April 6, 2006 | Commentary on Energy and Environment

Paying more at the pump -- needlessly

Imagine this: New York state mandates that milk must be enriched with Vitamin A. Next door, Pennsylvania mandates milk contain no extra Vitamin A, but extra Vitamin D. Nearby Vermont mandates extra Vitamin A, no extra Vitamin D and extra Vitamin B. What would happen to the price of milk in these three states?

It'd go through the roof.

Companies that produce commodities count on being able to sell the same product anywhere. Demand that they produce their product in different ways for different places, and the price -- for the producer and thus for the consumer -- goes up.

Now, in real life we'd never demand different formulations of milk from state to state. Yet that's exactly what we do with gasoline, and it's one reason the price of fuel is so high.

When the 1990s began, gasoline was a national commodity, sold the same way no matter which state it was purchased in. The major price variable was how much each state chose to tax it. But the Clean Air Act Amendments in 1990 changed that. Specialized blends -- namely, reformulated gasoline and oxygenated gasoline -- were mandated for certain areas of the country. Today the market is balkanized, with as many as 12 distinct types of motor fuels in use at any given time.

In 1999, the Energy Information Administration noted the growing fuel problem this created. It concluded that, "the proliferation of clean fuel requirements over the last decade has compli­cated petroleum logistics" and predicted "additional clean fuels programs could make the system more vulnerable to local outages and price spikes."

And the problem isn't simply shipping different types of gasoline to different markets. Several of these special­ized blends are more expensive to produce than conventional gasoline. In addition, the logistical burden of separately refining, storing and ship­ping so many "boutique fuels" adds to costs and raises the likelihood of temporary shortages in different places. When there's a shortage, prices rise quickly.

Unfortunately, the hodgepodge of gasoline regula­tions has been especially problematic in the late spring and summer, when gasoline demand increases and more stringent summer-grade requirements take effect.

These regulations also have exacerbated the grow­ing problem of tight refinery capacity. Even without the new requirements, America's refineries would be hard-pressed to keep up with the growing demand for gasoline, but these rules make it an even greater challenge to produce sufficient fuel.

For example, some components of gasoline now must be removed to meet the federal specifications, adding to produc­tion costs and decreasing output. The new regula­tory requirements have added tens of billions of dollars to refining costs without increasing output. This leaves the refining sector with considerably less in resources to invest in expanding capacity and makes those expansions more expensive.

Unfortunately, specialized fuels aren't merely expensive; they're also ineffective. They were designed to clean the air, but the experiment in federally micromanaged gasoline blends has accomplished little to justify the costs.

Motor vehicles have become much cleaner, and overall air pollution has declined dramatically over the past three decades. However, those gains are attributable mostly to improvements in the vehicles themselves rather than to the proliferation of special­ized fuels.

Indeed, the rate of decline in auto pollution shows little change after these blends were introduced. And new vehicle emissions standards now being phased in will ensure con­tinued declines in exhaust emissions, regardless of whether conventional or specialized blends are used.

In fact, some provisions of the 1990 law actually have proven to be environmentally counterproductive. In particular, the requirement that some gasoline contain 2 percent oxygen led to the widespread use of methyl tertiary butyl ether (MTBE). Not only has MTBE done little to help clean the air, it has contami­nated many water supplies.

We can have more gasoline at lower prices if Congress is willing to streamline the regulations.

The Energy Policy Act of 2005 did make some changes in the fuel requirements, but they were a wash, overall. The MTBE requirement was repealed, and the law modestly streamlined gasoline regula­tions. However, it also contained a requirement that ethanol be added to the fuel supply, which likely will add to the cost and complexity of providing motor fuels.

Washington should limit the number of different gasoline types it demands and provide more flexibility in implementing the substantive require­ments of the Clean Air Act so that fewer areas will need to use specialized fuel blends.

Let's make gasoline, like milk, a commodity again, so it will no longer be cheaper (or more expensive) in one part of the country than in another.

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