March 24, 2005

March 24, 2005 | Commentary on Regulation

Streamlining regulations would help reduce gasoline prices

It's a good bet gasoline in Chicago won't be cheap this summer. The only question is whether Chicagoans will again face the highest prices in the nation.

Right now, regular unleaded is above $2 per gallon throughout the U.S., and the culprit is high oil prices. Oil is selling in the mid-$50s per barrel compared to the mid-$30s this time last year, and under $20 throughout most of the 1990s. Oil accounts for nearly half the cost of gasoline, and each $1 per barrel increase adds approximately 2.5 cents to the price we pay for each gallon.

Thus, the rise in the price of crude explains the pain at the pump. And relief any time soon is unlikely: The Department of Energy predicts a national average of $2.15 per gallon during the spring.

Non-discrimination in pricing

Oil costs the same everywhere, and doesn't discriminate against Chicago. But other factors do -- namely, fuel regulations. Oil prices create the floor, then federal and state regulations on the composition of gasoline raise production costs above that floor. Unfortunately, the rules affecting Chicago gas are more stringent than those elsewhere.

Complying with these fuel regulations is particularly challenging heading into late spring/early summer. This is the time of year when the industry must switch from winter-grade to summer-grade gasoline.

Chicago is required under federal law to use something called reformulated gasoline, which was designed -- very imperfectly, as it turns out -- to combat summer smog. And not just any reformulated gasoline: The reformulated gasoline mandated in Chicago uses ethanol as an additive, while several other reformulated gasoline markets do not.

So not only must the refining and distribution system make the transition to summer gasoline without any glitches, but it must do so when demand is picking up heading into summer vacation season.

The tricky transition to Chicago-style summer fuel helps explain why the city posted the nation's highest gas prices in May and June of 2000 and again in 2001, an honor usually reserved for Los Angeles or other California markets.

Indeed, there were times when Chicago gas was 50 cents per gallon above the national average.

Since the price spikes of 2000 and 2001, area refiners and distributors have made great strides in dealing with the complex regulatory challenges, and the springtime bloom in prices haven't occurred since. Nonetheless, a recurrence is always possible.

Even after the transition to summer gas is complete, the city still isn't out of the woods.

Because Chicago gas is distinct from that used in many surrounding areas, the market is prone to logistical problems that inflate pump prices. Chicago's refining capacity is tight, with only a handful of refiners dedicated to supplying the market. Thus, a mishap causing downtime at even one refinery can lead to localized shortages and price spikes that cannot be quickly addressed by bringing in supplies from outside.

With oil costs already making gas expensive enough, any such hiccups can send area prices to really uncomfortable levels.

Unfortunately, there isn't much the federal government can do to bring down oil prices, particularly in the near term. Increasing domestic production would help, and the Senate's recent vote to allow drilling in Alaska's Arctic National Wildlife Refuge should be applauded. However, increasing supplies should be seen as a long-term project, not a short-term solution.

Within government control

On the other hand, streamlining regulations is fully within government control. Last year's energy bill, which stalled in Congress, contained a few consumer-friendly, useful gasoline provisions, but didn't go far enough. As Congress revisits the energy bill in the weeks ahead, it should consider eliminating motor fuel rules that have done more economic harm than environmental good.

Doing so won't bring back $1-per-gallon gas, but it could help ease Chicago's gasoline problems.

Ben Lieberman is a senior policy analyst in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies

First appeared in The Chicago Sun Times