The stage is set for sky-high gasoline prices this summer. We probably won't threaten the inflation-adjusted record of $2.90 per gallon set in 1981, but all signs point to bad news for motorists in the months ahead. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
And despite the implications of $40 fill-ups so close to the fall elections, the federal government continues to contribute to the problem.
What you pay at the pump is determined by the price of crude oil, the cost of refining the oil into gasoline and transporting it your local gas station, and fuel taxes. Of these, the largest factor is the cost of oil, which is responsible for more than 40 percent of the retail price for gas. Strong global demand and less-than-robust supply have kept levels around $35 to $38 per barrel, more than $10 above the price heading into last summer. Every dollar increase in the price per barrel translates into an extra 2.5 cents per gallon of gas.
Once the summer vacation season starts on Memorial Day, demand increases, and oil probably won't decline until September. In other words, today's already high pre-summer prices may be the lowest we'll see for many months.
The cost of oil is set by global supply and demand, and federal policy can affect it only a little in the short term. But the cost of crude merely sets the gas price floor, while the other costs add to it. It is with these costs that federal regulations have greatly exacerbated matters.
In recent years, <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Washington has imposed a bewildering variety of regulations, mostly designed to make gasoline cleaner-burning. Each adds to the cost of producing gasoline.
Further, federal and state regulators now mandate numerous unique gasoline recipes for different parts of the country, turning what was once an efficient national market into a patchwork of many smaller ones. The logistical burden of separately refining and distributing all these distinct blends strains the nation's already struggling motor fuel infrastructure, and adds another layer to the costs. This is particularly true in California and the upper Midwest, where the number and complexity of motor fuel requirements are the worst in the nation.
The greater Chicago area is required by federal law to use a specialized blend called reformulated gasoline, which is more expensive to produce. And, since Chicago is surrounded by areas that mostly use other blends, it is a somewhat isolated market prone to occasional supply disruptions and price spikes. According to AAA, a gallon of regular gas in Chicago currently costs $1.80, only slightly above the national average of $1.74, but that could change rather quickly.
The fact that gas in the most expensive areas (right now in California) costs 50 to 75 cents per gallon more than in the cheapest ones (Georgia and South Carolina) demonstrates that more is going on than a rise in the price of oil, which is the same everywhere. Not coincidentally, the most expensive cities also have the most stringent regulatory requirements.
For Chicago and several other metropolitan areas, the regulations get tougher in the summer months, when smog-fighting requirements kick in. This explains the springtime price spikes that have become common in recent years, as refiners begin to make the difficult transition from winter-grade gasoline to these summer blends.
And, as if all the existing regulations are not challenging enough, the federal government is constantly phasing in new ones, including a reduction in the sulfur content in gas that began this year.
A major overhaul of the Clean Air Act's gasoline requirements is long overdue, but even if one is not in the cards, Congress could at least make a few small changes to streamline the regulatory burden. A good place to start is with those requirements—and there are several—that not only add to the cost of gas but have failed to do any good environmentally.
There are some motor fuel provisions in the energy bill, which is currently stalled in Congress, but they are a mixed bag at best. They do eliminate a few problematic fuel requirements, but also add new ones, in particular a mandate that ethanol be added to gasoline. Overall, a Department of Energy report forecasts that the energy bill may actually add a little to the price of gasoline.
But Washington's relative indifference may not last long. While comparable gas price spikes occurred in 2000, 2001, and 2003, none lasted more than two months. When prices went back down, so did the public outcry for Congress to do something about them.
In contrast, if today's high prices persist well into the summer—especially the summer of an election year—we may finally see some serious efforts to tackle the red tape surrounding the nation's gas pumps.