Regulations to Blame for Rising Gas Prices

Published June 1, 2003

This spring, labor unrest in oil-producing Venezuela and developments in Iraq sent the average price of gasoline above $1.70 per gallon, up 35 cents since January 1. Fortunately, those problems are being resolved and prices are falling. But before prices return to January levels, drivers will face the next big threat to affordable gas: summer. To make matters worse, Congress is taking steps that may cause a summertime price jump at the pumps.

Motor fuel consumption rises along with the temperatures, as millions take to their cars and SUVs for vacations. Several experts think the summer of 2003 may be busier than usual.

The Department of Energy’s Energy Information Administration (EIA), in its Summer 2003 Motor Gasoline Outlook, states “gasoline demand is projected to average 9.18 million barrels per day, a new record, up 150,000 barrels per day from last summer.” Similarly, AAA predicts “there is a pent-up demand for travel that will gain momentum as we get closer to the start of the summer travel season.”

Regulatory Burden

Recent events have shown even modest supply-demand imbalances can translate into big price increases. A host of environmental regulations, including several smog-fighting provisions that take effect every May through September, contribute to supply uncertainties. These measures include requiring the use of reformulated gasoline (RFG) in metropolitan areas with the highest summertime smog levels.

Washington’s efforts to create cleaner-burning summer blends have earned only a mixed environmental record, but they have clearly added to prices. Not only does it cost more to make each one of these formulations, but, according to EIA, “the proliferation of clean fuel requirements over the last decade has complicated petroleum logistics.” Refiners have to make and pipeline operators have to transport a wide variety of distinct gasoline types to their specific markets. The difficulties in doing so were major contributors to localized early-summer price spikes in 2000 and 2001, and they still pose a threat for this and future summers.

Washington created this costly maze of regulations, so Washington can fix it. Instead, both the House and Senate are planning to complicate matters by adding an ethanol mandate to the pending energy bill. If enacted, it would require that minimum amounts of costly renewable fuels, mostly ethanol derived from Midwestern corn, be added to the nation’s gasoline supply. Ethanol costs considerably more than an equivalent amount of gasoline, which is precisely why the ethanol industry needs a federal law requiring its use.

Some predict the ethanol provisions will add no more than a penny per gallon, but recent price spikes associated with increased ethanol use in California do not bode well for a coast-to-coast mandate. Worse yet, ethanol’s properties make it particularly difficult to use in hot weather, adding yet another summertime difficulty.

To its credit, Congress is also proposing to streamline the RFG program. Still, most of the costly regulatory burden would remain, and the ethanol mandate “adds one more layer of regulatory complexity,” according to a refining industry source.

We’ll soon find out whether this summer will be a good or bad one for gas prices. But unless Washington refrains from micro-managing the recipes for motor fuels, future summers will likely get worse.

Ben Lieberman is director of clean air policy with the Competitive Enterprise Institute, in Washington, DC.