March 17, 2006

March 17, 2006 | Commentary on Energy and Environment

U.S. regulations big part of high gas prices

It isn't an anniversary to celebrate, but Chicago passed the one-year mark of gasoline above $2 per gallon. And, thanks in part to our federal government, another year at this level is a real possibility.

 

 According to the Department of Energy, Feb. 28, 2005 was the last time gasoline averaged $1.99 per gallon in Chicago. By early March, it hit $2 and has stayed well above that level since.

 

Chicagoans have dealt with shorter stretches of $2 gas before. Indeed, Chicago was the first American city to reach that milestone back in May 2000. But a few fill-ups at this wallet-emptying level is one thing, a year's worth is quite another.

 

Of course, the main culprit is the high price of oil. After staying comfortably below $20 per barrel throughout most the 1990s, the cost of crude ballooned to $56 in 2005, and currently sits at $62.17. Each dollar-per-barrel rise translates into roughly 2.5 cents more per gallon. Strong global demand is the primary cause of the increase.

 

But oil prices aren't the only reason. Federal regulations also have played a big part. This includes complicated fuel requirements that have led to a variety of costly, specialized gasoline blends, dubbed "boutique fuels."

 

In addition, the EPA has created a maze of red tape that makes it difficult for refiners to expand capacity to meet growing demand. These regulations have disproportionately hurt the Chicago market, which has both tough fuel requirements and tight refining capacity.

 

The $2 era for gasoline

 

How much longer will the $2-and-above era last?

 

It's hard to say, given the difficulties in predicting the future price of oil. Petro-pessimists warn that the amount of oil still untapped is limited, and point to the continued political turmoil in many major oil-producing nations. Optimists see a flood of new investment in global production that should come online in the years ahead, and hope that the federal government will lift restrictions on domestic oil production in Alaska and offshore.

 

While future oil prices might rise or fall, the federal regulatory burden is going nowhere but up.

 

Last year's energy bill was supposed to provide gas price relief, but it's having the opposite effect. For example, the new law's requirement that ethanol be added to gasoline has already boosted prices since it took effect Jan. 1. Since then, ethanol has ranged from 50 cents to $1 per gallon more than gasoline. The ethanol requirement might be good news for the Midwest corn farmers and big ethanol producers such as Decatur-based Archer Daniels Midland that lobbied for it, but it has added several cents to the pump price. The mandate, currently at 4 billion gallons for 2006, nearly doubles, to 7.5 billion gallons, in 2012.

 

The Environmental Protection Agency also is phasing in costly new limits on the sulfur content of gasoline and diesel fuel, and it recently proposed another rule designed to reduce benzene and other components from gasoline.

 

Many of these provisions, including the new ethanol mandate, are particularly costly during the summer months when the more stringent summer-grade fuel requirements take effect.

 

For this reason, the price of gasoline often rises in late spring, as the fuels system begins the difficult transition to these summer blends. Thus, the price this March/April might be the cheapest Chicagoans will see until fall.

 

Even beyond this year, the cumulative cost of so many gasoline requirements is likely to continue growing.

 

Regulatory inertia

 

Efforts to streamline or eliminate some of these regulations have been unsuccessful. Even relatively modest changes have been derided as environmental rollbacks. In truth, there is ample room to reduce the economic burden of these gasoline rules without sacrificing environmental protection, but attempts by some in Congress to do so have all failed.

 

Although 12 months of $2 gasoline has made this a high-priority political issue, Washington remains part of the problem. Right now, the federal government is doing nothing to reduce the likelihood that March 2007 will mark the two-year anniversary of $2 gas.

Ben Lieberman is a senior policy analyst at The Heritage Foundation (heritage.org), a Washington-based public policy research institute.

About the Author

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

Related Issues: Energy and Environment

First appeared in the Chicago Sun-Times