The New Reason For Pain at the Pump

Everyone knows that the recent rise in the price of oil has had an effect at the pump, but something less well known is also affecting gasoline prices.  It is something the federal government could reduce, since the federal government created it in the first place.  It is gasoline regulations. <?xml:namespace prefix = u1 /><?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />


Until the mid-1990s, the feds did not micromanage the recipe for gasoline, the only exception being the phase out of lead in the 1970s.  But that changed with the 1990 amendments to the Clean Air Act, which began to take effect a few years later.


As a result of these provisions, we now have a bewildering variety of gasoline requirements.  One third of the nation uses something called reformulated gasoline, designed—very imperfectly as it turned out—to deal with summer smog in the nation's most polluted metropolitan areas.  We also have so-called oxygenated gas in several areas to combat high wintertime levels of carbon monoxide, a problem that was rapidly disappearing before the provisions even took effect.  In addition, conventional gasoline is also subjected to a number of requirements, which can vary by geographic location and time of year.


Beyond the direct role of the federal government, several states have also come up with their own unique gasoline blends, often in order to obtain the required federal approval for their pollution-fighting plans.


Some of these measures have helped reduce vehicle emissions and improve air quality, while others have not.  But all have succeeded in driving up the cost at the pump. In addition to the compliance costs of each regulation, the fact that we have gone from an efficient, fungible, national market in gasoline to a patchwork of regional, state, and local ones adds to the logistical costs in meeting the nation's fuel needs.


The impact of these regulations, some of which are still being phased in, has become especially noticeable in recent years.  And during periods—such as now—when high oil prices boost prices, the total effect can be very punishing on working families.


The fact that gas in the more expensive cities (mostly in California) currently costs as much as 75 cents per gallon more than in the cheapest cities attests to the fact that there is more going on than an increase in the price of oil, which is the same everywhere.  Not coincidentally, the most expensive cities also have the most onerous regulatory requirements.  Nonetheless, when gas price spikes occur, the policy debate focuses on the cost of crude while the regulatory burden often gets ignored.


Gas usually gets pricier heading into the summer months, as demand picks up and even tougher regulations designed to fight smog take effect.  Given today's starting point of $1.77, which is unusually high for March, this summer could prove to be very costly.  Breaking the inflation-adjusted record of $2.90 per gallon set in 1981 seems out of reach but is far from impossible.


Despite the specter of $50 summertime fill-ups just months before the fall elections, <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />Washington has yet to do anything substantial to reduce the regulatory burden.  This isn't so surprising given the focus on oil prices, which is something the feds can do little to change in the short term— opening up ANWR and other US sites to drilling would help, but would take several years.  Tapping the 600 million barrels of oil in the Strategic Petroleum Reserve (SPR) is a short-term option, but the SPR was meant for national emergencies that disrupt oil supplies to the US.  If used now simply to temporarily reduce today's high prices, it would not be available later until it is replenished.


Streamlining the regulations could do some good but is politically difficult, as the necessary changes to the Clean Air Act's gasoline requirements would spark loud environmentalist opposition.  If anything, policymakers may be heading in the wrong direction.  The proposed energy bill, currently stalled in Congress, is at best a mixed bag on gasoline.  It would modestly streamline a few of the fuel regulations, but would also add new ones, in particular a mandate that ethanol be added to gasoline.  According to the Department of Energy's Energy Information Administration, the energy bill may actually add up to three cents to the price per gallon once fully implemented.


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 it.  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 federal red tape surrounding the nation's gas pumps.