Misperceptions At The Gas Pump
Gas prices have surged, as have the demands for the government to do something about it. But only a few of the factors affecting gasoline prices are within federal control. It is these things — particularly taxes and regulations — that should be, but aren't, the focus of efforts to reduce the pain at the pumps.
One factor that is hard for Washington to influence is the market price of oil, which is set by global supply and demand. Strikes in oil-producing Venezuela and uncertainty surrounding Iraq increased the price per barrel of crude by 50 percent since Jan. 1. Unfortunately, episodes of instability in oil-producing regions are unavoidable, as are the resultant price spikes.
Domestic oil has the advantage of flowing free of foreign tyrants and turmoil, but the supply is currently limited to 42 percent of the nation's needs. Allowing production in the Arctic National Wildlife Refuge (ANWR) and other new U.S. sites would only dent, but not substantially reduce, our dependence on foreign crude.
Government efforts to reduce demand have limits as well. Past federal fuel economy standards for cars and trucks have failed to deliver the predicted declines in energy use. Setting stringent new standards would only hurt consumers by forcing them into smaller, less safe vehicles. And, feasible alternatives to petroleum-powered cars and trucks are still at least a decade away, despite many years of federally funded research.
Thus, the price of oil, which is responsible for about 40 percent of the price we see at the pumps, is largely outside of government control. On the other hand, a good chunk of the other 60 percent can be reduced. The most obvious target is taxes, including the 18.4 cents per gallon federal excise tax, as well as state and local taxes averaging 24 cents per gallon.
But rather than consider gas tax relief, Reps. Don Young, Alaska Republican, and James Oberstar, Minnesota Democrat, just announced a proposal to increase the federal tax by a nickel a gallon.
Beyond direct taxes is the hidden tax of federal regulations. This includes reformulated gasoline (RFG), a specialized blend required by federal law in nine major metropolitan areas. RFG currently costs nearly 15 cents per gallon more than already pricey conventional gasoline.
During the summer driving season, refiners face the dual challenge of meeting higher demand while producing fuel that meets the tougher warm weather regulations designed to combat smog. Assuming the cost of crude remains high over the next few months, this summer could be a record-breaker for gas prices.
Here too, Congress is headed in the wrong direction, adding new gas regulations instead of streamlining the existing ones. For example, the pending energy bill contains provisions requiring the addition of ethanol to gasoline. While a boon for Midwestern corn farmers and ethanol producers like Archer Daniels Midland, an ethanol mandate can only increase the price at the pumps. And Sens. John McCain, Arizona Republican, and Joseph Lieberman, Connecticut Democrat, recently introduced a bill designed to fight global warming that would further boost the cost of petroleum and other fossil fuels.
Oil prices fluctuate over time, but the tax and regulatory burden seems headed in only one direction — up. Since Washington created this burden, Washington can also reduce it. If the federal government wants to get serious about dealing with high gasoline prices, this should be the place to start.