July 19, 2000

July 19, 2000 | News Releases on Energy and Environment

High Gas Prices Aren't Entirely OPEC's Fault, Study Shows

WASHINGTON, July 19, 2000-Many Americans blame high gas prices on OPEC, the Mideast oil cartel that produces most of the crude oil consumed in the United States. But several other factors, from gas taxes to environmental regulations, play a large role in what Americans pay at the pump, a new Heritage Foundation paper shows.

It's true the cost of crude oil makes up the single biggest share of gasoline prices-specifically, 43 percent, or 69 cents of the $1.60 per gallon consumers now pay in many metropolitan areas. But the rest, according to The Heritage Foundation analysis, comes from taxes (28 percent, or 45 cents), refinement (20 percent, or 32 cents), and distribution (9 percent, or 14 cents).

Gas prices have been driven up by production cuts OPEC made last year and by high demand from recovering Asian economies, which increased competitive bidding for crude oil, the analysis shows. Meanwhile, U.S. inventories of crude oil have declined sharply, resulting in lean reserves that will prevent prices from dropping much in the near future.

The tax burden breaks down as follows: Federal taxes add 18.4 cents per gallon (including the 4.3 cent increase imposed in 1993 that some lawmakers are trying to repeal); state taxes add an average of about 23 cents; and local taxes add another 2 cents. Americans spend about $53 billion per year in federal and state gas taxes, the study authors note.

Refinement costs-which include the price of reformulating gasoline to conform with federal environmental standards-are also on the rise, especially in the Midwest, the analysts say. New federal requirements that took effect June 1 make it more difficult and costly to make reformulated fuel, especially with ethanol. A recent Congressional Research Service report found that gas prices in the Chicago/Milwaukee area increased 25 cents as a result of the new federal requirements.

The study shows that regulations issued by the Environmental Protection Agency affect the price of gasoline in every state. For example, according to the Department of Energy's own Energy Information Administration, the average price for a gallon of regular gas in New England states ranges from $1.62 for conventional gasoline to $1.76 for reformulated gasoline.

As for distribution costs, areas farthest from the Gulf Coast-source of nearly half the gasoline produced domestically-tend to have higher prices. Technical problems with two oil pipelines that serve the Midwest recently disrupted supply to that region and contributed to the price hikes, the Heritage study notes.

Because the crude oil price is determined largely by OPEC, there is little the United States can do to change it. And another price run is possible because inventories remain low, refineries are operating at full capacity, and supply disruptions are unpredictable. All of which makes it imperative, the authors say, that federal lawmakers act quickly to reduce gasoline taxes.

"Cutting the federal gas tax would be one of the fairest, most significant and most sensible ways to reduce the price of a gallon of gas in the short term," they write. "At a time when Washington expects to have a record-breaking $4.2 trillion surplus of tax payments-or nearly $40,000 per family-over the next 10 years, Congress should take immediate steps to return at least a tiny portion of that surplus to American families."

Congress is considering several bills that would cut at least part of the federal gas tax, one of the fastest growing federal taxes. The proposals range from eliminating the 1993 increase (of 4.3 cents) to suspending the entire 18.4 cent federal tax for up to nine months. Suspending the federal tax for just three months would save motorists $4.4 billion, the study says.

The authors predict the economy will suffer if the price of oil remains high for too long. High oil prices, without any tax relief, will cost the average family of four more than $1,300, decrease consumer spending by nearly $80 billion, and cost almost 500,000 jobs, they estimate. And higher prices, combined with slower economic growth, will reduce federal tax revenues by $12.4 billion over the next three years.

The study was conducted by Heritage policy analysts D. Mark Wilson, a former economist with the Department of Labor, and Angela Antonelli, who previously served as an assistant branch chief in the Office of Management and Budget.

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