This morning’s NPR story was about refineries. The reporter visited our Valero Refinery here in Corpus Christi to gather information for his report, and climbed the ladders on cracking towers to get a feel for how things operated.
He described the problem of cost as it related to EPA requirements fairly well. Then he left it to an environmentalist to rebutt the claim that increased emissions standards caused increases in fuel costs. The implication was that oil companies attribute all the current increases to environmental regulation. The expert disputed that saying the rules added only about 10-20 cents to each gallon.
I don’t think I’ve ever heard anything from the oil companies that claimed such a thing. But I always wonder when someone who is an activist of any kind ever fully comprehends what costs actually are. Without having been in the engineering, management, or accounting system of an industry, how can you reasonably determine such a thing?
Capital investment can be a shadowy thing. There are costs involved which outsiders never think about. Consider, for example, replacing a cooling tower at a facility. The expense of the tower is only a small part of the cost. There is interest on that money (loss of interest if cash is used, or interest on a loan), the cost of engineering to develop a specification and statement of work, cost of legal review of a contract, cost of coordination with local, state, and government regulators, cost of disposal of the old tower, cost of any hazardous material abatement, and cost of downtime in the facility. Many more issues increase the cost.
The reporter said that “streamlining” (you could hear the scare quotes in his voice) EPA requirements, as the Bush Administration wants to do, would increase the sulfer content of gasoline, and cause health problems for Americans. Common misperception of “streamlining”.
What the EPA currently requires is that a facility which upgrades its processes and adds any environmental improvements must make the same environmental upgrade in the entire facility. What the administration wants to do is allow companies to make improvements.
The EPA requirements are akin to making you replace every window in your house with a more energy-efficient model if you break a pane and replace that single window. A lofty goal, right? Unfortunately, companies cannot afford that large a capital outlay at a given time. Every company would like to improve the efficiency of their physical plant at the earliest convenience. It improves their profit. But given the choice between going under and not making any changes, companies won’t make changes. That is what streamlining addresses. That is how loosening EPA requirements actually improves the environment.
If the company has ten cooling towers, as in the example above, they can replace them one at a time over a period of years. Does that improve the environment? Yes, and the company remains solvent. In fact, it probably improves profits at the same time. I get the impression that environmental activists would actually prefer to see companies fold. Then they produce nothing that endangers the environment.
Wouldn’t it be nice if none of us had a job? We’d never have to work again!
We should also note that environmental regulation isn’t the sole environmental cost driver. There’s also unlimited potential liability for discharges or other calamities. Companies have been bankrupted by judgments on a single spill of a “hazardous substance.”
Oil companies and refiners must carry insurance against such possibilities, and it costs them big time. The costs must be passed on to the consumer as part of the product’s price.
Comment by Francis W. Porretto — May 28, 2004 @ 9:43 am
Very few will truly try and understand the oil business. It’s much easier to blame “big oil” for everything from enviro problems to the high price of gasoline, than to be more introspective and see that the real problem is America’s high fuel consumption addiction.
Comment by Wallace — May 28, 2004 @ 10:28 am