Cover: Cost–Benefit Analysis of Proposed California Oil and Gas Refinery Regulations

Cost–Benefit Analysis of Proposed California Oil and Gas Refinery Regulations

Published Mar 16, 2016

by Daniel Gonzales, Timothy R. Gulden, Aaron Strong, William Hoyle

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Research Question

  1. What are the overall costs and benefits of implementing the proposed changes to the process safety management and California Accidental Release Prevention regulations that govern the operation of oil and gas refineries in the state of California?

The research reported here assessed the costs and benefits of the proposed California process safety management (PSM) and California Accidental Release Prevention regulations that are designed to improve safety at oil and gas refineries in California. The authors estimate these costs and benefits in four categories: costs to industry (to implement the regulation), costs to society (pass-through of certain industry costs), benefits to industry, and benefits to society.

This report examines the PSM activities and their implementation costs called for in the proposed regulation. Many, if not all, of these costs will likely be passed on to California consumers in the form of higher prices for petroleum products. The new PSM regulations are designed to improve safety at California refineries, which might result in fewer major refinery incidents and fewer releases of hazardous materials from refineries. Because the number of major refinery incidents might be reduced under the proposed regulation, the regulation could provide safety and health benefits to the public in nearby communities and might provide other economic benefits. This report examines these potential benefits.

To compare the costs and benefits of the regulations, the authors use a break-even analysis framework. They estimate the break-even point for effectiveness of the proposed regulations to be about 7.3 percent. That is, given the frequency and cost of recent costly major incidents, the best estimate of the cost of the regulations requires reducing the frequency of major incidents by around 7.3 percent to justify the regulations' cost.

Key Findings

Annual Refiner Costs Would Most Likely Be Around $58 Million

  • Maintaining compliance with the proposed regulations would cost refiners an estimated $58 million per year.

Costs to Society Would Come in the Form of Increased Gasoline Prices

  • In recent years, gasoline consumption in California has averaged about 14.5 billion gallons per year. Spreading the $58 million estimated refiner cost of the regulations across this volume of sales indicates a price increase of about $0.004 per gallon.

Safety Improvements Could Reduce the Number of Costly Major Refinery Incidents

  • Each major refinery incident avoided could save refiners about $220 million.
  • These changes could also improve system reliability, community relations, labor–management relations, and company reputation and public image.

Benefits to Society Would Come in the Form of Costs Avoided and Deaths Avoided

  • The largest potential benefit of the proposed regulations is the avoided cost of fuel-supply disruption related to a future major refinery incident. The researchers estimated that major refinery incidents have cost California consumers about $800 million per year, averaged over the past 16 years.
  • Reducing the number of refinery incidents avoids costs to those living near afflicted refineries, including emergency services, health care, reductions in property values, and reductions in local tax revenue to local governments.
  • The benefits could extend to prevented death and injury among nearby residents and refinery workers.

The Cost–Benefit Analysis Finds a Break-Even Point

  • The regulations need to make California refineries 7.3 percent safer than they are under the current regulations in order to be worth their cost.

The research reported here was conducted in the Infrastructure Resilience and Environmental Policy Program, a part of RAND Justice, Infrastructure, and Environment.

This report is part of the RAND research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

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