The EPA has announced it will release the final rule on the Tier 3 gasoline standard by February of this coming year, after revising the timeline due to the volume of responses received. The standard is set to be in effect by 2017, with the stated purpose of reducing harmful vehicle emissions and pollution generated by cars and light duty trucks by dropping the sulfur content of gasoline from its present 30 parts per million down to 10 parts per million. (If you recall, Tier 2 dropped gasolines sulfur content from 300 PPM to the current 30PPM)
The EPA estimates the cost impact of Tier 3 should be around a penny per gallon, but refiners believe that it could be more like 9 cents per gallon. This is because of the overhaul needed at approximately 66 major US refineries to make their existing hydrotrating equipment meet the new standards, and the fear that there is not enough excess in supply to cover demand while the upgrades happen could shoot the price at the pump up.
The EPA says that by the year 2030 the program should cost about 3.4 billion annually, that they claim is more than offset by the projected monetized health benefits of somewhere between 8 and 23 billion.
I wrote an article for NEFI's Oil & Energy Magazine that goes into more detail on the standard and how it works, you can read that article here: Oil & Energy Magazine or in PDF Form by clicking here
The April 2012 Issue of Oil & Energy Magazine features an article by yours truly on the East Coast refinery closures, and what expected future impact may be. You can read the full article here: Oil & Energy Magazine (or if you prefer, open it as a PDF by clicking here )
Factoring into the closures, and the soon-to-be resultant price increases is the Northeast's traditional import of Brent crude vs WTI. Historically, Brent and WTI have traded fairly close, so the price impact at the refinery level was essentially equivalent. However, due to geopolitical and other factors, the crack spread on Brent vs WTI has been trending wide, as shown by these real time tickers:
Lets put it in actual dollars - as of May 2nd, WTI is trading around 105ish, Brent 118ish... to figure out what that equates to in dollars per gallon (what refiners work on) we look at the crack spread. The crack is essentially “what do I get per gallon for every barrel coming in?”
So how do you know the crack spread? You calculate it this way:
($ per barrel/ 42 (gal per barrel)= X).. you then take current trading price of HO (~3.14) and subtract X. Then you multiply by 42 to get gain or loss per barrel.
($ per barrel/42 gal per barrel= X)
(Current HO trading $ - X)*42 = gain/loss per barrel
Refiners will say they need at least a $5 crack to operate. To put it in real numbers, the current WTI crack is around $26.88 a barrel; the current Brent crack is around $13.88. Here’s how we get that:
WTI= $105/42g=2.50 base cost for crude to make HO at refinery
JUN HO= ~3.14
Equates to = .64 margin on current economic conditions (3.2018-2.5238=.64)
Multiply that by 42 gallons per barrel and you get $26.88 profit for every barrel of HO produced from WTI crude.
Do the same math for Brent:
Brent = $118/42=2.8095
JUN HO= ~3.14
(3.2018-2.976=.3305 x 42= $13.881 per barrel)
[Interestingly, the same math on these two products in April yielded a WTI crack spread of $28 to Brent's $9.50. (JP Morgan has predicted that the spread will drop further, before widening to new records as reported in the Economic Times Here )]
Which product would YOU rather have access to?
There is a massive push to not only improve the pipeline system in the US but the rail system as well, in order to take advantage of this crack spread. If you’re a northeast refiner and have access to WTI, you have a huge advantage vs. your competitor in the Northeast because they’re based on Brent.