"Boutique Fuels" and Reformulated Gasoline: Harmonization of Fuel Standards

"Boutique Fuels" and Reformulated Gasoline: Harmonization of Fuel Standards

Order Code RL31361
CRS Report for Congress
Received through the CRS Web
“Boutique Fuels” and Reformulated Gasoline:
Harmonization of Fuel Standards
Updated May 10, 2006
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

“Boutique Fuels” and Reformulated Gasoline:
Harmonization of Fuel Standards
Summary
The current system of gasoline standards in the United States is complex.
Because of federal and state programs to improve air quality, and local refining and
marketing decisions, suppliers of gasoline face many different standards for fuel
quality. As a result, fuels are formulated to meet varying standards. State and local
decisions overlap with federal requirements, leading to situations where adjacent or
nearby areas may have significantly different standards. These various fuel
formulations are often referred to as “boutique fuels.” In this system, supply
disruptions can result if fuel from one area cannot be used to supply another area.
Because of potential supply concerns, there is interest in simplifying
(harmonizing) the system so that regional or national standards are consistent.
However, the competing goals of air quality, supply stability, and costs make
harmonizing the system a complex process.
Adding to these complications are concerns over methyl tertiary butyl ether
(MTBE), a common gasoline additive that has been detected in groundwater in
numerous states. At least 25 states have passed legislation to ban or limit the use of
MTBE.
On August 8, 2005, President Bush signed the Energy Policy Act of 2005 (P.L.
109-58). Among other provisions, P.L. 109-58 addressed several boutique fuels
issues. As a result of P.L. 109-58, a key component of the federal reformulated
gasoline (RFG) program was eliminated May 6, 2006. This requirement, which
gasoline suppliers asserted was a de facto MTBE requirement, was used by gasoline
suppliers as a defense against liability for MTBE contamination. Therefore, while
P.L. 109-58 actually gives the industry more flexibility, the industry moved quickly
to eliminate MTBE from the gasoline supply in spring 2006. This increased pressure
on already tight refining capacity. The loss in volume and energy from eliminating
MTBE increased demand for gasoline, as well as ethanol. Exacerbating the supply
problem was the fact that the industry was making the transition from winter gasoline
to more stringent summertime air quality specifications, which adds competition for
the highest-quality gasoline components. These pressures, along with historically
high crude oil prices, led to historically high gasoline prices. Further, some localized
areas faced short-term supply disruptions as refineries made the transition.
This report discusses how gasoline composition is regulated and explains the
various federal and state gasoline standards. Next, the report presents some of the
key issues with the federal RFG program. Some of the problems associated with
boutique fuels are discussed, as well as some of the potential effects of
harmonization. Finally, congressional actions in the 109th Congress related to
boutique fuels, RFG, and harmonization, including the passage of P.L. 109-58, are
discussed.
This report will be updated as events warrant.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What Are “Boutique Fuels”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What Is the Concern over Boutique Fuels? . . . . . . . . . . . . . . . . . . . . . . 1
Why Not Simply Require One Fuel Across the Country? . . . . . . . . . . . 2
Harmonizing Standards Would Be a Complex Process . . . . . . . . . . . . . 2
Organization of Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Gasoline Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Changing Gasoline Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
General Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Nitrogen Oxides (NO ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
x
Heavy Metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Toxic Compounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sulfur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Oxygen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Federal Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Conventional Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Reformulated Gasoline (RFG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Low Volatility Conventional Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . 5
Oxygenated Fuel (Oxyfuel) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
State Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
California Cleaner-Burning Gasoline (CBG) . . . . . . . . . . . . . . . . . . . . 6
Elimination of the Federal RFG Oxygenate Standard Under P.L. 109-58 . . 6
The Debate Over the RFG Oxygen Standard . . . . . . . . . . . . . . . . . . . . . 7
Issues in the Spring of 2006: MTBE Phase-Out and Ethanol Supply . . 8
Renewable Fuels Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Harmonizing Gasoline Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Production Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Production Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Supply Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Air Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
State Fuel Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Energy Policy Act of 2005 and Harmonization . . . . . . . . . . . . . . . . . . 12
Administration Action on Harmonization . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Congressional Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

“Boutique Fuels” and Reformulated
Gasoline: Harmonization of Fuel Standards
Introduction
Because of federal and state programs to improve air quality, and local refining
and marketing decisions, suppliers of gasoline must supply fuel that meets a number
of different standards. According to ExxonMobil, as of 2002 there were 18 different
gasoline formulations required across the country.1 Depending on how various
overlapping standards are counted, this number can increase or decrease.2
The two key federal programs are the reformulated gasoline program (RFG),
which aims to reduce emissions of toxic air pollutants and ozone-forming
compounds, and the oxygenated fuels (Oxyfuel) program which aims to reduce
carbon monoxide emissions. These programs are required by the Clean Air Act. In
places where federal RFG is not required, states may “opt-in” to the program, or they
may impose other fuel requirements as part of a plan to meet air quality standards.
This mix of state and federal standards, along with local marketing and refinery
decisions, has resulted in adjacent or nearby areas that may require gasoline with
significantly different properties.
What Are “Boutique Fuels”? The term “boutique fuels” refers to the
various specialized gasoline formulations made to meet air quality standards or local
preferences. Besides conventional fuel,3 refiners and marketers in a state may also
have to meet requirements in different areas for one, two, or even three different
formulations.
What Is the Concern over Boutique Fuels? Because requirements can
vary from state to state, and within a state, if there is a disruption in fuel supply, it
may be difficult for refiners to supply fuel meeting local specifications to the affected
area. If this happens, prices can rise sharply, as occurred with particular severity in
the Midwest in the summer of 20004 and in the wake of Hurricanes Katrina and Rita.
1 ExxonMobil, U.S. Gasoline Requirements. February, 2002.
2 Drastically higher numbers generally imply that the number of standards has been
multiplied by three, to indicate that each type of gasoline is sold at three octane levels, or
“grades”. Suppliers are not required by law to sell three grades of gasoline.
3 Conventional gasoline is sold across most of the country.
4 Major pipeline problems, along with other complicating factors, led to short supplies of
gasoline in the area. Conventional gasoline supplies were low, as were supplies of the
blendstock used to create RFG for the Chicago-Milwaukee area.

CRS-2
The ability to move product from one area of the country to another is called
“fungibility.”
Why Not Simply Require One Fuel Across the Country? The existing
system has evolved in response to various federal air quality standards, and resulting
state standards, local refiner decisions and consumer choices. Further, many of the
state formulations were designed to mitigate moderate air quality problems without
requiring more stringent and, presumably, more expensive measures. An attempt to
group states under one regional or national standard, referred to as “harmonization,”
might lead to higher pump prices for areas with less severe ozone problems, or higher
emissions in areas with more severe problems. Further, refiners may have made
considerable investments in tooling facilities to meet specific local requirements.
Harmonizing Standards Would Be a Complex Process. Competing
goals will make harmonizing standards a complex process. Gasoline distribution
would likely be more uniform under regional or national standards. But refining
costs and consumer price could increase under new standards.5 Further, air quality
could be improved or diminished depending on how standards are combined. Any
changes in the U.S. gasoline system will need to take all of these factors into account.
Organization of Report. This report outlines the current situation with
boutique fuels. It discusses the various state and federal requirements, their purposes,
and how they interact. Next, it discusses in detail one of the key components of the
federal RFG program, a component eliminated by the Energy Policy Act of 2005
(P.L. 109-58). Then, the report describes some of the supply problems caused by the
current system, followed by a discussion of the trade-offs associated with
harmonization. Finally, the report discusses congressional actions, as well as actions
taken by the Bush Administration, that will likely affect the fuel system. This report
will be updated as events warrant.
Gasoline Standards
Changing Gasoline Standards
As was stated above, the current fuel system has resulted from a mix of federal
and state requirements mandated or motivated by the passage of the Clean Air Act
Amendments of 1990.6 Before 1990, fuel requirements were much simpler, with
only limits on volatility in the summer months to control ozone formation. Because
temperature plays a key role in ozone formation, a two-tier system was established,
with tighter summer volatility standards in the South.
5 It is difficult, however, to distinguish the effects of any one change on the costs of refining
and distribution, or on consumer prices. Both the costs to supply gasoline, and pump prices,
respond to a wide range of variables.
6 P.L. 101-549.

CRS-3
The 1990 Clean Air Act amendments added additional requirements, producing
a more complex multi-layer system. These requirements include the use of various
fuel formulations targeted at specific air quality problems. In addition to federal
requirements, states with less severe pollution problems may establish their own
standards. These various federal and state standards lead to a patchwork of areas
with, in some cases, very different standards. Gasoline supply and distribution is
further complicated by local refining and marketing decisions to promote or limit the
use of certain additives. This multi-layer system of various standards and
formulations can lead to supply instability if fuel from one market cannot be used in
another market to meet changes in supply and demand.
General Standards
Some gasoline standards apply to all fuel, while others only apply to particular
formulations. Currently, fuel may be regulated for volatility, nitrogen oxide
emissions, heavy metal content, content and emissions of toxic compounds, sulfur
content, and/or oxygen content. Each of these factors plays a role in pollutant
emissions, and overall air quality.
Volatility. Volatility is a chemical’s propensity to evaporate. Evaporative
emissions of hydrocarbons such as motor fuel contribute to the formation of ground-
level ozone, which leads to “smog.”7 Reid Vapor Pressure (RVP) is a measure of a
fuel’s volatility; lower numbers indicate lower volatility. The RVP for conventional
gasoline can range from about 8 to 15 pounds per square inch (psi),8 but is limited to
9.0 psi in the summer months. In areas where ozone is a problem, lower RVP is
required.
Nitrogen Oxides (NO ). Nitrogen Oxides (NO ) include nitrous oxide, nitric
x
x
oxide, and nitrogen dioxide. NO contributes to the formation of ozone. Therefore,
x
fuel may be formulated to limit NO emissions.
x
Heavy Metals. Lead was commonly used as an octane enhancer until it was
phased-out through the mid-1980s (it was completely banned in 1995), due to the fact
that lead can disable emissions control devices, and because it is toxic to humans.
In some areas, the use of other heavy metals (e.g., manganese) in gasoline may also
be restricted.
Toxic Compounds. Some gasoline components and additives are toxic to
humans. Further, fuel combustion can lead to the formation of other toxic
compounds. Such compounds include benzene, acetaldehyde, formaldehyde, 1,3
butadiene, and polycyclic organic matter. Benzene is a known human carcinogen,
while the other compounds can cause irritation and exacerbate asthma; some might
7 Ground-level ozone is an air pollutant that causes smog, adversely affects health, and
injures plants. It should not be confused with stratospheric ozone, which is a natural layer
some 6 to 20 miles above the earth and provides a degree of protection from harmful
radiation.
8 U.S. Department of Energy, Alternative Fuels Data Center, Properties of Fuels.
[http://www.afdc.doe.gov/pdfs/fueltable.pdf].

CRS-4
be human carcinogens.9 In some fuels, benzene content is limited. The overall
emissions of toxic compounds may be limited, as well.
Sulfur. Sulfur in gasoline can interfere with on-board emissions control
devices. Catalytic converters are especially vulnerable.10 To improve the
performance of emissions controls, the sulfur content of gasoline may also be limited
by state or federal regulations. Currently, Alabama, California, Georgia, and Nevada
require lower-sulfur gasoline. Starting January 1, 2004, EPA began phasing in new
national limits for sulfur in gasoline. Effective January 1, 2006, most gasoline is
limited to a sulfur level of 30 parts per million (ppm).11 Before the new standards,
gasoline sulfur content averaged around 300 ppm.
Oxygen. Because oxygen can improve combustion (and thus limit the
emissions of certain compounds), a minimum oxygen content may be required.
Because pure oxygen cannot be added directly to gasoline (it would simply escape
from the fuel), an oxygen-bearing compound called an “oxygenate” is added.
Typically ethers, such as methyl tertiary butyl ether (MTBE), or alcohols, such as
ethanol, are used to enhance the oxygen content of gasoline. These oxygenates are
also high-octane compounds, and reduce the need for other octane enhancers that
may be more toxic (such as benzene). As discussed below, a key oxygen standard
for federal reformulated gasoline was eliminated by P.L. 109-58.
Federal Fuels
The Clean Air Act requires the use of special fuels in areas that are in
nonattainment of the National Ambient Air Quality Standards (NAAQS) for ozone
or carbon monoxide. Federal reformulated gasoline (RFG) must be used in severe
or extreme nonattainment areas for ground-level ozone. Other areas with less serious
ozone problems may opt-in to the RFG program to help them attain or maintain
compliance with the NAAQS. In carbon monoxide nonattainment areas, federal
oxygenated fuel (oxyfuel) is required in winter months.
Conventional Gasoline. As was stated above, conventional gasoline is the
fuel sold across most of the country. It is the least stringently regulated fuel, with a
summertime limit on RVP of 9.0 psi, a prohibition on the use of lead, and a limit on
the level of manganese (a heavy metal). Because gasoline blended with 10% ethanol
(“gasohol”) has a higher volatility, the RVP limit is raised by 1 psi, to 10.0 psi (the
9 Agency for Toxic Substances and Disease Registry, ToxFAQs.
[http://www.atsdr.cdc.gov/toxfaq.html].
10 For more information on issues relating to sulfur in gasoline, see CRS Report RS20163,
Sulfur in Gasoline, by Stephen Thompson and James E. McCarthy.
11 This sulfur restriction is part of a larger whole-system approach by EPA to limit vehicle
emissions. Starting in model year 2004, automobile manufacturers are facing more stringent
emissions standards for their vehicles. To enable the use of more advanced emissions
control devices, the sulfur content of gasoline must be limited, as well.

CRS-5
“one pound waiver”).12 In summer months, conventional gasoline accounts for
approximately 49% of U.S. gasoline consumption.13
Reformulated Gasoline (RFG). In areas with major ozone pollution
problems, federal RFG is required. Other areas with less severe problems may also
opt-in to the program. Currently, major metropolitan areas in 17 states and the
District of Columbia use RFG. The program has several requirements, including a
benzene cap of 1.0% by volume, limits on NO and toxic emissions, and a cap on
x
RVP. In the summer months, the RVP limits are more stringent than in the winter
months.14 Before P.L. 109-58, summertime RVP limits were also more stringent for
southern areas than for northern areas; that law set a single standard at the more
stringent (southern) level. Federal RFG accounts for about 28% of summertime
gasoline consumption.15 Prior to May 6, 2006, RFG was also required to contain 2%
oxygen by weight, a requirement that was eliminated by P.L. 109-58.
Low Volatility Conventional Gasoline. The Environmental Protection
Agency (EPA) requires that certain ozone non-attainment areas (that are not required
to use RFG) use a lower volatility fuel in the summer months. Instead of the 9.0
RVP conventional fuel required across most of the country, RVP is capped at 7.8 for
these areas, which include parts of states in the South and West. The “one pound
waiver” for gasohol still applies. Low-volatility gasoline accounts for about 7% of
summertime gasoline consumption.16
Oxygenated Fuel (Oxyfuel). In carbon monoxide nonattainment areas, the
Clean Air Act requires the use of oxygenated fuel in the winter months. As of
November, 2005, 12 areas were implementing the program.17 The Oxyfuel program
requires a minimum oxygen content of 2.7% by weight. Because of the nature of
carbon monoxide pollution, most carbon monoxide nonattainment areas are not
ozone nonattainment areas.18 The only exception is the Los Angeles area, which is
in nonattainment for both pollutants. The program has been largely successful, with
12 There are other benefits to using ethanol in gasoline that counterbalance its higher
volatility.
13 U.S. Environmental Protection Agency (EPA), Office of Transportation and Air Quality
(OTAQ), Staff White Paper: Study of Unique Gasoline Fuel Blends (“Boutique Fuels”),
Effects on Fuel Supply and Distribution and Potential Improvements. October, 2001.
14 Heat is a catalyst for the reactions that produce ozone. That is why ozone tends to be
more serious in the summer months. Therefore, in warmer areas, and during warmer times,
ozone-forming emissions are more tightly controlled.
15 EPA, OTAQ, op. cit.
16 EPA, OTAQ, op. cit. 7.8 RVP gasoline actually accounts for about 13% of gasoline
consumption, but 6% of this is a result of state, not federal requirements. See the section
below on “State Fuels.”
17 EPA, OTAQ, State Winter Oxygenate Fuel Program Requirements for Attainment and
Maintenance of CO NAAQS, November 2005.
18 Carbon monoxide emissions tend to increase at colder temperatures, and carbon monoxide
pollution tends to be worse at higher elevations.

CRS-6
fewer than half of the original participants in the program still required to use the
fuel.19 As the number of participating areas has dropped, so has Oxyfuel
consumption as a share of winter gasoline consumption. The Oxyfuel program
should not be confused with the oxygen standard in RFG (see above), which was
eliminated by P.L. 109-58.
State Fuels
In areas that have less serious ozone problems (in contrast to severe or extreme
nonattainment areas), states may establish their own fuel standards as a strategy for
mitigating emissions, if they do not to opt-in to the RFG program. The Clean Air Act
gives the EPA the authority to permit reductions in the allowable RVP of fuel in the
summertime. Most states require only a lower RVP (at 7.0, 7.2, 7.8, or 8.5 RVP);
in all other ways these state fuel requirements are identical to conventional gasoline.
However, some states go further and require a lower sulfur content (e.g.,
Georgia), or limit the use of certain additives (e.g. Texas). Further, Minnesota
requires a minimum of 10% ethanol in all gasoline sold in the state. These various
fuels account for about 12% of summer gasoline consumption.20
California Cleaner-Burning Gasoline (CBG). In addition to giving states
leeway on setting fuel standards, the Clean Air Act allows California to set its own
standards, as long as those standards are more stringent than the federal standards.
California requires the use of “Cleaner-Burning Gasoline” (CBG), with generally
stricter requirements than those for federal RFG. Sulfur is restricted to 30 ppm,
benzene is limited to 0.8% by volume, and performance standards are tighter for
VOC, NO , and toxic emissions. In areas of the state where federal RFG is required,
x
gasoline must meet all the standards for RFG as well as CBG.21 Arizona and Nevada
have state programs that mimic the California standards. California CBG accounts
for approximately 4.5% of summertime gasoline consumption.22
Elimination of the Federal RFG Oxygenate Standard Under
P.L. 109-58
Before amendment by the Energy Policy Act of 2005, the Clean Air Act
required that RFG contain at least 2% oxygen by weight. Refiners met this
requirement by adding a number of ethers or alcohols, any of which contain oxygen
and other elements. Until recently, the most commonly used oxygenate was MTBE.
In 1999, 87% of RFG contained MTBE, a number reduced to about 46% in 2004,
according to EPA. MTBE has also been used since the late 1970s in conventional
19 Of the 12 areas implementing the program, 5 are for attainment purposes and 7 for
maintenance purposes. In 1992, 36 areas were implementing the program. EPA, OTAQ,
op. cit.
20 EPA, OTAQ, Staff White Paper.
21 For example, while federal RFG requires a minimum oxygen content, California CBG
does not.
22 EPA, OTAQ, op. cit.

CRS-7
gasoline as an octane enhancer. As a result, gasoline with MTBE has been used
throughout the United States and elsewhere in the world, whether or not an area has
been subject to RFG requirements.
MTBE leaks, generally from underground gasoline storage tanks, have been
implicated in numerous incidents of groundwater contamination. The substance
creates a perceptible taste and odor in water at very low concentrations, and some
animal studies indicate that it may pose a potential cancer risk to humans. For these
reasons, 25 states have taken steps to ban or limit its use, according to the Renewable
Fuels Association.23 The most significant of the bans (in terms of the amount of fuel
affected) took effect at the end of 2003 (California and New York), leading many to
suggest that Congress revisit the issue to modify the oxygenate requirement and set
more uniform national requirements regarding MTBE and its potential replacements,
principally ethanol.
The Debate Over the RFG Oxygen Standard. Support for eliminating
the oxygenate requirement on a nationwide basis was widespread among
environmental groups, the petroleum industry, and states. In general, these
stakeholders concluded that gasoline can meet the same low emission performance
standards as RFG without the use of oxygenates. But agricultural interests presented
a potential obstacle to enacting legislation to remove the oxygen requirement.
According to the U.S. Department of Agriculture, roughly 13% of the nation’s corn
crop is used to produce the competing oxygenate, ethanol. Supporters of ethanol
argued that as MTBE use was phased out, with the oxygen requirement still in effect,
ethanol use would soar, increasing demand for corn. (In fact, according to EPA,
ethanol demand has grown substantially as MTBE has been be phased out as a result
of state bans and refinery decisions.) Conversely, if the oxygen requirement were
waived by EPA or through legislation, not only would MTBE use decline, but so,
likely, would demand for ethanol. Thus, some Members of Congress and governors
from corn-growing states took keen interest in MTBE legislation and related
oxygenate requirements.
One concern voiced by ethanol supporters over the elimination of the RFG
oxygen standard is that it had provided a major impetus for ethanol demand. To fill
a potential void in ethanol demand left by an elimination of the oxygen requirement,
there were legislative proposals to develop a renewable fuels standard (RFS). A
renewable fuel is one that can be produced from renewable resources, such as solar
energy, agriculture products, or waste material. In general, renewable fuels are those
produced from animal or vegetable matter. Ethanol is the most common renewable
fuel; approximately 3.9 billion gallons were produced in the United States in 2005.24
The next most common renewable fuel is biodiesel, a synthetic diesel fuel made from
23 Renewable Fuels Association, New Jersey Becomes 25th State to Ban MTBE, August 19,
2005.
24 Renewable Fuels Association, From Niche to Nation: Annual Industry Outlook 2006,
February 2006.

CRS-8
vegetable oils (mainly soy) or recycled grease; approximately 75 million gallons of
biodiesel were produced in 2005.25
As enacted, the Energy Policy Act of 2005 (P.L. 109-58) contains numerous
provisions relevant to MTBE and ethanol.26 Most notably, P.L. 109-58 repeals the
Clean Air Act requirement to use MTBE or other oxygenates. In place of this
requirement, the bill establishes an RFS. To prevent “backsliding” on air quality, the
bill requires that reductions in emissions of toxic substances achieved by RFG be
maintained; it also authorizes funds for MTBE cleanup.27
P.L. 109-58 established an RFS of 4.0 billion gallons in 2006, increasing yearly
to 7.5 billion gallons in 2012. Supporters argue that a renewable fuels standard will
foster agricultural production, promote domestic energy sources, and lead to cleaner
air. Critics argue that it will raise gasoline prices, artificially inflate demand for
ethanol, and add one more layer of requirements to an already complex gasoline
supply system. Further, some critics argue that a renewable mandate will result in
“corporate welfare” for a few large ethanol producers. Some critics question the net
energy saving from fuel ethanol, because the production of corn and ethanol requires
significant fossil fuel inputs.28
Issues in the Spring of 2006: MTBE Phase-Out and Ethanol Supply.
As a result of P.L. 109-58, the oxygen requirement for RFG was eliminated as of
May 6, 2006. The elimination of the oxygen standard was supported by various
states with MTBE contamination and by the refining industry as a way to simplify
gasoline supply. However, the oxygen requirement, which gasoline suppliers
asserted was a de facto MTBE requirement, has been used by gasoline suppliers as
a defense against liability for MTBE contamination.29 P.L. 109-58 did not ban
MTBE use; rather, it actually gives the industry more flexibility in making RFG with
or without oxygenates. But because of liability concerns, the industry moved quickly
to eliminate MTBE from the gasoline supply in spring 2006. This increased pressure
on already tight refining capacity, because higher grades of gasoline blendstock were
25 National Biodiesel Board, Estimated U.S. Biodiesel Production, May 2006.
26 For a more detailed discussion of MTBE and ethanol provisions in P.L. 109-58, see CRS
Report RL32865, Renewable Fuels and MTBE: A Comparison of Selected Provisions in the
Energy Policy Act of 2005 (H.R. 6), by Brent D. Yacobucci, Mary Tiemann, James E.
McCarthy, and Aaron M. Flynn.
27 Not included in the final version was a particularly controversial provision in an earlier
version of the bill, a “safe harbor” from product liability lawsuits for producers of MTBE,
ethanol, and other renewable fuels (product liability lawsuits have been used to force
petroleum and chemical companies to pay for cleanup of ground and surface water
contaminated by releases of fuels containing MTBE). A disagreement over the safe harbor
provision for MTBE is seen as one of the issues that led to the failure an energy bill in the
108th Congress.
28 For a more detailed discussion of the energy balance of corn ethanol, see CRS Report
RL33290, Fuel Ethanol: Background and Public Policy Issues, by Brent D. Yacobucci.
29 Petroleum Industry Research Foundation, Inc., Rising Gasoline Prices: Made in the USA,
May 2006.

CRS-9
required to make the transition away from MTBE-blended fuel. In 2005, U.S. MTBE
production was approximately 2 billion gallons, representing roughly 1.5% of U.S.
gasoline demand. The loss in volume and energy due to eliminating MTBE increased
demand for gasoline (refined from petroleum), crude oil for the production of
feedstocks, and ethanol.
In response to P.L. 109-58, in spring 2006, many refiners began producing
gasoline blendstock for ethanol-blended RFG.30 For use in RFG areas, ethanol
cannot be blended with conventional gasoline but requires a specific, low-volatility
gasoline blendstock. This blendstock, called Reformulated Blendstock for
Oxygenate Blending (RBOB), tends to be more difficult and costly to produce, and
it requires the use of more high-quality gasoline blending components. Further, a
sharp increase in demand for ethanol for gasoline blending strained ethanol supplies.
Also, during the transition from MTBE- to ethanol-blended gasoline, in many cases
refiners, terminals, and retailers had to halt operations to purge their tanks of the old
fuel.
A potential issue with the transition between RFG with and without the oxygen
requirement is one of timing. During the transition, some refiners had eliminated
MTBE-blended RFG before the May 6 transition to non-oxygenated RFG. However,
between the time they eliminated MTBE and May 6, RFG was still subject to the
oxygen standard. Therefore, some gasoline suppliers, who may in the future make
the transition to non-oxygenated RFG, needed to supply ethanol-blended RFG during
the transition. The ultimate demand for ethanol in RFG will depend on gasoline
refiners’ and suppliers’ decisions about whether to market ethanol-blended or non-
oxygenated RFG.

Exacerbating the supply problem was the fact that the industry was making the
transition from winter gasoline to more stringent low-volatility summertime
specifications, which adds competition for the highest-quality gasoline components.
These pressures, along with historically high crude oil prices, have led to historically
high (nominal) gasoline prices. Further, some localized areas faced short-term
supply disruptions as refineries made the transition.
Renewable Fuels Standard. Some detractors of the RFS have claimed that
high gasoline prices in spring 2006 are partly due to the enactment of the RFS.
However, while the short-term increase in ethanol demand from the elimination of
the oxygenate standard has certainly played a role in the spring 2006 gasoline
situation (see above), the effects of the RFS on high gasoline prices are less evident.
For 2006, the RFS requires the use of 4.0 billion gallons in gasoline, roughly
equivalent to U.S. ethanol use in 2005. Therefore, while the increasing RFS could
put pressure on ethanol supplies and gasoline prices in coming years, it seems less
likely that the RFS has played a role in the current situation.31
30 Statement of A. Blakeman Early, American Lung Association, before the Senate
Committee on Environment and Public Works, March 29, 2006.
31 It should be noted that when gasoline prices are relatively high, ethanol prices tend to
track with gasoline prices (when taxes are factored in). Ethanol blended into gasoline is
(continued...)

CRS-10
Harmonizing Gasoline Standards
The multiple gasoline standards, along with the use of various fuel additives,
have led to supply incompatibility. Before 1990, the U.S. gasoline system was
relatively fungible. Product could be moved from one market to meet diminished
supply in another. Currently, gasoline used in one area may not necessarily meet the
standard of another. For example, in the summer, fuel produced for the Charlotte,
NC area cannot be used in Norfolk, VA (RFG), or Atlanta, GA (lower RVP and
sulfur cap). However, fuel from either Norfolk or Atlanta could be shipped to
Charlotte. In many cases, the system is essentially one-way, giving suppliers the
ability to move product from more stringent areas to less stringent areas, but not vice-
versa.
Adding to this problem is the fact that U.S. refiners and fuel pipelines are
currently operating at or near capacity, reducing the flexibility to produce and ship
a multiplicity of formulations, or respond to a change in local market needs. Any
supply disruption (caused by a refinery fire, pipeline rupture, or other incident) can
lead to price volatility, even with more fungible conventional gasoline. Adding
localized requirements creates an even more complex situation where excess supply
in one area may not be moved to the affected area because of emissions standards.
Because of the complex nature of various gasoline standards, there is interest
in harmonizing the standards. This would entail requiring one set of standards across
a region (or even across the country). Potential scenarios include requiring that
within an area, only one low RVP fuel could be used in addition to conventional
gasoline and RFG. In the above scenario with Norfolk, Charlotte, and Atlanta, while
Norfolk would still use RFG, the standards for Charlotte and Atlanta would be
identical. Another, more drastic, scenario would require that all fuel be conventional
gasoline or RFG. Some of the key issues involved in harmonization would be
production costs, consumer prices, production capacity, supply stability, and air
quality.
Production Cost. Depending on the way standards are harmonized,
production costs could increase.32 While fewer standards across the country would
seem to benefit refiners, it could create a need for expensive refinery modifications
to meet the harmonized standards. Because refiners made investments in tooling
their plants to meet the local requirements, changes could be costly. However, a less
drastic harmonization, where some of the low-RVP fuels are harmonized, but not
eliminated, could mitigate some of these difficulties.
31 (...continued)
subject to a 51-cent-per-gallon tax credit. Therefore, ethanol tends to sell for roughly 50
cents higher per gallon than conventional gasoline. For example, on March 30, regular
unleaded gasoline sold for approximately $2.00 per gallon wholesale, while ethanol spot
prices were $2.47 to $2.51, a difference of between 47 and 51 cents. Oil Intelligence Link,
“Key Spot Product Prices,” The Ethanol Monitor, April 3, 2006.
32 It should be noted that refinery production costs are only one factor among many that play
a role in determining pump prices.

CRS-11
Production Capacity. Most U.S. refiners are operating at or near capacity;
U.S. refiners have operated at or above 90% nominal capacity for over a decade.33
Limited production capacity can lead to higher prices, especially if there is a
disruption in production on in the flow of gasoline and gasoline inputs. It is possible
that harmonization could exacerbate this problem, depending on how it is
implemented. New standards could lead to higher or lower supply levels. For
example, very stringent volatility standards could require refiners to limit the use of
some gasoline components. The loss of volume from cutting back on these
components would require increased supply in the form of petroleum, ethanol, or
other blending components, some of which are imported.
Supply Stability. Presumably, a main goal of harmonization would be to
improve the fungibility of the system, reducing the possibility of supply and
distribution problems. Fewer standards make it more likely that product could be
moved from one area of the country to another to meet local needs. However, it must
be noted that supply disruptions can never be completely eliminated because there
are so many factors outside of fuel standards that play a role in supply. These include
levels of crude oil supply, petroleum imports, refining capacity, seasonal fluctuations
in demand, and weather patterns (which may influence demand for fuel).
Air Quality. A key concern in any discussion of harmonization is the effect on
air quality. Many of these “boutique fuels” standards were created specifically to
mitigate the unique air quality problems in a specific metropolitan area. The
standards were devised as part of a State Implementation Plan (SIP) for ozone. SIPs
are based on models showing that particular fuels requirements will lead to projected
reductions in pollutant emissions. More stringent requirements, while more costly,
lead to greater emissions reductions. Therefore, an effort has been made in the SIPs
to balance air quality goals with producer and consumer concerns about cost.
Any harmonization would necessitate that certain state fuels be chosen over
others. What must be resolved is the question of which standards should apply to all
states in a region. The most stringent? The least stringent? Some compromise
standard? Any standard less stringent than an SIP’s current standard would require
the state to identify other emissions reductions. Any standard more stringent than a
state’s current standard would likely lead to higher consumer prices.
State Fuel Requirements. In addition to the above concerns about
harmonization, other issues remain. One of these has to do with local marketing
decisions and state requirements unrelated to air quality. If these factors are not
addressed, the system could still remain quite complex. For example, Minnesota
requires the use of ethanol in gasoline across the state. Under harmonization, would
states be allowed to set such a standard, or would they be precluded?
33 U.S. Department of Energy, Energy Information Administration, Oil Market Basics.
Chart: U.S. Refining Capacity, Crude Runs, and Utilization Rate, 1973-2004.
[http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/
Ref_image_Crude_runs.htm]

CRS-12
The Energy Policy Act of 2005 and Harmonization
The Energy Policy Act of 2005 (P.L. 109-58) contained four key provisions
aimed at addressing boutique fuels issues.
! First, as was stated above, Section 1504(a) eliminated the oxygen
standard for federal RFG. This standard was a key motivation for
the use of MTBE in gasoline.
! Second, Section 1504(c) eliminated the distinction between
summertime RFG in northern and southern areas. Starting in May
2006, all RFG areas will use the more stringent southern RFG in
summer months.
! Third, Section 1541(b) capped the number of state boutique fuels at
the number as of September 1, 2004. EPA must publish a list of
these fuels and may not approve a State Implementation Plan that
establishes a new state fuel, if that would increase the number of
fuels on EPA’s list. If a listed fuel is no longer used, it may be
delisted; EPA may then approve a new fuel to take its place on the
list.
! Fourth, Section 1509 requires EPA to study the potential effects of
comprehensive harmonization of fuel standards across the country.
On May 4, 2006, EPA Administrator Stephen L. Johnson launched
a task force to study potential harmonization. EPA plans to submit
the report to the President in July 2006.34
In addition to the above provisions, Section 1501 established a renewable fuels
standard (RFS) that requires the use of 7.5 billion gallons of renewable fuel in
gasoline by 2012.
Administration Action on Harmonization
As part of the Bush Administration’s action on its National Energy Policy,35
EPA is currently studying the potential effects of harmonization. In a preliminary
report, EPA studied various scenarios and attempted to analyze the effects of those
scenarios. Recognizing that its study is the first step in a much longer process, EPA
found that depending on the scenario, standards could be harmonized without major
cost increases, increases in emissions, or reductions in gasoline supply. The study
states that even though some of the harmonized areas have not faced supply
disruptions in the past, harmonization could reduce the potential for future
34 EPA, EPA Administrator, Governors to Review Boutique Fuels, May 4, 2006.
[http://yosemite.epa.gov/opa/admpress.nsf/68b5f2d54f3eefd28525701500517fbf/8f5536
a5e3ba331f852571640071d496!OpenDocument]
35 National Energy Policy Development Group, National Energy Policy. May 2001. For a
detailed discussion of the National Energy Policy, see CRS Report RL31096, Bush Energy
Policy: Overview of Major Proposals and Legislative Action.

CRS-13
disruptions.36 More drastic measures, the study finds, would lead to a simplified
supply system, but might lead to higher prices and major reductions in gasoline
production capacity.
As was stated above, on May 4, 2006, EPA Administrator Stephen L. Johnson
announced a task force to study potential harmonization, and report to the President
in July 2006.
Congressional Action
The most notable congressional action on boutique fuels in the 109th Congress
was the passage of the Energy Policy Act of 2005 (P.L. 109-58). As stated above,
P.L. 109-58 eliminated the oxygen standard for RFG, eliminated the distinction
between northern and southern summertime RFG, limited the number of state
boutique fuels, required the study of fuel system harmonization, and established a
renewable fuels standard.
Other bills have been introduced in the 109th Congress addressing boutique fuels
from various angles. H.R. 3807 (Ney) would eliminate all boutique fuels, including
federal RFG and Oxyfuel, requiring the use of conventional gasoline across the
country. S. 1859 (Burr) would make some boutique fuels provisions of P.L. 109-58
more stringent. For example, the bill would not allow new fuels to be added to
EPA’s list of allowable state boutique fuels after a fuel is delisted. Language similar
to H.R. 1459 (Blunt) and H.R. 1493 (Blunt) on limiting state fuels and studying
comprehensive harmonization was included in P.L. 109-58. All of these bills have
been referred to committee.
Among other provisions, H.R. 3893 (Barton), the Gasoline for America’s
Security Act of 2005, would significantly limit the number of boutique fuels across
the country. Other than California, all states would be limited either to conventional
gasoline, federal RFG, or one of two low-RVP gasolines, in addition to two blends
of diesel fuel. H.R. 3893 passed the House October 7, 2005, on a 212-210 vote. It
has been referred to the Senate Committee on Energy and Natural Resources.
Conclusion
The current system of gasoline standards in the United States is complex. State
and local decisions overlap with federal requirements, leading to adjacent or nearby
areas that may have significantly different requirements. These various fuel
formulations can lead to shortages and price spikes if an area facing supply
disruptions cannot import fuel from another area. Adding to these complications is
the fact that MTBE use has largely been phased-out by states and refiners, and the
demand for blending components to replace MTBE has increased.
36 EPA, OTAQ, Staff White Paper. p. 47.

CRS-14
The competing goals of air quality, supply stability, and costs will make
harmonization a complex process. Even with regional or national standards, factors
such as local marketing decisions and the use of ethanol will complicate the system.
For these reasons, whether or not Congress passes additional fuels legislation, fuel
standards will continue to be a major issue.