Lessons from the Gas Price Spike

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Labor Day weekend marked the end of summer and its high seasonal demand for gasoline. An estimated 28 million vacationers who hit the roads paid an average of $1.85 per gallon, still higher than a year ago but a reprieve from the $2-plus plateau of late May and early June.     

Prices typically drop after Labor Day, so the gas price spike of 2004 is most likely winding down. Coming in an election year, the price rise led to heated debate over the federal government's role, and there are important lessons.

Perhaps the biggest lesson is that the feds can't do very much about the oil price. Oil is responsible for almost half the price of gasoline, and its nearly 40 percent rise since the beginning of the year is the main reason for the jump at the pump.     

However, the cost of a barrel of crude is set by global supply and demand, and most reasons for the big increase—record demand in China and other nations, terrorism and political turmoil jeopardizing supplies from Persian Gulf countries, Russia, Venezuela and Nigeria — are not in American control.     

In fact, other than the <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />Iraq invasion and its resulting instability, none of these factors can be pinned on the United States.

Granted, we could do more to make use of domestic oil supplies—including the billions of barrels under a small portion of Alaska's Arctic National Wildlife Refuge (ANWR) now off-limits. But for the most part, the price of oil will fluctuate independent of any actions by Washington.

Though the rising price of oil was the chief culprit, costly federal regulations affecting gasoline made a bad situation worse.  As recently as the early 1990s, the U.S. had a single, fungible motor fuels market.  Today we have a patchwork of 18 or more distinct gasoline blends.  Several of these blends are more expensive to produce than conventional gas, and the logistical burden of having to separately refine, store and ship them adds costs.  In addition, these rules created many so-called “fuel islands,” markets with unique blends produced by only handful of refiners, making those markets far more vulnerable to localized shortages and price spikes.


New provisions effective this year brought the regulatory burden to an all-time high, and noticeably added to gas prices beyond the effect of oil alone.  And still more new requirements are scheduled for the years ahead.     

In contrast to the price of oil, these regulations are squarely within government control. Streamlining them is politically controversial but shouldn't be, since their environmental rationale is questionable.  Experience has shown these supposedly cleaner-burning fuels have fallen short of delivering promised air-quality benefits.  Overall, pollution is declining, but mainly not because of specialized gas formulations.     

Looking ahead, tough new vehicle emissions standards, being phased in beginning with this year's models, mean even less need for these gas regulations.  Your next new car, SUV or truck will be far cleaner than the one it replaces, regardless of the fuel type used.  All that is needed is conventional gasoline meeting certain minimal standards.     

In fact, the nation could eliminate most of the current specialized blends, return to a more fungible gasoline market, and still see continued pollution declines in the years ahead.     

John Kerry and George Bush both address gasoline prices in their respective energy plans. While there are several differences, both lay out a comprehensive energy agenda with a host of new federal programs. But, rather than an affirmative national energy policy, what we really need from Washington is an end to its current anti-energy policy.     

We have strangled gasoline in far more red tape than necessary. If politicians really want to make good on their promises to do something about high gas prices, reducing this regulatory burden is the logical place to start.