New gasoline specification is increasing gasoline prices

As gasoline demand increases, a new specification is increasing gasoline prices. The specification, called the Tier 3 Standard, limits gasoline sulfur to 10 ppm maximum versus the previous (Tier 2) 30 ppm limit.

The Tier 3 Standard was enacted in 2014 and phased in starting in 2017, with full implementation in 2020. Now is the first time all refiners must meet it at full production rates.

The move to 10 ppm sulfur has been slow:

The most recent reading on the US gasoline pool was 18 ppm in 2019. That’s way behind schedule, which anticipated meeting 10 ppm well before the Jan 1, 2020 deadline. The actual gasoline sulfur number for 2020 will be released soon. It will probably be close to 10 because it was easy for refiners to make 10 when running at half speed in 2020.

But the challenge is to make 10 consistently when running at full speed; and the question is what will that cost? Many US refineries are poorly-equipped for the job. The Tier 3 sulfur spec has created a new bottleneck limiting their ability to ramp up production and make Tier 3 gasoline profitably.

So the current gasoline supply squeeze is about more than just pipeline shutdowns and shortages of fuel transport truck drivers. Those are temporary factors affecting distribution. The Tier 3 supply squeeze is a fundamental constraint in the US refining system that limits gasoline and octane production capacity.

Imagine you have a barrel of premium gasoline with 93 octane and 30 ppm sulfur (Tier 2). To make it into Tier 3 gasoline, you can put it through a desulfurization process and bring its sulfur down from 30 to 10 ppm. But, in addition to reducing its sulfur, the desulfurization process inevitably reduces its octane. You started with Tier 2, 93 octane premium gasoline and you end up with Tier 3, 87 octane regular gasoline.

That octane loss hurts more today than ever before. Just check the difference between the premium and regular pump prices next time you fill up. That difference keeps increasing and averages 67 cents per gallon today in the USA:

67 cents per gallon is $28.14 per barrel in units used by refining executives, economists and security analysts.

In recent weeks, refining engineers have been rerouting streams and making adjustments within their refineries to increase production of Tier 3 gasoline and they’ve been taking a hit on octane. For the first time, the new Tier 3 sulfur constraint is taking its toll on gasoline supply capacity and profits and putting upward pressure on gasoline price.

There are many ways for refiners to reduce the Tier 3 octane destruction and relieve the constraint. Capital investment is the best option, but that takes time to implement. Meanwhile, refiners should be taking steps to optimize their gasoline desulfurizers, something that has not been a priority until now.

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