Gas Price Scapegoating: Lieberman in the Chicago Sun Times

Published in the Chicago Sun Times

June 25, 2000

The White House and federal bureaucrats are trying to find out who is behind the recent surge in gasoline prices, particularly in Chicago and Milwaukee. Somebody should just hand them a mirror.

In what is fairly obvious to everyone else, the main culprit is the Environmental Protection Agency’s reformulated gasoline (RFG) program, designed to fight smog. Since 1995, the smoggiest areas of the country are required to use RFG, the cost of which has been several cents per gallon higher than conventional gasoline. But on June 1, 2000, tough new RFG requirements took effect (RFG 2), sending the initial cost differential to ten cents per gallon nationwide, according the figures compiled by the US Energy Information Administration (EIA).

The spread has since narrowed, but is still too much in light of a 1999 National Academy of Sciences study concluding that RFG is only modestly effective in reducing smog. However, in Chicago and Milwaukee, where there have been problems in refining and distributing sufficient supplies of this newfangled RFG 2, costs have been 40 cents or more per gallon above conventional gas.

The Clinton Administration has tried to shift the focus away from regulations and towards the oil industry, launching a Federal Trade Commission (FTC) investigation into possible collusion and price gouging. White House spokesman Joe Lockhart explained that “reformulated gasoline adds a couple of pennies to the price of gas,” suggesting that the rest of the increase is due to oil company shenanigans. Vice President Al Gore, particularly sensitive to claims that environmental regulations are at fault, similarly leveled accusations that “big oil is gouging American consumers.” EPA Administrator Carol Browner flatly denied any blame, stating that “this is not about the RFG program.”

These and other Administration officials neglected to explain why an industry they think can easily manipulate the market would have let gas prices remain so low for most of the past twenty years, or why it would engage in price gouging only in Chicago and Milwaukee. The FTC investigation need not take long.

Of course, the real lesson here is that when the federal government micromanages fuel supplies – or anything else for that matter – costly unforeseen problems will emerge. And the real solution is for legislators and regulators to consider such possibilities before taking action, not to divert blame by concocting silly conspiracy theories afterwards.

There are several reasons why the introduction of RFG 2 in Chicago and Milwaukee has been a disaster. First, the inflexible June 1st deadline meant that the old gas could no longer be sold after that date, leaving stocks low just at the time of year when demand typically rises. Further, there have been greater than expected difficulties in producing and delivering the type of RFG 2 unique to the midwest, which is blended with ethanol. Some ill-timed pipeline outages made a bad situation worse.

Another key factor, thus far completely ignored by EPA, is the cumulative effects of its numerous clean fuel requirements. One third of the nation uses RFG 2, but mostly the non ethanol-containing kind, while the other two thirds uses conventional gasoline. In addition, there are several other federally-imposed fuel requirements specific to particular states or regions. Ten years ago, a localized shortage like that in Chicago and Milwaukee would have quickly ended with an influx of gas from elsewhere. But today, the rest of the country doesn’t make midwest-specific RFG 2. Balkanization, not collusion, kept gas supplies low and prices high weeks after the initial problems in meeting the June 1st RFG 2 deadline emerged. Indeed, wide geographically-based price disparities distinguish this gas crunch from those in the 1970s, and are a clear sign that a complex regulatory scheme is the leading cause.       

Too bad the Administration has not learned the right lessons, because EPA is in the process of promulgating a slew of new regulations that will further impact the gasoline market. For example, the agency is creating tough new standards for sulfur content in gasoline and diesel fuel, ignoring warnings from refiners of higher costs and supply problems. Furthermore, EIA has predicted that “additional clean fuels programs could make the system more vulnerable to local outages and price spikes.” In other words, what happened in Chicago and Milwaukee on June 1st may be repeated elsewhere as new EPA requirements take effect in the years ahead.

In the meantime, the government officials responsible can either start working on regulatory reform, or start working on their excuses for when the next price spike hits.

Ben Lieberman is a policy analyst with the Competitive Enterprise Institute.