Executive Summary

California's drivers are heading full-speed down a rocky road toward an uncertain gasoline future. Every day, the state's refineries churn away in an attempt to produce the nearly one million barrels of gasoline California needs. But even though refineries are working at full capacity, they still come up roughly 30 thousand barrels a day (TBD) short. The state is able to make up this shortfall through imports, but it will need to find even more supplies of imports in the future. California is expected to grow by 14 million people over the next two decades. By 2010, total gasoline demand is expected to have grown around 15 percent from today's levels; by 2020, 30 percent. As demand increases with California's growing population, the shortfall will become increasingly unmanageable.

Soon, however, the gasoline problem will go from unmanageable to unsustainable. By the end of 2003, per state mandate, the oxygenate additive methyl tertiary butyl ether (MTBE) must be phased out of gasoline in order to protect water supplies. Since the early 1990s, as required by the federal Clean Air Act, MTBE has been used as an additive in reformulated gasoline to help prevent air pollution. But in 1999, after MTBE was found to contaminate groundwater, California's governor ordered its phaseout to be completed by the end of 2002 (later delayed until 2003). While necessary to protect groundwater supplies, the phaseout of MTBE will exacerbate the current in-state refinery shortfall, as it will reduce output by 5 percent, or 50 TBD -- roughly doubling the amount of gasoline that must be imported. In short, just as demand is increasing, supply will be decreasing.

As the balance between supply and demand becomes increasingly unstable, the health of California's economy, public, and environment are all at risk. Prices at the gas pump -- the nation's highest -- will keep climbing. California drivers already pay a $.15 surcharge on every gallon of gasoline due to imports and another $.05 per gallon due to price volatility. We will likely see more frequent and more severe price spikes of as much as $.50 per gallon; as a result, average gasoline prices could climb to $2.00 per gallon. In addition to the economic fallout, unchecked gasoline consumption will result in increased pollution from more oil drilling, tanker traffic, and vehicle tailpipes. Public health will suffer, as will our coastlines and wilderness areas.

This path is not inevitable; in fact, NRDC has charted a course toward a clean and reliable fuel supply. This report presents a plan that will reduce California gasoline demand by 15 percent below 2000 levels by 2020, ensure the state's independence of imported gasoline by 2011, save drivers approximately $28 billion, and protect public health, the economy, and the environment.

Recommendations: Creating a Clean and Reliable Fuel Supply

The state is facing many certainties: decreased in-state refinery supply as a result of the phaseout of MTBE, a growing fleet of cars and trucks, limits on how much the state's refineries are able to produce, and a growing reliance on unreliable gasoline import supplies. As a result, the economy, public health, and environment are at risk. California must confront these certainties immediately and devise solutions in order to provide a reliable fuel supply that minimizes the economic and environmental costs.

NRDC has crafted a four-step plan to enable California to do just that. Our plan requires action and commitment from the state government, which must in turn engage automakers, oil companies, planners, and other related business sectors, as well as the general public in a shared effort to reduce California's unsustainable gasoline consumption. The NRDC plan will:

• enable California to become independent of imported gasoline by 2011 (which would eliminate what is now a $.15 per gallon surcharge for imports);
  
  
• relieve pressure on California's refineries so that they run at only 90 percent by 2015, thereby mitigating price spikes and allowing them to respond quickly to unplanned shortfalls (which would reduce the average price per gallon by perhaps another $.05);
  
  
• save California drivers approximately $28 billion during the period between 2002 and 2020 (including the cost to implement the technologies and programs);¹
  
  
• reduce California's need to import gasoline and crude oil from the Middle East and other troubled regions of the world by cutting gasoline demand to 15 percent below 2000 levels by 2020;
  
  
• benefit public health and the environment by decreasing air and water pollution, global warming emissions, and pressure to drill in our wilderness areas.

These goals can be accomplished in four steps:

Today's automakers already have the technology to increase the fuel economy of passenger vehicles to 42 miles per gallon (mpg) by 2015 -- up from today's average of 24 mpg. However, instead of taking advantage of improved technology, U.S. automakers are continuing to build less efficient cars and light trucks: the fuel economy of the typical passenger vehicle is at a 21-year low.

All automakers who sell cars in California can make voluntary commitments to raise fuel economy standards; they have already done so in Europe, where their voluntary commitments will result in the equivalent of a 41-mpg new vehicle fleet by 2008 -- a 36 percent increase over the base year of 1995.

In addition, California can build consumer demand for clean and efficient vehicles by expanding its existing purchase incentive programs for better electric vehicles and hybrids. A comprehensive approach would be to adopt "feebates" -- a system of rebates and fees on new vehicle sales. California can also adopt a public education program and "green vehicle" labeling to help consumers make more informed choices when purchasing new vehicles.

Fuel-cell powered vehicles can usher us into a gasoline-free future. A fully optimized hydrogen-powered fuel-cell car will use approximately two-thirds less energy (none of it coming from oil) than today's average car, enabling it to get the equivalent of about 80 mpg. With proper infrastructure in place, fuel-cell powered vehicles can hit the market in significant volumes by 2010.

Automakers will soon begin pilot production of several hundred fuel-cell vehicles for fleet use. The only obstacle to full-scale commercialization is creating an adequate refueling infrastructure -- and this can happen quickly. Oil companies can eliminate their antiquated system based on 19th century oil technology and redirect funds to implement a clean, petroleum-free, hydrogen infrastructure. The state can offer tax incentives or grants for the construction of hydrogen refueling stations. The total capital cost for meeting California's 2020 import demand using hydrogen would be equal to the cost of meeting the anticipated demand with gasoline: building a new refinery in the Gulf Coast, installing a new pipeline to bring the fuel to California, and constructing additional service stations to supply added fuel would add up to nearly $5 billion in undiscounted capital costs.²

In response to the electricity crisis of the summer of 2001, state government, business organizations, and advocacy groups executed a series of policies and incentives that had been coordinated in advance; around $50 million of the state's impressive $730 million conservation campaign was used for public education. The effort was highly effective: nearly one-third of households served by Pacific Gas & Electric slashed their monthly electricity use by 20 percent or more.

California can organize a similar public education effort to reduce its dependence on gasoline. The government can also enlist the support of tire manufacturers, service stations, automakers, and oil manufacturers. Such a campaign would educate the public about the benefits and savings of:

• inflating tires properly;
• changing air and oil filters more frequently;
• driving the speed limit on highways;
• modest trip reduction and elimination;
• replacing worn tires with low-friction, fuel-efficient tires.

If followed, these measures could reduce gasoline consumption by nearly 6 percent by 2010; at today's fuel consumption levels, that would be equivalent to more than 800 million gallons, or more than 50 TBD.

As metropolitan areas have spread out helter-skelter, most Americans find themselves driving longer distances in steadily worsening traffic congestion. With homes, workplaces, schools, and stores located far apart, and with local planning emphasis on building roads rather than expanding transit options, Americans have little choice but to drive.

Smart-growth planning can significantly reduce gasoline use. California is expected to add 4.2 million new homes by 2020, but planning for smart growth now would alleviate increased gasoline pressure in the years to come. A recent study for the California Energy Commission (CEC) found that California could reduce statewide gasoline consumption by 3 to 10 percent by 2020 if several smart-growth policies were adopted across the state.³ The study identified four policies as particularly promising:

• city and transit station-focused land-use development;
• increased transit supply;
• market pricing of parking;
• improvements in regional job-to-housing ratios to encourage people to live close to where they work.

State and local policymakers can direct investments to building the infrastructure to create and promote affordable housing, create regional revenue-sharing arrangements, enhance mass-transit service, and promote location-efficient mortgages (market-based incentives to encourage homeowners to buy in greater-density neighborhoods, thereby reducing monthly expenses associated with commuting). And these policies will support efforts to reduce our dependence on gasoline.

Putting to Work NRDC's Four-Step Plan to Reduce Oil Dependence

NRDC's plan for a clean and reliable fuel supply for California can meet the state's future fuel needs, protect the environment, and save drivers money. If implemented, the plan will reduce California's gasoline use by about 12 percent from projected 2010 consumption levels (a 2.0-billion-gallon reduction) and about 39 percent from projected 2020 consumption levels (a 7.5-billion-gallon reduction, or 490 TBD).

• Step 1: Fuel-efficient cars and light trucks can save 5.2 billion gallons of gasoline by 2020, or about 340 TBD;
  
  
• Step 2: Fuel-cell vehicles and battery-electric vehicles can save almost 1 billion gallons of gasoline by 2020, or about 60 TBD;
  
  
• Step 3: Public education efforts and fuel-efficient replacement tires can save 0.7 billion gallons of gasoline by 2020, or about 45 TBD;
  
  
• Step 4: Smart growth can save 0.7 billion gallons of gasoline by 2020, or about 45 TBD.

The total net discounted savings to consumers as a result of the NRDC's Four-Step Plan would be approximately $28 billion. By following these four steps, California can reverse the trend toward greater dependency on imported supplies of gasoline and oil, and put the state on a path toward a clean and reliable fuel supply, protecting the California economy, public health, and environment.

Notes

1. Includes the additional cost of new technologies and programs, and the fuel cost savings at the pump. Net savings calculated using a 5 percent discount rate.

2. The cost would be roughly half if discounted at 5 percent, approximately the rate of return on capital for the refinery industry over the past several years (see Appendix B).

3. Parsons Brinkerhoff, "California Smart Growth Energy Savings MPO Survey Findings," September 21, 2001.

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