Another Gas Spike: The Energy Crisis, Take Two

Lieberman Op-Ed in National Review Online<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />

Once again, gasoline prices are on the rise. As in the summer of 2000, and again last May, Chicago and Milwaukee are leading the nation — with prices above $1.80 per gallon, a 40-cent jump in less than a month. Elsewhere, prices have increased 16 cents per gallon, to an average of $1.54.

Fortunately, this time the federal government has admitted to contributing to this volatility, and it's trying to do something about it.

During the Midwestern gas crunch of 2000, prices in Chicago and Milwaukee topped $2.00 for the first time, spurring a wave of accusations. Some critics blamed collusion and price gouging on the part of the major oil companies; others pointed to the growing motor-fuel regulatory burden under the 1990 amendments to the Clean Air Act.

Several federal investigations have found the latter to be the main culprit. Specifically, a Federal Trade Commission (FTC) report, released last March, uncovered “no evidence of collusion or any other anti-trust violation” behind the price increases. The FTC report went on to implicate federal regulations, particularly the one requiring reformulated gasoline (RFG) — a specialized blend mandated in 9 metropolitan areas, including Chicago and Milwaukee. Though the RFG program had been in place since 1995, tough new standards (RFG II) took effect just prior to the 2000 price spike. The FTC concluded that the “difficulties in producing the new, more complex RFG II contributed to supply problems specific to the Chicago/Milwaukee area.” (Chicago and Milwaukee use a unique type of RFG that is blended with ethanol.)

The Department of Energy's Energy Information Administration (EIA) reached similar conclusions. As early as 1999, EIA was warning that “the proliferation of clean fuel requirements over the last decade has complicated petroleum logistics,” and that “additional clean fuels programs could make the system more vulnerable to local outages and price spikes.” In a recent report on the 2000 price spike, EIA noted that “RFG prices in the Chicago and Milwaukee areas increased more than 30 cents per gallon over conventional prices,” and cited the “unexpectedly difficult transition” to the new RFG II as a contributing factor.

EIA also predicted that the summer 2000 price increases could be repeated in 2001, since the conditions that gave rise to them have not changed. In addition to the upper Midwest, EIA identified California and the East Coast as areas subject to greater-than-average price volatility. Unfortunately, they were right. Early in the summer, RFG cost as much as 20 cents per gallon more than conventional fuels, adding to pump prices in Baltimore, Chicago, Hartford, Houston, Los Angeles, Milwaukee, New York, Philadelphia, Sacramento, San Diego, and other cities.

Compounding the challenges in providing these specialized blends is the lack of adequate refining capacity. Due in part to strict environmental regulations, no new oil refineries have been built in the U.S. in over 20 years, and expansions of existing facilities are lagging behind demand. Only a small number of refineries are available to produce the fuels for the specialized markets in California and the upper Midwest.

Last June, John Cook, Director of EIA's Petroleum Division, noted that Chicago/Milwaukee and California are markets in which “the required gasolines are unique, and only a limited number of refineries make these products.” He noted that a production problem at even one facility could boost prices. Cook's prediction was proved right when the August 14th outage at Citgo's Lemont, Illinois, refinery sparked a sharp rise in prices.

Still, at least the recent gasoline price jump might shake some out of their energy complacency. Last May, President Bush released his comprehensive energy plan, which included provisions to streamline the regulations on gasoline and refinery construction. At the time, gasoline was over $2.00 per gallon in several areas, natural gas was also near record levels, and California was experiencing rolling blackouts. Then the price of gasoline and natural gas fell in June and July, and predicted summer blackouts failed to materialize; so many critics of the administration declared the so-called “energy crisis” a dud.

But the recent price increases only underscore just how precarious motor fuel markets have become. We need to take the administration's energy plan seriously. If we don't, gasoline price spikes could become both more common and more severe in the years ahead.

Copyright © 2001 The National Review