California Air Resources Board

SACRAMENTO – Panic buying and the marketplace forces of supply and demand are far more responsible for recent price hikes for diesel fuel than the state's clean-up standards for it, the chairwoman of the Air Resources Board (ARB) told a legislative panel today.

Testifying before the Senate Transportation Committee, Jananne Sharpless added that key equipment failures -- which have since been repaired -- contributed to spot shortages in parts of Northern California. Repairs have boosted diesel fuel production significantly, which should eliminate shortages and force prices down.

"We believe that the situation was at its worse around October 1," she told the committee, referring the effective date of the ARB's most recent standards for clean diesel fuel. Customers trying to avoid price increases made a "run on the racks" in late September, draining refineries while they were drawing down their supplies in preparation for complying with the new rules. "Late September demands on the state's largest diesel fuel producer were 35 percent above normal," she added.

Based on her discussions with oil companies, she told the committee, "Actions taken to date have already produced significant improvements in the supply situation. The increase in supply should help prices decline substantially in the near future."

Sharpless explained that the ARB adopted the new clean-up standards for diesel fuel in 1988 to reduce harmful soot-like emissions as well as pollutants that form acid rain and urban smog. She also emphasized that the Board has acted to insure a steady diesel fuel supply under normal circumstances and also to reduce costs.

In addition to the five years lead time for refiners to plan their compliance, the ARB also provided oil companies with an option of designing their own unique diesel fuel formula, provided that it reduced the same amount of pollution. Three of the state's largest producers took advantage of that option (Chevron, Texaco, ARCO), estimating that it cut their costs by up to 50 percent and adding only about 6 cents per gallon.

The clean-up standards are estimated to cut truck and bus emissions by up to 25 percent she noted. "Cleaning up diesel fuel is far less than the cost that California's industry or the or the auto drivers would incur to reduce equivalent amounts of pollution."

Many factors influence diesel prices, she emphasized, including federal taxes and distribution costs passed on by oil companies. The ARB's clean-up rules, she emphasized, can account for only six cents per gallon of production costs and she expressed her concern for price hikes that have exceeded 20 cents in many instances. "Much of the differences between the cost of producing cleaner diesel and selling it cannot be accounted for, based on ARB requirements," she added.

To avoid shortages of diesel fuel, the ARB also granted variances to three large oil companies (Chevron, Ultramar, Unocal) in the last month, allowing them to produce fuel that does not comply with the new clean-up rules while they finish refinery modifications by the end of this year or early 1994.

 With these safeguards and the assurances of oil companies, the ARB previously estimated that diesel production would exceed demand by up to 10,000 barrels per day, up to 165,000 barrels. Based on recent talks with oil companies, the Board believes that, in an effort to ease shortages, they are now producing 190,000 barrels per day, far above the state's normal need.

 Sharpless also emphasized the public health needs for the clean diesel fuel. "Pollution from diesel engines is a major source of the state's worst air quality problems," she said, "includes urban smog, soot-like particles and potentially cancer-causing compounds."

"Cleaner diesel fuel is essential if we are to continue the progress in providing the public with healthy air. My goal is to make sure that we maintain the benefits of this vital air quality program, without enduring unreasonable impacts on business and citizens."

"We believe that the problems experienced over the last month have begun to be resolved," she continued. "Refiners are now producing fuel at levels that significantly exceed current demand....prices have stabilized and adequate supplies should bring prices down substantially."