Over the past 20 years, not all Federal Government interventions in energy markets have been aimed strictly at protecting the environment, nor have they all been concerned primarily with energy. For example, the Emergency Petroleum Allocation Act of 1973 (EPAA) was enacted with the intent of assisting small refiners by providing them with cheaper sources of crude oil than that available to large refineries. In contrast, the desire to conserve domestic petroleum resources was, in part, responsible for the introduction of the Corporate Average Fuel Economy (CAFE) Standards in 1975. Domestic petroleum resource conservation was also the motivation for restrictions placed on the construction of oil- and natural gas-powered electric powerplants, the primary purpose of the Powerplant and Industrial Fuel Act (PIFUA). Government initiatives unrelated to energy have also had a substantial impact on energy markets. For example, although the primary purpose behind the deregulation of the airline industry in 1978 was not to change the nature of U.S. petroleum product demand, the resulting increase in air traffic mileage produced a substantial increase in jet fuel demand.

Environmental Expenditures

Environmental costs are an increasingly large component of FRS refining capital expenditures. In recent years, these expenditures have grown considerably and, due to the Clean Air Act Amendments of 1990, are expected to grow considerably in the years ahead.

A substantial portion of the costs to refiners associated with environmental legislation stems from reducing pollution resulting from the refining process itself. The level of FRS company stationary pollution abatementrelated capital expenditures has been strongly influenced by major pieces of environmental legislation. In 1975, FRS company pollution abatement capital spending (adjusting for inflation) reached a level unmatched until 1992 (Figure 37).229 Clearly, a large portion of the unusually high level of spending during the mid-1970's was traceable to the original 1970 Clean Air Act. Similarly, the recent sharp increase in environmental expenditures was in large measure due to the Clean Air Amendments of 1990. In 1975, the FRS companies spent an estimated $1.2 billion (in 1993 dollars), largely to reduce pollution from the refinery process itself. By 1985, these costs to FRS companies had fallen to an estimated $298 million (in 1993 dollars). Beginning in 1990, the costs associated with reducing

stationary pollution skyrocketed. The FRS companies expended $1 billion in 1991 and $1.9 billion in 1992. A rapidly increasing share of overall refining industry capital expenditures has been devoted to pollution abatement expenditures (Figure 38). As recently as 1989, FRS companies devoted roughly 12 percent of their domestic downstream capital budget to stationary source pollution control. By 1990, this share had risen to 21 percent and by 1992, pollution abatement expenditures comprised more than a third of FRS company capital expenditures for refining. Pollution abatement expenditures directed towards reducing air pollution accounted for two-thirds of all stationary refinery pollution capital spending in 1992, roughly equal to the share spent on refinery air pollution abatement in 1974.230

Operating costs (adjusted for inflation) for pollution abatement expenditures peaked in 1984, after rising sharply during the late 1970's and into the early 1980's. In the years since, operating expenses related to pollution abatement have generally been on a downward trend. However, when taken as a share of operating costs-less the costs of raw material purchases these expenditures have grown somewhat. In 1977, the FRS companies devoted 7 cents of each

Source: U.S. Department of Commerce, Bureau of the Census, Current Industrial Reports, Pollution Abatement Costs and Expenditures, 1992 (Washington, DC, March 1994), p. 12.

dollar spent on operating costs towards pollution abatement. By 1992, the FRS companies were spending nearly 9 cents of each operating cost dollar on pollution abatement.

Foreign Refining

Overseas, the supply and demand for petroleum products was also strongly influenced by the Arab Oil Embargo, the Iran/Iraq War, and the 1986 crude oil price collapse. Foreign refining has also undergone a considerable restructuring and upgrading as a result of pronounced improvements in the product slate, increasing environmental strictures, and shifts in regional refined product demand. Over the last 20 years, overall foreign refined product demand growth has outstripped the growth in U.S. and European refined product consumption. Comparison of the years 1974 to 1993 shows that refined product demand was largely unchanged in North America and in Europe, but in other regions, refined product demand grew by roughly 25 percent. Of all regions, the Far East showed the largest increase in product consumption (Figure 39).

Million Barrels per Day

Source: British Petroleum Company, p.l.c., BP Statistical Review of World Energy (London, June 1994).

By 1993, foreign refineries had grown much more complex relative to where they were 20 years ago. This was particularly true in the Far East and Western Europe, where catalytic cracking capacity more than doubled between 1974 and 1993.231 The product slates of foreign refineries were increasingly directed toward producing higher end products, particularly distillates (Figure 40). Although gasoline's share of total foreign product output rose only slightly (from 19 percent in 1974 to 23 percent in 1993), middle distillate's share rose to 38 percent (from 29 percent in 1974). Residual fuel oil's share of the foreign product slate fell to 22 percent (from 38 percent in 1974).

For FRS companies, foreign refining/marketing operations have generally seen a higher rate of return than investment in U.S. downstream operations. Between 1977 and 1993, the gap between returns on foreign versus domestic refining/marketing operations has averaged more than 4 percentage points for the FRS companies (Figure 41). The higher returns on foreign investments, in part, reflect the major consolidation of FRS foreign downstream operations. In 1974, FRS companies operated 75 wholly owned refineries and 25 partly owned refineries overseas.232 By 1993, the number of foreign FRS refineries had fallen to 26 and 14, respectively.233 In 1974, FRS companies' foreign downstream operations produced 8.7 million barrels per

The gasoline marketing sector today is very different than it was in 1973. In fact, the very look of the average retail gasoline outlet has changed dramatically. Because of the greatly reduced number of service stations in operation, the average station today is a much higher volume outlet than 20 years ago. The last 20 years have also seen the installation of self-serve gasoline pumps as well as the increasing importance of credit and debit card sales. Meanwhile, the proliferation of the convenience store-and its growing mergence with the business of marketing gasoline-was another important change in the nature of gasoline marketing.

The oil price escalations during 1974-1981 brought a wave of restructuring in gasoline marketing, which continued until the mid-1980's. Another wave of restructuring was clearly evident by 1993. Indicative of the dramatic change in gasoline marketing has been the substantial reduction in the number of branded outlets in operation. In 1977, the earliest year for which data are available, there were about 179,000 branded (company- and dealer-operated stores) FRS outlets. However, by 1993, there were only 44,000 branded outlets (Figure 42).

The runup in gasoline prices, following the oil price escalations of 1973 to 1974 and 1979 to 1980, reduced

gasoline consumption and provided an impetus for industry restructuring. Motorists reduced their driving, and fewer miles were driven per vehicle. At the same time, consumers were moving toward more fuelefficient autos, and the national average for miles per gallon rose. Walking, biking, carpooling, and the use of public transportation lessened the congestion on roads and highways, raising fuel economy for those who continued to drive and allowing them to move with fewer interruptions. The reduction in gasoline demand over the 1973 to 1980 period, resulted in an excess of gasoline retail outlets, which, in turn, resulted in higher marketing costs per gallon of gasoline sold (Figure 43). Reduced gasoline demand provided the industry with a strong incentive to lower unit marketing costs through restructuring.

The effects of the Arab Oil Embargo spurred the Federal Government to take a number of actions directly affecting the U.S. gasoline market. One of the most important was mandated fuel economy standards (CAFE), which tended to reduce gasoline consumption. The Federal Government's imposition of a 55-mile-perhour speed limit also worked to reduce gasoline consumption. These developments put upward pressure on marketing costs, providing strong incentives to reduce them through restructuring.