No Knocks Yet for New Gas : Less-Toxic Fuel Is Here; Higher Prices May Follow

The air in Southern California is already slightly cleaner today than it was a month ago because of the latest gasoline required by a federal law that officially takes effect Sunday.

Most drivers in the air basin covering Los Angeles, Orange, San Bernardino and Riverside counties have been using the new fuel for the past few weeks as it has steadily replaced conventional gasoline at service stations ahead of the New Year’s deadline.

So far, no complaints have been heard from consumers about the new mix, known as reformulated gas, according to the U.S. Environmental Protection Agency, which administers the rule mandated by the federal Clean Air Act.

“We have not had any reports of performance problems,” said Dave Schmidt, a spokesman in the EPA’s San Francisco office.

The EPA has found that one component of the new gas, which improves combustion by introducing extra oxygen, could result in an almost undetectable 1% to 2% reduction in mileage. But Schmidt noted that Southern California drivers have used such oxygenated fuel without much notice for the past few winters, under a separate regulation.

So far, retail prices for the new fuel have yet to rise, though reformulated gasoline is more expensive to produce. However, oil experts caution that gas prices in Southern California could rise substantially over the next two years because of changes in the refining process to meet federal and state standards.

The latest fuel change is aimed at cutting gasoline toxins and smog-forming substances--which damage lungs and have been linked to cancer--by 15% from 1990 levels in the nation’s smoggiest cities.

The re-brewed gasoline will be the only fuel available in the Los Angeles area and eight other cities, as well as other less smoggy regions that have voluntarily opted to use the gas to cut their own air pollution. In all, a third or more of U.S. drivers will be using the new formulation, which is required for all octane grades.

Particularly in the past decade, public health laws requiring cleaner-burning gasoline have been implemented one after another--and more are coming over the next five years. Ending air pollution has been much more difficult than early Los Angeles regulators had hoped, some of whom predicted that smog would be gone by 1970.

Perhaps the toughest change of all takes hold in California a year from now, when gasoline must become even cleaner--and therefore more expensive--under state regulations known as CARB II, shorthand for the second phase of reformulation required by the California Air Resources Board.

“CARB II is the most severe reformulation of any gasoline in the world,” said D.J. Youngblood, general manager of environment, health and safety for Texaco Refining & Marketing in Universal City.

Converting refineries to make different fuels can be expensive, and these costs are inevitably passed along to consumers.

Investments to enable California refineries to make the current reformulated gasolines and diesel will total $5 billion to $7 billion, according to Purvin & Gertz Inc., a refining consulting firm with offices in Long Beach.

Oil industry experts and federal and state regulators estimate it will cost refiners up to 6 cents a gallon more to produce the new fuel due Sunday. As for CARB II gasoline, the same experts expect it will cost 6 cents to 8 1/2 cents a gallon more to produce.

Some oil industry planners say California gasoline could rise as much as 17 cents a gallon at the pump by mid-1996, depending on what happens to crude oil supplies and prices. Much also depends on how refining, wholesale and retail profit margins fare under the changes.

Historically, confusion in the marketplace has offered a chance to widen profit margins. Unleaded gasoline was expected to cost refiners 3 cents to 5 cents a gallon more to make than conventional fuel. But retail prices at the pump increased from 5 cents to 15 cents, an EPA fuels expert recalled recently. Refiners today, who have lately been squeezed by unusually tight margins, might see opportunity in rising prices.

But many refiners say they are worried that in highly competitive gasoline markets such as Southern California, they may have trouble passing along the extra costs of refining, let alone gaining a shade more profit.

Interestingly, prices haven’t risen yet.

In the latest Lundberg Survey, analyzed in mid-December, regular unleaded self-serve gasoline in Los Angeles averaged $1.26 a gallon, down almost a cent from two weeks before. The American Automobile Assn., which has been tracking costs weekly in cities where the new gasoline is required, has also found pump prices dropping nationwide.

Analyst Trilby Lundberg suspects that several factors could be keeping prices low.

“There has been energetic price cutting of conventional gasoline to purge it from the system, to make way for the new reformulated gasoline,” Lundberg said.

And crude oil prices, which are sooner or later reflected in gasoline prices, have been falling for more than a month, Lundberg said. That could offset the higher cost of the new fuel.

Meanwhile, refiners have been careful to see that adequate supplies of the new fuel are on the market at the same time they have cut prices to lower inventory of conventional gasoline by the end of the taxable year, Lundberg said.

“Refiners have cushioned themselves, and the benefit for the moment has come to the consumer,” Lundberg said.

But few service station owners expect that to last.

Gene Doms, owner of a Unocal station in Mission Viejo, has cut his pump prices slightly in recent weeks, but he expects his wholesale suppliers to start raising fuel costs in January.

“There’s a number of us sitting around waiting for the other shoe to drop,” Doms said.