Primary Costs to Produce Gasoline
major components drive the retail price of gasoline: the cost of
crude oil, refinery processing costs (including environmental
regulations), distribution and marketing costs, and taxes.
Crude oil is the largest cost component. EIA data show
that crude oil accounted for 46 percent of gasoline costs in March.
Increasing world demand, unrest in energy-rich countries such as
Venezuela, and the March decision by OPEC to cut crude oil output
by 1 million barrels per day have kept world supplies tight and
have driven up crude oil prices.
EIA's "Summer 2004 Motor Gasoline Outlook" notes that the price for
West Texas Intermediate crude oil surpassed $38 per barrel in late
March--the highest level since early 1991. The EIA projects that
crude oil prices will average $33.40 per barrel (79.6 cents per
gallon) during the summer. It expects retail regular gasoline
prices to average $1.76 per gallon from April through September--up
20 cents from summer 2003.
While Congress can do little to drive down
the cost of crude oil during the summer driving season, it can and
should authorize access to more domestic oil supplies for the
Federal, state, and local taxes account for 24 percent
(the second largest component) of the retail price of gasoline. The
federal gas tax is 18.4 cents per gallon. State gasoline tax rates
vary: They amount to 8 cents per gallon in Alaska, 33 cents per
gallon in New York, 32.4 cents per gallon in California, and 36.3
cents per gallon in Hawaii. These taxes add to the price of motor
fuel and--in part--drive the regional price differences. On
average, local taxes add approximately another 2 cents per gallon
to the price.
The EIA also reports that distribution and marketing costs
in March accounted for 11 percent of the retail price of gasoline.
The wide variety of specialized regional gasoline formulas required
by federal and state regulators make storage and distribution more
difficult and increase the potential for supply disruptions and
short-term price spikes. Moreover, specialized blends required for
one area of the nation may not be suitable for another area.
Furthermore, not every refinery can
produce every grade of gasoline and pipelines have limited
flexibility to move different grades of gasoline to different
places. The American Petroleum Institute states that these
circumstances make it difficult for refiners to get the right grade
of gasoline to the right market in the right quantity.
According to the EIA, refining costs represented almost 20
percent of the retail cost of gasoline in March. Congress could
significantly reduce these costs by scaling back the excessive and
cumbersome federal regulations on refiners.
example, the 1990 Clean Air Act amendments mandate the sale of
cleaner-burning reformulated gasoline (RFG) in order to reduce
summer smog in nine major metropolitan areas. The law also requires
that RFG contain at least 2 percent oxygen by weight. To comply
with these regulations, refiners must switch from winter-grade fuel
to costlier summer-blend gasoline. According to the Federal Trade
Commission (FTC), this adds 4 cents to 8 cents per gallon to the
price of gasoline.
Moreover, a common oxygenate, MTBE (methyl
tertiary butyl ether, which is used in about 70 percent of the
reformulated gasoline) has been banned in California, New York, and
Connecticut. This means that refineries must use a different
additive, such as ethanol--which requires more crude oil in the
production process. Reducing or phasing out MTBE use--but leaving
the 2 percent oxygenate requirement in effect--would increase
ethanol use. This would further contribute to price volatility and
unnecessarily high gasoline prices.
Likewise, complying with a new national
low-sulfur gasoline regulation for passenger cars not only presents
scientific challenges for refiners, but also could adversely affect
gasoline supply and availability. The industry will need to invest
more than $8 billion over the next three years to meet this
requirement--which will result in higher prices at the pump.
addition to these federal regulations, some state and local
governments require specialized fuel blends--"boutique fuels"--to
satisfy local air quality needs.
hodgepodge of customized fuel requirements increases production
costs, which are ultimately reflected in the price of gasoline.
These varied gasoline specifications also restrict the ability of
refiners and distributors to move supplies around the country in
response to local and regional shortages. Further proliferation of
boutique fuel requirements would only contribute to the overall
problem and drive up costs during disruptions.