Reduce Emissions and Contribute to Improved Air
  Quality

Special gasoline blends reduce emissions-particularly those involved in
the formation of harmful ground-level ozone-by varying degrees, depending
on the blend. The extent of reductions remains unclear, however, because
the estimates have not been comprehensively validated through testing on
current vehicles and emissions controls. According to EPA and others,
these special gasoline blends have contributed to improvements in air
quality seen in some parts of the country. The extent of their
contribution to improvements relative to that of other contributing
factors, such as reductions in power plant emissions, is somewhat
uncertain because of the difficulties in isolating the effects of
individual emissions reduction efforts, such as special gasoline blends,
from other factors that may affect air quality.

11The directive was issued as part of the President's National Energy
Policy Report issued on May 17, 2001.

12According to EPA staff, Congress considered providing additional
authority in legislation after the release of this report; however, those
bills did not pass. As of April 2005, new legislation passed by the House
of Representatives, but not yet passed by the Senate, would limit the
number of gasoline blends, but this bill has not yet become law.

13In April 2005, the U.S. House of Representatives passed a bill, H.R. 6,
which, among other things, limited the expansion of special gasoline
blends and requires EPA and DOE to examine the issue and present options
to Congress. As of May 2005, no comparable bill had passed the Senate.

    Special Gasoline Blends Reduce Emissions, but the Extent of Reduction
    Remains Uncertain

Over the past 15 years, a wide range of studies by EPA and others have
concluded that changes to the properties of gasoline can substantially
reduce emissions from automobiles. For example, in 1996, EPA concluded
that RFG and low-RVP blends can both significantly reduce VOCs but that
RFG offers greater promise in reducing NOx, CO, and toxics. The Air
Quality Improvement Research Program (AQIRP), funded by the auto and oil
industries, analyzed gasoline properties in detail and comprehensively
tested a variety of gasoline blends in a range of vehicles between 1989
and 1992. This effort produced data regarding how the use of various
gasoline blends affect emissions from then-current vehicles and concluded
that changing certain properties of gasoline, in particular reducing RVP
and sulfur, was effective in reducing emissions of pollutants such as NOx,
CO, and also hydrocarbons such as unburned fuel. According to EPA
officials, using special gasoline blends is attractive to states because
the blends can offer immediate emissions reductions from vehicles already
on the road.

EPA and others have used the results of these studies to develop models
that provide detailed emissions estimates for several of the special
gasoline blends currently in use. These models have been used by states in
their SIPs to estimate the expected emissions from requiring the use of
special gasoline blends instead of conventional gasoline.14 As shown in
table 1, the models estimate that special gasoline blends reduce emissions
by varying degrees. California's gasoline-the blend formulated to reduce
emissions the most-is estimated to provide the greatest level of emissions
reductions, about 25-29 percent for VOCs and about 5.7 percent for NOx.
RFG is estimated to provide about the same level of VOC reduction, a lower
NOx reduction of about 0.7 percent, but also a 10-20 percent reduction in
CO. The special gasoline blend most commonly used in areas not using
conventional gasoline-gasoline with an RVP of 7.8-is estimated to reduce
VOC emissions by 12-16 percent and NOx by about 0.7 percent. In addition
to the pollutants listed in table 1, RFG and California's cleaner burning
gasoline also reduces emissions of some toxics such as benzene.

14Excluding California, which uses the Motor Vehicle Emissions Inventory.

Table 1: Projected Emissions Reductions Resulting from Low-RVP, RFG, and
CBG Gasoline Blends

           Estimated emissions reductionsa Gasoline blend VOC NOx CO

Low RVP

12 to 16% 0.7% No effect

19 to 23% 0.7% No effect

21 to 25% 0.7% No effect

RFG

                      Federal RFG 25 to 29% 0.7% 10 to 20%

                  California CBGb 25 to 29% 5.7% Not estimated

Source: GAO analysis of EPA data.

aEmissions reductions are based on reductions from conventional 9.0 RVP
gasoline projected to be in use in calendar year 2006.

bEPA estimated VOC and NOx emissions reductions for California CBG and RFG
CA/CBG (which includes an oxygenate) were the same for these pollutants;
however, RFG CA/CBG would likely provide some reduction of CO, in
addition.

However, the extent of emissions reductions associated with various
gasoline blends remains somewhat uncertain. GAO,15 the National Research
Council, and others have identified concerns about the overall accuracy of
emissions estimates. EPA has addressed some of the concerns about
emissions estimates. In one effort to address concerns about the validity
of emissions estimates, EPA sponsored a study that compared emissions
estimates to measured emission data obtained between 1992 and 2001. The
study looked at pollutant concentration data from tunnels and vehicle
exhaust data collected from vehicles on roadways using special remote
sensing devices at a limited number of sites using a limited range of
gasoline blends. As a result, EPA found that the observed emissions data
conflicted with emissions estimates; in some cases the testing data were
higher than predicted, while in other cases it was lower.

Despite this effort, EPA has not comprehensively studied how various
gasoline blends affect vehicle emissions since the early 1990s-when the
AQIRP comprehensively tested a variety of gasoline blends in a range of
vehicles. Since then, there have been advances in emissions control

15GAO, Air Pollution: Limitations of EPA's Motor Vehicle Emissions Model
and Plans to Address Them, GAO/RCED-97-210 (Washington, D.C.: Sept. 15,
1997).

technology. Consequently, to the extent that emissions from vehicles with
newer emissions control technology differ from those of older vehicles,
emission estimates may become less certain, especially as vehicles with
the newer technology compose a growing portion of the U.S. fleet. EPA
officials acknowledge that their efforts since the early 1990s to validate
emissions estimates have not allowed them to fully validate how special
fuel blends operate in a full range of vehicles of varying vintages and
designs over their operating lifetimes. EPA officials told us that they
believe such a detailed analysis would improve their understanding of how
special gasoline blends affect emissions, but said that they have not had
sufficient budgetary resources to collect the needed data to support such
an analysis.

In addition to these broad concerns, there is also controversy over the
emissions benefits associated with special blends containing oxygenates,
which were initially added to gasoline to reduce the emissions of carbon
monoxide and other pollutants. However, although there appears to be
agreement that oxygenated fuels help reduce emissions of CO from older
vehicles, recent studies indicate that the emissions benefits for newer
vehicles are questionable. For example, AQIRP, the National Science and
Technology Council, and others have reported that improvements in
emissions controls on newer vehicles, such as oxygen sensors and
computer-controlled emissions systems, may now automatically reduce
emissions of CO and other pollutants and may negate many benefits of
adding oxygenates. Further, some experts have concluded that adding
oxygenates to gasoline may increase emissions of NOx and VOCs and may
contribute to increased levels of ozone. As a result, some states,
including California, New York, and Georgia have requested waivers from
EPA to allow them to use fuel that does not contain an oxygenate. The
state of California stipulated in its waiver application that its fuel
reduces emissions to a greater extent than federal RFG and that the
oxygenate requirement has impeded its efforts to reduce ozone. To date,
EPA has not granted any of these waivers. Recently, Congress and others
have considered expanding the use of ethanol in gasoline for other
reasons, including to benefit U.S. farmers and to reduce the country's
reliance on foreign oil.

    Reduced Vehicle Emissions Have Led to Air Quality Improvements, but the
    Extent of Benefits Attributable to Special Gasoline Blends Is Uncertain

EPA and other experts have concluded that improvements in air quality in
some parts of the country are at least partly attributable to the use of
special gasoline blends. In 2004, EPA reported that ground-level ozone has
decreased over the past 10 to 25 years and that these reductions resulted,
at least in part, from emissions control programs that include
requirements to use special gasoline blends. Further, EPA and other
experts concluded that special gasoline blends, such as RFG and low-RVP
blends, are effective strategies for states to use to reduce ozone
pollution. In addition, a research effort funded by AQIRP found that
reducing RVP decreased peak ozone in several cities and would continue to
provide benefits for years to come. In addition, the National Research
Council reviewed EPA data and found that average ozone levels dropped by
about 1 percent coincident with reduced emissions of VOCs, NOx, and CO
from on-road vehicles, which fell by 31 percent, 2 percent, and 20
percent, respectively. Based on these and other data, the National
Research Council concluded that improvement in air quality is likely
attributable, at least in part, to recent improvements in gasoline
properties.16

Despite the conclusions that special gasoline blends have contributed to
improved air quality, findings specifically linking air quality
improvement to the use of special gasoline blends are limited and
incomplete because of the inherent difficulties in isolating the effects
of special gasoline blends from other efforts to improve air quality.
Studies examining the effect of special gasoline blends on air quality
noted that attributing a change in ozone levels to the use of a special
gasoline blend would be difficult.17 In particular, experts from EPA, the
National Science and Technology Council,18 and the National Research
Council have determined that relating trends in the levels of ground-level
ozone to trends in emissions and to emissions-control policies can be
challenging because of the confounding effects of other variables,
including the effects of other control efforts and

16Other possible reasons for the improvements include the advent of more
stringent standards for vehicles that gradually replace old vehicles built
to more lenient standards than current models; and maturation of
new-vehicle emissions-control hardware and software as field experience
accumulated.

17David Stikkers, "A Retrospective Study of Reformulated Gasoline Use in
Chicago," Environmental Informatics Archives. 1 (2003): 282-294.

18The National Science and Technology Council is composed of
representatives from several federal agencies charged with coordinating
science and technology policies across the federal government.

meteorological fluctuations. For example, the National Research Council
noted that since the 1990s-when special gasoline blends became widely
used-several other efforts to reduce emissions from vehicles have been
made that could also explain changes in air quality, such as the addition
of enhanced emissions-control systems and improvements in inspection and
maintenance programs in some areas. During this time, EPA and the states
have also undertaken efforts to reduce emissions from electric utilities,
chemical manufacturing, and other stationary sources that could have
contributed to the improvements. Further, because ozone is more readily
created when VOCs, NOx, and CO react in sunny and hot weather,
meteorological fluctuations affect the relationship between emissions and
ozone levels. For example, EPA has identified cases where air quality
improved, but the improvement was largely due to better weather (more air
circulation, lower amounts of heat and sunlight, and other factors).
According to the National Research Council and others, determining how
much air quality improvement is specifically attributable to any specific
emissions control program, including special gasoline blends, would
require the collection of high-quality, long-term data on air pollution,
on other control measures, and on weather.

  Use of Special Gasoline Blends Has Made It More Complicated and Costly to
  Supply Gasoline

The increasing numbers of special gasoline blends have made it more
complicated and costly to supply gasoline, elevating the risk of localized
supply disruptions. Producing special gasoline blends can require changes
at refineries, making it more complicated and costly to produce gasoline.
Special blends also add to the number of fuels shipped through pipelines,
reducing the efficiency of the pipelines and raising costs. In addition,
because the tanks at the fuel terminals were often built before the
proliferation of blends, they are often too large and too few to
efficiently handle the increased number and smaller size batches of
special gasoline blends and, as a result, total storage capacity has
fallen. Further, in some cases, the proliferation of blends has reduced
the supply options available to some retailers, making them more
susceptible to supply disruptions.

Making Special Gasoline Producing some special gasoline blends sometimes
requires refineries to Blends Has Added invest in additional refinery
units, making their refineries more complex, or Complexity and Costs at
reducing their capacity to make gasoline. For example, producing

cleaner-burning fuel with lower levels of toxic and other emissions, such
asRefineries RFG or CBG, has required some refiners to install specialized
units that remove sulfur and benzene during the refining process.
Similarly,

production of low-RVP gasoline requires that refiners leave out the
lightest components typically included in conventional gasoline.
Separating these components or converting them to ones that can be used in
these blends may require additional refinery units. If the components are
not immediately used in gasoline at that refinery, they may be stored, may
be used in less valuable fuels such as diesel or jet fuel, or shipped to
other refineries that can use these components. The removal and additional
processing of these components can decrease the amount of gasoline a
refinery can produce. For example, officials from one California refinery
told us that their refinery could produce 12 percent more volume if it
produced conventional gasoline rather than California gasoline because
conventional gasoline uses more of the components that are typically
generated in the refining process.19

Adding refinery units and losing refinery capacity can increase the
overall costs of refining gasoline. Manufacturing low-RVP fuel generally
involved reducing the use of some components and, as a result, was less
costly than the more significant changes needed to make the cleanest
burning blends. Specifically, in 1996, EPA estimated that low-RVP blends
cost 1-2 cents per gallon more to make than the conventional gasoline at
the time. In contrast, in 2003, the Energy Information Administration
(EIA), within the Department of Energy, estimated that blends formulated
to meet the most stringent standards, such as oxygenated California
gasoline, cost 5-15 cents more per gallon to make than the conventional
gasoline required at the time and that RFG generally costs 2.5-4 cents
more per gallon to make.

In addition, the use of oxygenates in blends such as RFG further increases
the complexity and cost of the refining process because refiners must
either invest in equipment to produce oxygenates from crude oil (in the
case of MTBE) or they must purchase these components from other sources.
MTBE is generally less expensive than ethanol as an oxygenate but has
raised water quality concerns. As described earlier, ethanol is generally
shipped by truck or rail, stored separately from other gasoline
components, and blended just before gasoline is sent to retail stations.
The higher cost of purchasing ethanol during the period of our analysis,
together with these separate handling procedures, adds to the total cost
of

19While the switch from conventional gasoline to a special gasoline blend
has led to reductions in refining capacity, all other things equal,
refiners, in investing in new processes to make the special blends, have
also typically increased the capability of their refineries to convert
less valuable components to more valuable ones, thereby increasing their
capacity.

making ethanol-blended gasoline. Additionally, because ethanol has a high
RVP, more components must be removed from ethanol-blended gasoline than
from MTBE-blended gasoline to meet specifications for RVP. Removing these
components and reprocessing them or diverting them to other products
increases the cost of making ethanol-blended gasoline.

    Shipping More Special Gasoline Blends Reduces Pipeline Capacity and Raises
    Costs

Shipping gasoline on a pipeline requires a great deal of coordination
between refineries, pipelines, and terminal stations to maintain pipeline
flows while fuels are being added and withdrawn. Pipeline operators told
us that they develop schedules of when individual shipments (called
batches) will occur at least 1 month in advance; however, some changes to
this schedule may occur up to the date when a product is placed on the
pipeline to adjust for, among other things, the need for more of a
specific gasoline blend in some locations. On the day of shipment,
pipeline operators precisely coordinate when refineries or other shippers
add or "inject" fuel to the pipeline and when fuel is taken off of the
pipeline along with other aspects of operating the system. Companies
shipping fuel on the pipeline, may request to keep their products isolated
from others (a segregated batch) or may choose to combine their product on
the pipeline with other blends meeting similar or identical product
specifications (a fungible batch). Because of the large number of gasoline
blends and, because some shippers require segregated batches, the number
of fuels shipped in pipelines has increased dramatically in recent years.
For example, one pipeline company noted that in 1970 they shipped 10
different products on their system over the entire year, whereas in 2004
they shipped 128 (including distinct blends and segregated products).20

The increased number of special gasoline blends has reduced the effective
capacity of the nation's petroleum products pipeline infrastructure
because the pipelines are generally operated at slower speeds to
accommodate more and smaller batches of gasoline while keeping the
different blends separate. The speed at which centrally controlled pumps
move product along pipelines-typically between 3 and 8 miles per hour-can
be affected by a number of factors, including the volume of product
relative to the

20Many of the pipelines that transport gasoline also ship other petroleum
products such as diesel fuel, jet fuel, and propane-some of which also
require multiple, although fewer, formulations. Recent regulations that
will require lower levels of sulfur in some diesel fuels will further
increase the number of fuels moving through the pipeline infrastructure
and may cause other complications in maintaining fuel quality and are
expected to have similar effects as special gasoline blends.

pipeline capacity being shipped, the size of batches, and the availability
of terminal storage along the pipeline route. Several pipeline operators
told us that, prior to the introduction of special gasoline blends, they
shipped many fewer products and much larger batches than they do now.
Further, they said that shipping smaller volumes can require them to slow
or stop the pipeline to allow shippers to inject or withdraw individual
fuels at fuel terminals or other locations. Lost opportunities associated
with reductions in the amount of fuel that the pipeline can transport
serve to raise the average cost of moving gasoline.

The increased number of fuels and fuel types shipped on pipelines has also
increased losses and costs associated with mixing of fuels. Two types of
fuel mixtures occur at the interface between batches on pipelines:
downgrading and transmix. Downgrading occurs when two similar fuels mix,
but the resulting mix no longer meets the more valuable product
specification. For example, if a high-and regular-octane gasoline are
mixed, then the downgraded gasoline may be sold only as lower-priced,
regular gasoline. Transmix results when two dissimilar fuels mix and the
fuel cannot be used without reprocessing. For example, if diesel fuel and
gasoline mix, the transmix must be processed to separate the fuels into
usable products. Similarly, because MTBE is banned in some areas, if
gasoline blends containing MTBE come in contact with other fuels, the
mixed fuel is considered transmix and must be reprocessed to remove the
MTBE before it can be used. To minimize losses associated with downgrades
and transmix and still maintain efficiency, pipelines generally set a
minimum batch size. Several pipeline operators reported that they have
witnessed increased losses and costs due to downgrades and because more
fuel requires reprocessing as the number of special gasoline blends has
increased.

In addition, according to some pipeline company officials, because some
gasoline blends are only used in one city or only in some areas served by
a pipeline, shippers incur additional costs if these gasoline blends are
not taken off the pipeline at the right location. For example, one
pipeline operator told us that RFG with MTBE shipped in Midwest pipelines
cannot be used without costly reprocessing if it is shipped past certain
points on these pipelines because no regions beyond these points allow the
use of RFG with MTBE. In some instances, the pipeline may need to be
slowed, or even stopped, to allow a special gasoline blend to be taken out
of the pipeline.

    Increased Numbers of Gasoline Blends Reduce Terminal Storage

The increased number of petroleum products generally, including special
gasoline blends, and the need to keep them separated, has reduced the
storage capacity of some gasoline terminals which can create difficulties
during periods when gasoline supplies are disrupted. To ensure product
quality, special gasoline blends must be stored in separate tanks. Several
terminal operators told us that their terminals were built before the
proliferation of special gasoline blends and were designed to handle
fewer, but larger, batches of gasoline. Terminal operators told us that,
because many of the special gasoline blends are shipped in smaller
batches, the tanks used for these blends are often not filled to capacity.
One terminal operator told us that some new storage tanks had been built
in recent years. This operator went on to say that adding new storage
capacity at existing terminals is often either prohibitively expensive or
extremely difficult because of space limitations and the need to obtain
federal, state, and local regulatory approvals. One terminal operator told
us that the company has chosen not to carry one or more gasoline blends
used in its area because the company's existing tanks were insufficient
and building additional tank capacity was too costly. For these same
reasons, it is often difficult to build new terminals. In addition to the
complexity of these factors, terminal operators told us that the
proliferation of special gasoline blends also raised their costs by
reducing their ability to fully utilize their existing tanks, which cost
them the opportunity to store additional fuels, or by forcing them to make
additional investment to build more tanks, or both.

In addition, terminal operators told us that reduced storage capacity at
their facilities, combined with the increased number of fuels in the
pipeline system, has made it more difficult to maintain adequate
stockpiles of some gasoline blends. Several pipeline operators said that
the interval between when a fuel is available from the pipeline may be 10
days or longer if capacity is not available on the pipeline-requiring that
many days' worth of fuel to be stored at the terminal. Increasing demand
for gasoline combined with this longer period between shipments, and
limited terminal storage, increases the likelihood that some areas will
run out of gasoline while waiting for a shipment. One pipeline operator
said that the terminals that they served did not run out of gasoline from
1995-1996, but that now one terminal per month runs out of fuel. One
terminal operator explained that running out of gasoline can be very
harmful to their business because terminal operators rely on retailers and
independent gasoline tanker trucks to regularly visit their
stations-visits that may not occur if their supplies are inconsistent. In
addition, the operator told us that, when tanks are pumped dry and later
refilled, they can release up to 1 ton of VOCs, which

contributes to pollution. While the terminal operators we spoke with said
they are generally able to maintain sufficient gasoline storage, they can
run short of some fuels when demand is high or pipeline deliveries are
delayed or interrupted. One operator noted that they increase their
wholesale gasoline prices as their available supplies fall in an effort to
reduce their sales and retain some gasoline for sale and avoid running
out. The terminal operators we interviewed did not provide us data on the
number of instances when they ran out of gasoline, but they said that the
number has significantly increased in recent years.

    Special Blends Limit Supply Options in Wholesale Markets When Local Supply
    Disruptions Occur

According to operators of independent retail gasoline stations that buy
from the wholesale markets, they have more limited supply options as a
result of the presence of special gasoline blends. According to an
industry representative, some gasoline retailers affiliated with, or owned
by, large oil companies (so-called "integrated" oil companies, such as
ExxonMobil and ChevronTexaco) receive their gasoline-referred to as
branded gasoline-only from these companies, generally paying slightly more
for it. However, other companies that are not affiliated with these
integrated oil companies, referred to as independent retailers, typically
purchase gasoline from a variety of suppliers including, but not limited
to, integrated oil companies and typically purchase gasoline at the lowest
price available from nearby fuel terminals. As a result of this and other
factors, independent retailers said that they generally sell gasoline at a
lower price than branded gasoline stations. According to some, the
introduction of special gasoline blends may increase the market power of
some refiners. In its 2001 white paper, EPA noted that the development of
special blends limits competition in the refining sector because some
blends are small, and only a few refiners may choose to make some blends.
Consistent with this view, independent retailers told us that they have
had fewer choices in some markets near where special gasoline blends are
required because some refineries and fuel terminals no longer sell
gasoline for those markets, and that they have tended to pay higher prices
in those areas. For example, one large independent retailer operating
retail gas stations on the East Coast told us that the number of
refineries producing gasoline for the market they serve fell from 12 to 3
after the introduction of special gasoline blends-leaving the retailer
with fewer options to identify the lowest cost supplies. Special gasoline
blends have also complicated the ability of some large entities to enter
local gasoline markets. Officials with a large company that has entered
several local gasoline markets across the country as an independent
retailer told us that obtaining sufficient supplies at reasonable prices
is more difficult in markets where special gasoline

blends are used and that limited supply options have reduced the company's
ability to enter and compete in some of these markets.

The plight of independent retailers is particularly pressing when
traditional supplies are disrupted. The independent retailers that we
spoke with said that their prices generally increase first and that they
may not have access to fuel supplies provided to branded retailers if
supplies are disrupted. Before special gasoline blends, these independent
retailers were able to truck fuel in from nearby cities or neighboring
states, however, because some gasoline blends may not be used anywhere
else, or they may only be used hundreds of miles away, this is a more
difficult and costly option today. For example, several industry officials
noted that, if supplies of California gasoline are disrupted, they would
expect prices to rise and that it could take weeks for additional supplies
to arrive. They said that nearby suppliers capable of blending
California's gasoline blend are generally operating close to their full
capacity. In the event that these supplies are disrupted, additional
supplies generally come from Western Canada, the Gulf Coast, the
Caribbean, or farther away, because there are only a few refineries
capable of making this special gasoline blend and, as a result, supplies
could take 3 weeks or more to arrive.

  Areas That Use Uncommon Special Gasoline Blends Tend to Have Higher and More
  Volatile Gasoline Prices

Among the 100 cities we examined, the highest wholesale gasoline prices
tended to be found in cities that used a special gasoline blend not widely
available in the region or that is more costly to make than other blends.
Cities that are far away from major refining centers or other sources of
gasoline also tended to have high prices. Prices also tended to be more
volatile in cities having one or more of these characteristics. Other
studies have also found higher and/or more volatile prices in some cities
that use special gasoline blends. Greater complexity and higher refining,
transportation, and storage costs associated with supplying special
gasoline blends have likely contributed to increased gasoline prices
overall, and for specific special blends, but it is not possible to
conclusively determine the extent to which special gasoline blends have
caused the higher prices and greater volatility found in specific cities.

We Found Higher and More We examined data from 100 selected cities to
determine how prices varied Volatile Gasoline Prices in across areas that
use special gasoline blends versus conventional gasoline Cities That Use
Special and found that, with some exceptions, the highest and most
volatile Blends gasoline prices tended to be found in cities that used
special gasoline

blends that are uncommon or particularly expensive to make, or in cities
that are long distances from major refining areas. Each of these factors
tends to isolate a city from the overall gasoline market by limiting the
available supplies of gasoline from other areas in the event there is a
supply shortfall in that city.

With regard to special gasoline blends, the data show that most of the 20
cities with the highest average prices over about the past 4 years
(December 2000 through October 2004) used special gasoline blends, most of
them formulated to meet stringent emissions standards. In many cases,
these cities used a fuel that is not widely used outside their area, or in
some cases is unique to that city or state. For example, the five
California cities in the data set are all in the top 20 cities with
respect to gasoline prices. California's gasoline is the cleanest-burning
gasoline and, in order to make it, California's refineries have invested
substantial capital in new refining processes. Further, only a few
refineries outside of California routinely make California gasoline, the
closest of which is in Northern Washington. The uniqueness of California's
gasoline has been noted by many sources as likely contributing to
California's high gasoline prices relative to the rest of the country. For
the period we examined, the five cities we looked at in California had
average prices ranging from about 24 to 26 cents per gallon more than the
city with the lowest price (Meridian, Mississippi), which uses
conventional gasoline and is located near the large refining center in the
Gulf Coast. The table in appendix II shows the price data and gasoline
blend types for each of the 100 cities we evaluated. Some of the cities
with the highest prices used conventional gasoline year-round, but most of
these are far from major refining areas or are located on or near a single
smaller pipeline. Average prices in these top 20 cities were between 14
and 41 cents per gallon more than in the city with the lowest price.

Using ethanol as an additive to gasoline is associated with higher
wholesale gasoline prices. To evaluate this, we examined national average
prices for gasoline blends containing ethanol. For example, for the nation
as a whole, average prices for conventional gasoline with ethanol were
about 4 cents per gallon higher than conventional without ethanol over the
time period we analyzed. The switch to using ethanol, as opposed to MTBE,
was also associated with higher gasoline prices.21 For example, in the
years 2001-2003, during which California phased out MTBE and phased in

21As discussed in this report, the switch to ethanol from MTBE has largely
been the result of MTBE's tendency to contaminate ground water sources.

ethanol, the average summer price of gasoline with ethanol was between
about 4 and 8 cents per gallon more than the price of gasoline with MTBE.
Similarly, over the period 2001-2004, the average summer price for federal
reformulated gasoline with ethanol was between about 6 and 13 cents per
gallon more than for federal reformulated gasoline with MTBE.

In contrast to the highest-priced cities, the 20 cities with the lowest
average wholesale gasoline prices over the period typically used common
gasoline blends and/or were located near a major refining center-most
often near the Gulf Coast, the largest refining center in the country in
terms of both numbers of refineries and total refining capacity. For
example, among the 20 cities with the lowest prices, 8 used conventional
gasoline-the most widely available gasoline blend. Conventional gasoline
is used extensively across the United States, and most cities that use it
are surrounded by areas using the same gasoline. Another 9 cities with the
lowest prices used 7.8 RVP gasoline-the most widely used of the special
blends and the one formulated according to the least stringent emissions
standards. Most of the 7.8 RVP gasoline is used in areas close to the Gulf
Coast refining center. In addition, refiners told us that making 7.8 RVP
gasoline is simpler and less costly than some of the other blends, so it
may be more available from refineries in the event of a local supply
shortfall. The other 3 cities with the lowest prices used less common
special blends but are all close to the largest refining center, the Gulf
Coast and, therefore, have many more potential supply options than more
isolated cities do.

We found similar results with regard to the volatility of gasoline
prices.22 For example, 18 of the 20 cities with the most volatile prices
used special blends of gasoline, and many of these cities were also among
the highest-price cities. In contrast to the cities with relatively high
price volatility, 17 of 20 cities with the lowest volatility use either
conventional or 7.8 RVP gasoline. However, while prices for special blends
tend to be higher and more volatile than prices for conventional gasoline,
available data did not allow us to attempt to isolate the effects of
specific special gasoline blends on gasoline prices or to definitively
establish a causal link between specific special blends and price
volatility. Specifically, we did not have sufficient data to control for
all other potential contributing

22We measured volatility for each city as the standard deviation across
time of the city price minus the price of West Texas Intermediate crude
oil-a widely used benchmark for crude oil, the principle physical input
into gasoline. A more detailed description of our methodology can be found
in appendix I.

factors-such as the distance from cities to the sources of gasoline
supply, or other specific features of these cities that might influence
prices regardless of the blend of gasoline used.

    Other Studies Have Found Similar Results

We reviewed the literature associated with special gasoline blends and
gasoline prices and found a number of studies done by government,
academic, and private entities. The results and conclusions of these
studies were largely consistent with our findings. For example, a recent
EPA study found that high prices and price volatility are most acute in
isolated markets, particularly those using special gasoline blends.23 The
study also pointed out that some states had adopted specific gasoline
blends in an attempt to use a blend that had a lower refining cost than
federal reformulated gasoline. EIA also studied these blends and
concluded, among other things, that the increasing number of distinct
gasoline blends has reduced the flexibility of the supply and distribution
system to respond to unexpected changes in supply and demand for gasoline.
EIA further pointed out that, in some cases, states have chosen low RVP
gasoline blends in an attempt to achieve lower gasoline prices than if
they had used federal reformulated gasoline, and they inadvertently may
have added strain to the distribution system, leading to greater potential
for price volatility. A number of other academic and private studies found
similar results.

    Special Gasoline Blends Contribute to Higher and More Volatile Prices, but
    Available Data Are Insufficient to Control for all Other Factors

There is a broad consensus among the experts and others we spoke with that
the proliferation of special gasoline blends have contributed to increased
and more volatile gasoline prices. The studies we reviewed also came to
similar conclusions. Further, the greater complexity and higher refining,
transportation, and storage costs associated with supplying special
gasoline blends have almost certainly resulted in increased prices or
volatility, either because of more frequent or severe supply disruptions,
or because higher costs are likely passed on, at least in part, to
consumers. For example, depending on the pipeline company, costs
associated with downgrades or transmix are recovered from customers. At
least part of these costs are, in turn, likely to be passed down the
supply chain and eventually to consumers of gasoline. Similarly, the costs
incurred to install

23EPA Staff White Paper, Study of Unique Gasoline Fuel Blends ("Boutique
Fuels"), Effects on Fuel Supply and Distribution and Potential
Improvements, EPA420-P-01-004, Office of Transportation and Air Quality,
U.S. Environmental Protection Agency: October 2001.

new processes to make special gasoline blends are likely passed on, at
least in part, to consumers because refining companies would not make
these investments without a reasonable expectation of a return on their
money.

While it is, therefore, almost certain that special gasoline blends have
been a contributing factor to higher gasoline prices, it is not possible
with the data available to us to conclusively determine the extent to
which these blends have caused the higher prices and greater volatility
found in specific cities or to rule out other potentially contributing
factors. Such other factors may include specific supply infrastructure
problems in or around these cities that would impact gasoline prices
regardless of the blend. For example, state and industry officials in
California told us that marine terminals for off-loading gasoline and
other petroleum products are in short supply in California, which
constrains the ability of suppliers in the state to receive these products
from outside the state in the event of a local supply shortfall. These
constraints would potentially contribute to higher gasoline prices
regardless of which blend is used. Another potential factor that might
influence gasoline prices independently of gasoline blends is the level of
competition in the petroleum products industry. For example, in a recent
GAO report, we found that oil company mergers had contributed to a 1 to 2
cent per gallon increase in conventional gasoline prices in the 1990s and
as high an increase as 7 cents per gallon for California's special
gasoline blend. In addition, there may be other such factors at play that
we do not observe, so we cannot definitively determine the precise extent
to which observed prices are the result of the proliferation of special
gasoline blends.

Conclusions	Special gasoline blends have reduced emissions and helped
contribute to improved air quality in some parts of the country. Using
special gasoline blends to achieve air quality standards is attractive to
states; the blends offer immediate reductions in emissions from all
vehicles already on the road by varying degrees. Unfortunately, EPA's
knowledge about the emissions generated when special gasoline blends are
burned is outdated. Much has changed regarding vehicle and emissions
control technologies since special gasoline blends, including those with
ethanol, were last comprehensively tested in automobile engines. However,
EPA and the states continue to rely on models built largely around these
dated findings when evaluating whether to allow states to use special
blends as a component in their efforts to improve air quality. Given the
significant changes in vehicles and fuels, EPA should have better
information about how the current fuels affect the vehicles currently on
the road. In addition,

Congress should have better information regarding the effectiveness of
these blends, particularly those containing oxygenates such as ethanol, to
aid in setting policy on fuel blends and the use of oxygenates.

Although special blends have helped reduce emissions and improve air
quality, the introduction of these blends appears also to have divided the
gasoline market, converting what had been closer to a single national
commodity market, into islands of smaller and more local markets for
blends of gasoline that are typically not interchangeable. Because of
octane, seasonal, and other differences, each additional special blend
that is added can require pipelines and fuel terminals to handle several
additional blends. Overall, this transformation of the gasoline market has
complicated the supply infrastructure, increased production and delivery
costs, and reduced the availability of gasoline, in some cases. The
impacts of the proliferation of special gasoline blends are most evident
when there is a disruption in the supply chain, such as when a refinery or
pipeline is shut down. In these instances, localities using a blend
different from the gasoline used in nearby areas must seek replacement
supplies from farther away, leading to delays that likely cause higher and
longer price spikes until these supplies arrive. Overall, it is likely
that gasoline prices are higher now than they would be if gasoline were
closer to a single commodity.

In light of the opposing effects of environmental benefits and negative
market implications, an ideal policy for approving the use of special
gasoline blends would balance these effects. However, each decision
involves trade-offs that all stakeholders may not value equally.
Specifically, different stakeholders may attach varying degrees of
importance to the environmental benefits or the impacts on gasoline supply
infrastructure. Further, individual state actions that impact the entire
regional supply infrastructure may not fully take those impacts into
account or, in some cases, even accurately predict the impact on their own
gasoline supply. With the 8-hour ozone rule and other regulatory changes
likely to lead to more applications to use special gasoline blends,
balancing the emissions effects of specific gasoline blends against the
implications for supply and price will be even more important in the
coming years. While EPA is currently authorized to approve state
applications to use special gasoline blends, the agency cannot effectively
weigh environmental and supply considerations because it does not have
authority to deny state requests to use these blends on the basis of
regional supply or price considerations and because its information on the
environmental benefits is dated.

  Recommendation for Executive Action

To provide a better understanding of the emissions impacts of using
special gasoline blends and these blends' impacts on the gasoline supply
infrastructure, we recommend that the EPA Administrator direct the agency
to take the following four actions: (1) work with states and other
stakeholders to comprehensively analyze how various gasoline blends affect
the emissions of vehicles that comprise today's fleet, including how
overall emissions are affected by the use of ethanol and other oxygenates;
(2) use this updated information to revise the emissions models that
states use to estimate the emissions and air quality benefits of these
fuels and provide this information to Congress; (3) work with states, the
Department of Energy, and other stakeholders to develop a plan to balance
the environmental benefits of using special gasoline blends with the
impacts on gasoline supply infrastructure and prices, and report the
results of this effort to Congress; and (4) work with the states, the
Department of Energy, and any other appropriate federal agencies to
identify what statutory or other changes are needed to achieve this
balance and report these findings to Congress and request that Congress
provide these authorities to the appropriate federal agency or agencies.

Agency Comments and 	We provided a copy of our draft report to EPA for
comment. The agency did not comment on our findings or recommendations but
did provide

Our Evaluation technical comments that we have adopted, as appropriate.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies to other appropriate
congressional committees and the Administrator of EPA. We also will make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-3841 or [email protected] Contact points for our Office of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who contributed to this report are listed in
appendix II.

Jim Wells Director, Natural Resources and Environment

Appendix I

Scope and Methodology

To determine the extent to which special gasoline blends are used in the
United States and how, if at all, this use is expected to change in the
future, we reviewed related literature, reviewed data on the use of these
fuels, and interviewed government and other officials. Specifically, we
reviewed reports on the presence and use of special gasoline blends by the
Environmental Protection Agency (EPA), the Energy Information
Administration (EIA), and others. We also examined data on the use of
special gasoline blends provided by EPA, ExxonMobil (a commonly mentioned
source of information on use of special gasoline blends), the Oil Pipeline
Information Service, state environmental agencies and others. In addition,
we interviewed federal and state government officials, academic and
industry experts, and industry officials. Specifically, we interviewed
officials with the EIA and EPA in Washington, D.C., as well as officials
with EPA's Office of Transportation and Air Quality in Ann Arbor,
Michigan, and officials in each of the 10 EPA regional offices. We also
interviewed representatives from industry trade associations including the
American Petroleum Institute, the Renewable Fuels Association, the
National Petrochemical Refiners Association, the Association of Oil
Pipelines, the National Association of Convenience Stores, the Alliance of
Automobile Manufacturers, and the Society of Independent Gasoline
Marketers and with representatives from the National Governors
Association. In addition, we interviewed academic and industry experts,
and industry officials from companies involved in refining, terminal
operations, and pipeline operations, as well as from large oil companies.
We also conducted site visits in California, Louisiana, New Jersey,
Pennsylvania, and Texas-states with large refining sectors and/or
organizations with experience with producing and using special gasoline
blends.

To document what EPA and others have determined regarding the role of
special gasoline blends in reducing vehicle emissions and improving
overall air quality we reviewed related literature, interviewed federal,
state, and other officials, and examined emissions estimates provided by
EPA. Specifically, we examined reports on the emissions impacts of special
gasoline blends done by EPA, the Auto/Oil Air Quality Improvement Research
Program (AQIRP), National Research Council, state environmental agencies,
and others. In addition, we interviewed federal and state government
officials, academic and industry experts, and industry officials.
Specifically, we interviewed federal officials at EPA and EIA, staff at
state environmental offices, researchers associated with the National
Academies of Science and the National Research Council, representatives
from industry trade and health advocacy associations, including the
American Petroleum Institute, the Renewable Fuels

Appendix I Scope and Methodology

Association, the National Petrochemical Refiners Association, the
Association of Oil Pipelines, the National Association of Convenience
Stores, the Alliance of Automobile Manufacturers, the Society of
Independent Gasoline Marketers, and the American Lung Association. In
addition, we interviewed academic and industry experts, and industry
officials from companies involved in refining, terminal operations, and
pipeline operations, as well as from large oil companies. To assess the
reliability of emissions analyses, we reviewed the analyses' overall
design and methodologies, including assumptions and inputs to modeling.
Automobiles emit a number of harmful pollutants; however, some have been
identified as potentially more significant than others. The Clean Air Act
authorizes EPA to mitigate potentially harmful concentrations of major
criteria pollutants, including carbon monoxide (CO), nitrogen dioxide
(NO2), sulfur dioxide (SO2), ozone (O3), particulate matter (PM) and lead
(Pb). GAO focused its analysis on VOC, NOX-important precursors to
ozone-and CO emissions because the transportation sector is responsible
for a large fraction of VOC, NOx, and CO emissions in the United States
and, as a result, the Clean Air Act and EPA have specified the reduction
of these pollutants through fuel control programs.

To identify what effects, if any, special gasoline blends have on gasoline
supply in the United States, we examined literature reporting on the
effects of special gasoline blends on gasoline supply, interviewed
government officials and a wide cross section of industry participants.
Specifically, we interviewed agency officials with EPA, EIA, the Federal
Trade Commission, and state regulatory agencies. In addition, we
interviewed representatives from industry trade associations, including
the American Petroleum Institute, the Renewable Fuels Association, the
National Petrochemical Refiners Association, the Association of Oil
Pipelines, the National Association of Convenience Stores, the Alliance of
Automobile Manufacturers, and the Society of Independent Gasoline
Marketers. We also interviewed petroleum industry officials from companies
involved in refining, terminal and pipeline operations, and marketing,
including interviews with senior industry officials from several
integrated oil companies such as ExxonMobil, ChevronTexaco, five operators
of large pipeline systems that carry multiple gasoline blends, several
operators of terminals, and three large independent marketers of gasoline
that buy wholesale gasoline and sell it to retail customers. We also
conducted site visits in California, Louisiana, New Jersey, Pennsylvania,
and Texas-states with large refining sectors and/or organizations with
experience with producing and using special gasoline blends.

Appendix I Scope and Methodology

To determine how these blends affect gasoline prices, we examined the
literature on gasoline prices, interviewed industry officials and experts,
and analyzed wholesale gasoline price data. We reviewed reports on the use
of specials gasoline blends and gasoline prices done by EPA, EIA, and
others. We also interviewed government officials and industry experts
including federal officials at EPA and EIA; staff at state environmental
offices; academic and industry experts; petroleum industry officials from
companies involved in refining, terminal operations, and pipeline
operations, as well as from large oil companies; and representatives of
trade associations.

In addition, we evaluated data on wholesale gasoline prices in 100 cities
provided by the Oil Price Information Service (OPIS), as well as data on
national average prices1 from the same source-these national data covered
all the terminals in the country for which OPIS collects data. The data
were weekly average prices from terminals selling gasoline at wholesale
and covered the period from December 2000 through October 2004. In
choosing which cities to evaluate, we first selected all cities on major
pipelines. Then we selected the largest cities in each state and in each
contiguous area that used a special gasoline blend. In so doing, we chose
at least one such city from each contiguous area in the United States that
we determined used a special blend of gasoline. Then, we chose cities in
areas that use conventional gasoline, using similar criteria-every
conventional-gasoline city chosen was the largest city in its respective
state that was on a major pipeline. We did not estimate an econometric
model to try to isolate the effects of specific special blends because we
felt we lacked sufficient data to control for all other potential
contributing factors-such as specific features of these cities that might
influence prices regardless of the blend of gasoline used or the degree of
competitiveness in the gasoline supply industry. Instead, we ranked the
100 cities according to the mean of their gasoline prices to determine if
there were consistent patterns with respect to areas that use special
gasoline blends versus areas that use conventional gasoline. To calculate
the mean, we first created price differentials between each week's price
in each city and the price per gallon of West Texas Intermediate crude
oil-a commonly used benchmark for world crude oil prices. These crude oil
prices came from Platts, a

1Wholesale prices are the prices reported by fuel terminals and did not
include any relevant taxes. According to OPIS, in some cases fuel
terminals may have reported tax credits available for ethanol fuels in the
prices that they reported, but they acknowledge that past reporting may be
inconsistent in this regard.

Appendix I Scope and Methodology

common source for crude oil and petroleum product prices. For each city,
we performed a statistical test comparing the average prices between each
city and two comparison cities in Texas2.

We also ranked the cities according to the standard deviations of their
prices over time and looked for similar patterns. To calculate the
standard deviations, we again created price differentials between each
week's price in each city and the price per gallon of West Texas
Intermediate crude oil. Creating a differential between gasoline and crude
oil prices controls for some volatility in gasoline prices that is caused
by changes in the price of crude oil, the fundamental raw material input
in gasoline. Then, we calculated the standard deviation over time for each
city for these price differentials. The standard deviation is a common
measure of the variability of data and, in this case, is a measure of how
much the prices in each of the cities varied over time, controlling for
crude oil prices. For each city, we performed a standard test for
statistical significance of the difference of the variability between that
city and the city with the lowest standard deviation.3

2Specifically, we performed a sign test. See, for example, R.V. Hogg and
A. T. Craig, Introduction to Mathematical Statistics. 4th ed. (New York:
Macmillan, 1978): 312-314. We use the sign test because it tests the
equality of matched pairs of observations without imposing further
assumptions on the underlying distributions. The results of this test
showed that all the highest 20 city prices were statistically
significantly greater than in the low price comparison city.

3H. Levene, "Robust tests for equality of variances," ed. I. Olkin,
Contributions to Probability and Statistics (Palo Alto: Stanford
University Press, 1960): 278-292. We use the Levene test because the
conventional F test is very sensitive to the assumption that the data are
drawn from a Normal distribution, an assumption that does not necessarily
hold for the gasoline price data. This test indicated statistical
significance for the difference between the variances of most of the
highest volatility cities compared to the lowest volatility city.

Appendix II

                     GAO Contact and Staff Acknowledgments

                      GAO Contact Jim Wells (202) 512-3841

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(360504)

In addition to the individual named above, Mark Bondo, Jon Ludwigson,
Kristen Massey, John Mingus, Cynthia Norris, Frank Rusco, Barbara
Timmerman, and Kim Wheeler-Raheb made key contributions to this report. In
addition, important contributions were made by Diane Lund, Dawn Shorey,
and Mary Welch.

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