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April 27, 2006

Why there's a "Jump at the Pump"

By

When the national average price for gasoline hits $2.90 a gallon in April, that's a bad sign. That could be the cheapest price we'll see for the rest of the year.

Worse, much of the recent increase could have been avoided.

Prices often rise as we head into May and stay elevated throughout the summer. One reason, of course, is that demand for gasoline picks up from Memorial Day through Labor Day as millions of families take vacations. But May is also the month when the fuels industry must complete the costly transition to the more stringent summer-grade gasoline standards, designed to fight smog.

These gasoline regulations have done little to improve air quality -- the air was getting cleaner just as quickly before they were imposed as after. But they clearly raise the prices at the pump, above and beyond the already-substantial impact of high crude-oil prices. Not only are these supposedly cleaner-burning blends more expensive to produce, but the logistical burden of having to provide so many different specialized fuel recipes (several cities, states and regions have their own unique summer gasoline blends) sometimes leads to localized shortages and price spikes.

Last year's big energy bill, passed as a response to high pump prices, is actually making things worse. Several of its provisions, including a requirement that expensive ethanol be added to gasoline, already have tacked on a few cents per gallon.

The energy law could do more damage throughout the summer, especially as ethanol use expands. According to the Department of Energy's Energy Information Administration (EIA), "as the summer progresses and demand grows, the tight supply situation is not likely to ease significantly, leaving the market exposed to the increased potential for price volatility." EIA is particularly concerned about summer supplies and prices on the East Coast and parts of Texas, where ramping up ethanol use will be especially problematic.

Drivers usually get a price break after Labor Day when demand declines and the summer regulations lapse. But that didn't happen last year, thanks to Hurricanes Katrina and Rita. By knocking out offshore oil wells (as well as onshore refineries and pipelines), the storms extended the pain at the pump into autumn.

The federal government obviously can't be held responsible for hurricanes, which threaten the coastal areas of the Atlantic and Gulf of Mexico from June through November. But it can be blamed for our over-reliance on energy from the hurricane-prone Gulf.

The central and western Gulf of Mexico provides fully 25 percent of America's domestic oil, in part because so many other offshore and onshore areas are off limits. If we allowed drilling elsewhere -- in currently restricted areas in the Pacific and in Alaska's Arctic National Wildlife Refuge (ANWR), for example -- America would have greater supplies and lower prices overall, but also less vulnerability should a hurricane or other natural disaster strike any one region.

As it is, if the Gulf of Mexico endures another active hurricane season, gasoline prices could stay elevated well beyond the summer. Colorado State University hurricane expert William Gray, who correctly predicted a busy hurricane year in 2005, forecasts "another very active Atlantic basin tropical cyclone season in 2006," though not as bad as last year.

On the other hand, it's always hard to predict oil and gasoline price trends, and a decline is always possible. Some experts argue that current prices already assume the worst for this summer and could decline given any good news -- for example, if a few oil wells and refineries still suffering from Katrina damage get back online sooner than expected or if tensions with Iran ease a bit. This is possible but not likely.

It's probably too late for the federal government to reverse the likely jump at the pump over the next several months. But it can begin the process of undoing the mistakes that contribute to high gasoline prices. President Bush's recent announcement that he may temporary suspend environmental rules for gasoline is a start. But Congress needs to overhaul the regulations that require unnecessarily costly summer gasoline formulations and restrict new oil drilling. Eliminating the disastrous ethanol mandate also would help.

Gasoline prices don't have to heat up along with the temperatures. If lawmakers take the right steps now, future summers could be a little cooler -- at the pump, at least.

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

Distributed nationally on the Knight-Ridder Tribune wire

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