September 2, 2005

September 2, 2005 | WebMemo on Energy and Environment

No Easy Answers For Post-Katrina Gas Prices

Hurricane Katrina's human toll has been devastating. As well, the hurricane's impact on already-high gasoline prices is hard to ignore. Politicians are coming up with the usual list of easy answers to ease pain at the pump, but unfortunately, they are the wrong answers. Setting price caps, pumping lots of oil out of the Strategic Petroleum Reserve, and going after industry "price-gouging" and collusion will not have much of an impact, and each comes with problems of its own. Waiving some gasoline regulations, however, could help in the short term, and in the long term, increased drilling and refining capacity will help to avert disaster-driven price spikes.


The state of Hawaii is set to try the easiest answer of them all, mandating lower prices. State Senator Ron Menor, a supporter of the law imposing price controls, believes that "over a period of time, Hawaii consumers will realize savings at the pump."


Price controls were tried before, by the federal government in the 1970s, and the consequences were disastrous. The experience showed that attempts to force gasoline prices below market levels invariably result in shortages. Expensive gas gets replaced by scarce gas.


Those old enough to remember waiting in long gas lines-and stations sometimes running out before your turn-will get a real feeling of déjà vu when Hawaii's price caps take effect. This is not something that the other 49 states should do.


Others advocate another quick fix: unloading the 700 million barrels of oil in the Strategic Petroleum Reserve (SPR). The SPR is a federally-run oil stockpile that was created for use in times of temporary oil supply disruptions, such as an outbreak of hostilities in the Middle East that cuts oil production or prevents tankers from getting through. It can also be used for smaller supply disruptions, including those caused by hurricanes. In such events, the SPR would be tapped to fill the void and prevent a sharp price spike until regular supplies come back on line.


The government is set to release SPR oil to supply some Gulf-area refineries that would otherwise sit idle due to a lack of petroleum. This would be a limited release of several million barrels for a few weeks, until the Katrina-damaged Gulf supplies become available again. A similar release was done last year, in response to Hurricane Ivan, and worked out well.


However, others have been calling on the Administration to authorize a much larger release of SPR oil in an effort to flood the market and bring prices down. Long before Katrina, Sen. Charles Schumer (D-NY) was calling on the President "to act immediately to reduce skyrocketing prices at the gasoline pump by tapping the Strategic Petroleum Reserve."


Using the SPR to manipulate prices is a shortsighted strategy. Given that the global price is set by the supply and demand of 84 million barrels per day, 700 million barrels is not enough to make much of a difference for very long. After a few months of slightly lower prices, we would be right back to where we would have been anyway, andwe would no longer have the SPR on hand in case of an even more severe supply disruption.


High gasoline prices have also led to calls for investigation of the oil industry, in the hope that finding illegal collusion or other illegal practices and bringing the perpetrators to justice will fix the problem. Past price increases have led to many such investigations, and for the most part, they have come up empty-handed. It is worthwhile for the federal government to conduct an additional investigation to ensure that no illegal conduct is occurring this time, but the reality is that it is unlikely to result in any relief at the pump.


Other "solutions" are simply out of the question. For example, some in Congress have called for a temporary repeal of the 18.4 cents per gallon federal gas tax, which is used to build and maintain federal roads and bridges, until prices go down. Given the recently-passed $286 billion highway bill and its multitude of pork barrel projects, those gas tax revenues are already spoken for.


Some have called for tougher federal vehicle mileage standards, even more stringent then the Administration's recently-announced new standards for small trucks and SUVs. Beyond raising consumer choice and safety issues (more efficient vehicles are smaller and less safe in collisions), the government simply cannot force people into smaller cars overnight. Vehicle fleet turnover takes many years, and thus tougher mileage standards are not an immediate answer to high gas prices.


There are steps for reducing oil and gasoline prices that do make sense. Allowing more domestic oil drilling is one. Indeed, if we had more drilling in currently off-limits areas in Alaska (including the Arctic National Wildlife Refuge, which will be part of the budget debate when Congress returns), the Pacific coast, and elsewhere across the U.S., then we would not have been as dependent on the Gulf of Mexico production that was impacted by Katrina. There is also room to streamline the rules hampering expansions of refinery capacity, which was barely adequate even before Katrina hit. More refinery capacity would mean greater resiliency and therefore less price volatility when some facilities experience downtime.


There are also opportunities to simplify the complex regulation of gasoline. The Environmental Protection Agency announced that, in light of Katrina, it will temporarily waive several problematic fuel regulations so that it will be easier to supply gasoline in the weeks ahead. If this works, Congress should consider more permanent streamlining of the maze of costly federal gasoline provisions.


Sure, these solutions would take time to have their full effect and would likely engender opposition from environmental activists and others. They may not be the easy answers, but they are the ones Congress should focus on when it returns after Labor Day.


Ben Lieberman is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

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