As Spring Arrives, Will Gas Price Hike Follow?

As Spring Arrives, Will Gas Price Hike Follow?

Lieberman Op-Ed in The Chicago Sun Times
April 01, 2002

Spring has returned to Chicago. The bitter cold is gone, the sailboats are back on Lake Michigan and the White Sox and Cubs have opened another season with high hopes. But there's one springtime Chicago tradition we can do without--the big jump in gasoline prices. It happened the last two years, and is already starting again.

The good news is that a return to the $2-per-gallon levels seen in May 2000 and 2001 is less likely--but only somewhat. Area refiners have now gained two years of experience dealing with the tough and expensive requirements for reformulated gasoline, a specialized blend required under the federal Clean Air Act for Chicago and several other metropolitan areas. Further, some minor regulatory changes by the Environmental Protection Agency might help ease the transition from the less stringent winter requirements for reformulated gasoline to the more challenging summer specifications. The switchover from winter to summer blends was cited by many as a big part of the reason prices had become so volatile in the spring.

Nevertheless, the risk of gas price increases remains. The Bush administration and Congress have thus far refrained from more substantive changes to the Clean Air Act's costly fuel requirements. In addition, surging crude oil prices (which account for about 40 percent of the price at the pumps), linked to OPEC production limits and rising demand, could continue to push costs up across the nation, they have over the past month.

Ethanol mandate will add to costs

Over the longer term, prices might be trending higher. More federal fuel changes are in the works, including a new provision in the pending Senate energy bill requiring that ethanol be added to gasoline. If enacted, ethanol usage would have to triple over the next decade. Though this provision is very good news for Midwestern corn farmers and ethanol producers like Archer Daniels Midland, the costs will be incurred by the driving public. The Department of Energy estimates that this ethanol provision would add 9 to 10.5 cents per gallon to the national average price of reformulated gasoline.

Adding to upward pressure are persistent problems with refinery-capacity problems. Relatively low profit margins, combined with complex and costly rules on refinery expansions, have kept capacity at barely adequate levels. This is particularly true of markets like Chicago, with its specialized blends made by a relative handful of refineries. Production problems at even one such facility have been enough to temporarily affect retail prices in the past, and the risk of recurring spot shortages has not yet been addressed.

How politics adds to fuel prices

Part of the problem is political as well. Past price spikes have led to charges of industry price gouging and collusion. Though perennially popular, these allegations have been investigated and largely refuted. The Federal Trade Commission, Congressional Research Service and Department of Energy have all implicated federal regulations, and not market manipulation, as the main cause of Chicago's occasional forays into $2-a-gallon territory. Even the Environmental Protection Agency, which initially denied any role in the Chicago price increases, has tacitly admitted culpability by modifying some of its fuel rules to address the problem.

Unfortunately, these allegations serve to draw attention away from what really needs to be done, and make the necessary reforms less politically possible. In fact, the Bush administration has become very sensitive to claims that it is helping its "big oil" friends, and has not yet offered any substantial changes to the way Washington regulates motor fuels.

Thus, the possibility of a return to $2-a-gallon gas is still very real in the upcoming weeks and particularly in the years ahead. Even $3 a gallon, once thought as unlikely as a Cubs-White Sox World Series, is no longer out of the question.

Ben Lieberman is a senior policy analyst with the Competitive Enterprise Institute, in Washington, DC. He can be reached at blieberman@cei.org.