Now, Who’s to Blame?

California Governor Gray Davis and the state’s Democratic legislature are starting to seize control of the energy industry in

Next to the presidential race, the skyrocketing price of gasoline was the biggest news item last summer. In June, drivers in Chicago and Milwaukee became the first Americans to pay more than $2.00 per gallon—not quite a record in inflation-adjusted terms, but a regrettable milestone nonetheless. While some blamed Environmental Protection Agency (EPA) regulations, many in the Clinton administration pointed fingers at the major oil companies. Vice President Gore joined others in endorsing a Federal Trade Commission (FTC) investigation to determine whether, in his words, “big oil is gouging American consumers.” Over half a year later, the FTC investigation has come up empty-handed and the truth is emerging that big government, not big oil, deserves most of the blame for the great gas crunch of 2000.

While the FTC investigation, launched in early June, was underway, the real causes of the price rise started to become clear. All agree that the increase in the cost of oil was a factor. After staying below $20 per barrel throughout much of the 1990s, oil shot up above $30 in 2000, largely due to strong global demand and a resurgent OPEC. But high oil prices alone cannot explain all of the increase at the pumps, and they are certainly not the reason the cost of gas in Chicago and Milwaukee far exceeded the national average.

The Midwestern situation was greatly exacerbated by environmental regulations. Reformulated gasoline (RFG), a special blend required under the 1990 amendments to the Clean Air Act, must be used in the nine metropolitan areas with the most serious smog problems, including Chicago and Milwaukee.

Midwestern RFG differs from that used elsewhere in that it contains ethanol. On June 1, 2000, strict new EPA standards for RFG took effect. These new requirements initially proved very difficult to meet with the ethanol-containing RFG blends sold in Chicago and Milwaukee.

According to a June 28 Congressional Research Service report on the price rise, “as much as 25 to 34 cents, roughly estimated, could have been due to the unique RFG situation in Chicago/Milwaukee.” Similarly, the US Energy Information Administration (EIA), which presciently stated in 1999 that “additional clean fuels programs could make the system more vulnerable to local outages and price spikes,” also confirmed that EPA contributed to the price increase. In a July 13 Senate hearing, John Cook, director of EIA’s Petroleum Division, noted that the Midwest increases were “similar to price surges often seen in California since the start of their RFG program.”

Nonetheless, as long as the FTC investigation was still in progress, EPA bureaucrats could use it to divert attention away from the true cause. When confronted with oil industry assertions that the onerous new RFG regulations were to blame, EPA Assistant Administrator Robert Perciasepe pointed out that “FTC is investigating these companies for fooling around with the supply.” Agency spokesman Dave Cohen was even more direct, telling reporters “We’re suspicious of gouging.”

Throughout the summer and fall, Vice President Gore voiced similar concerns, usually after reminding voters that George Bush and Dick Cheney are former oilmen. “One of the central choices we face in this election is whether we will have a president who’s willing to stand up to the big oil interests and fight for our families,” said Gore, promising to “put an end to the big oil price gouging.”

The FTC issued an interim report in late July, which provided no substantive information about the oil industry’s conduct. The agency concluded that “the investigation likely will consume at least three or four more months.” FTC then fell silent, until now. In a February 26 status report to Rep. Billy Tauzin (R-LA), chairman of the House Energy and Commerce Committee, FTC Chairman Robert Pitofsky conceded that the “investigation uncovered no evidence of tacit or explicit collusion among market participants.” FTC’s final report has still not been released.

The summer of discontent at the pumps is now a memory, but the blame game is still important, at least for those interested in avoiding future gasoline price increases. Now that it is clear that EPA, and not the oil industry, caused the price surge, it is time for corrective action. New EPA Administrator Christine Todd Whitman has an opportunity to take a fresh look at her agency’s other motor fuel regulations, with an eye toward ensuring that they don’t inflict unnecessary pain on the driving public. Congress can also step in and reject gas regulations that may be doing more economic harm than environmental good.

It won’t be easy. Even as millions of consumers were fuming over $40 fill-ups last summer, EPA was busy working on new regulations that threaten to ratchet up prices further. Some of these rules were finalized by previous EPA Administrator Carol Browner in the closing weeks of the Clinton administration.

Unraveling the Clinton admin-istration’s motor fuels legacy will be a cumbersome task. But it is one worth undertaking, lest $2.00 for a gallon of gas become the norm.