De minimus cost to refineries not likely to impact consumers
CHICAGO – June 14, 2012 - Navigant (NYSE: NCI) announced today that a new study by Navigant Economics analyzes the economic and health implications of the EPA’s proposed Tier 3 regulation of sulfur in gasoline. Mandating a reduction in the level of sulfur in gasoline generates private costs in terms of equipment upgrades by U.S. oil refineries, but it also generates social benefits in terms of improving the environment, reducing the cost of Tier-3 compliant vehicles for consumers, and generating economic output and employment from the installation and operation of the refinery modifications. The study’s authors, Drs. George Schink and Hal Singer, both Managing Directors with Navigant Economics, conclude that the benefits of the sulfur-reduction program would vastly exceed its costs.
Setting aside the offsetting social benefits, Schink and Singer show that the private modification costs to U.S. refineries, when expressed on a cents-per-gallon basis, are de minimus: the retail price of gasoline would rise by at most one cent per gallon.
“To reach that one-cent-per gallon estimate, however, refineries must pass 100 percent of their (largely fixed) cost increases along to consumers,” comments Singer. “But a statistical analysis of prior EPA sulfur regulations suggests that refineries do not adhere to that practice.”
In particular, Tier 2 sulfur-reduction rules increased refineries’ costs by two cents per gallon, nearly twice the projected cost impact of the planned Tier 3 rules. Using a regression analysis, which controlled for other factors that affect gasoline prices, Schink and Singer show that the Tier 2 regulations had no material impact on the U.S. retail price of gasoline, suggesting that U.S. refineries could not pass on their increased compliance costs to consumers. Because the cost impact of Tier 3 sulfur-reduction rules is roughly half that of Tier 2 regulations, the authors conclude that retail prices (and hence consumers) would be largely immunized from higher gasoline prices as a consequence of the proposed Tier 3 regulation.
With respect to the benefits of the proposed rule change, Schink and Singer estimate that the health benefits from cleaner air alone (between $5 and $6 billion by 2020) would exceed the private costs to refineries. Finally, the authors use an input-output model to calculate the nationwide employment effects of installation and operation of the refinery upgrades needed to comply with the Tier 3 gasoline sulfur content standards. According to their estimates, installation of the refinery modifications produces almost 24,500 jobs for full-time equivalent employees with total associated employee compensation of $1.2 billion for each of the three years of installation. The continuing annual operation of the refinery modifications produces almost 5,300 jobs for full time equivalent employees with total associated employee compensation of $0.3 billion.
Navigant Economics provides economic and financial analysis of legal and business issues to law firms, corporations and government agencies. It includes more than 30 Ph.D. economists and over 100 consulting professionals, many of whom are affiliated with leading academic institutions including the University of Chicago, Georgetown University, Northwestern University and the George Mason University School of Law. More information about Navigant Economics can be found at www.naviganteconmics.com
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