EPA Cuts CITGO Some Slack To Lower Gas Prices

AP reported that

The Environmental Protection Agency on Tuesday temporarily relaxed standards on the gasoline produced and sold by Citgo Petroleum Corp. in the Midwest in an attempt to alleviate a recent price spike in the region.

In other parts of the country, particularly in the West, the wholesale price of gasoline has been rising fast on the spot market and analysts said it is only a matter of time before retailers pass along those costs at the pump.

Since Aug. 1, the wholesale price of gasoline has risen roughly 50 cents per gallon in Los Angeles and more than 10 cents a gallon in Houston, according to OPIS.

"There is a lot of momentum to take prices higher," said Kloza, adding that refineries in California and Oklahoma are having problems and that retail prices have already risen about 10 cents in the past two weeks.

Under the agreement with the EPA, Citgo will be allowed to market a blend of gasoline to retailers in Chicago and Milwaukee that meets less stringent air quality requirements for the remainder of the summer driving season.

In exchange, the EPA said Citgo will have to pay the Treasury Department about 14 cents for every gallon it sells of the lower grade gasoline, which is cheaper to manufacture than the summer-grade product.

The move is intended to help Citgo make up for a production shortfall that began Aug. 14, when a fire forced the Tulsa, Okla.-based company to close its 160,000 barrel-a-day refinery in Lemont, Ill.

The impact of the Lemont refinery fire was magnified in the Midwest, where markets have been tight since January, when Premcor Inc. shut down its 80,000 barrel-a-day Blue Island, Ill., refinery to make improvements.

Drivers in Chicago and Milwaukee are paying, on average, 22 cents more for a gallon of gasoline than they did the same time a year ago, according to the Energy Information Administration, the statistical arm of the Energy Department. A gallon of gas in the Midwest is averaging $1.66, compared with the U.S. average of $1.49.

Gas prices in Michigan have gone up 34.2 cents in the last three weeks, according to a recent study by AAA Michigan.

The statewide average for self-serve unleaded is $1.716, up 13.7 cents from last week. The per-gallon average for the Detroit area is $1.65, up 12.7 cents from a week ago.

With the EPA's decision, Citgo will now be able to sell inventories of autumn-grade gasoline, which normally does not go on sale until Sept. 15.

"Now they can put those stocks to market right away," said Ed Silliere, an analyst at Energy Merchant LLC in New York.

Citgo will be allowed to sell gasoline with a less stringent vapor pressure standard, which is intended to reduce the release of volatile organic compounds, or VOCs, into the air. VOCs contribute to the formation of smog during warmer months.

The EPA action "demonstrates what can quickly be accomplished when governmental agencies and the private sector work in close cooperation," said W.A. DeVore, senior vice president of supply and marketing at Citgo.

Citgo, which is owned by PDV America Inc., a subsidiary of Venezuela's state-owned Petroleos de Venezuela SA, can sell the lower grade product at its own branded stations and to other independent retailers.

Citgo can acquire the lower grade product from its own terminals in Lemont, Des Plaines, and Mt. Prospect, all in Illinois; a Milwaukee, Wis.-based facility jointly operated by Citgo and Exxon Mobil; and Premcor's terminal in Blue Island.

"The intent of this is to level the playing field economically for Citgo," said Bruce Buckheit, the EPA's director of air enforcement division. "We're not allowing other refiners to do the same thing."

Buckheit said the impact to the environment would be minimal.

Before the EPA took action, refiners in other parts of the United States and Europe were already working to make up for the shortfall in the Midwest.

"When prices goes up, that gets the product to the markets where it's needed and that solves the problem," Silliere said.

The recent run-up in prices -- caused by a spate of refinery problems and dwindling U.S. gasoline reserves -- came after prices fell nearly all summer long.

When wholesale and retail gasoline prices soared during spring on fears there wouldn't be enough to meet peak demand, U.S. and foreign refiners cranked up production to profit from the price spike. In doing so, they flooded the market with cheap gas and drove prices back down.

But since the beginning of August, wholesale and retail prices have been climbing in connection with problems at refineries, including one owned by Conoco Inc. in Ponca City, Okla., and another owned by Equilon Enterprises in Martinez, Calif.