Bringing Down Gasoline and Oil Prices

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					                                                                                National Center for Policy Analysis

                                                                                                     BRIEF ANALYSIS
                                                                                                     No. 557
                                                                                                     For immediate release:
                                                                                                     Thursday, June 8, 2006

Bringing Down                                                 growth in developing economies, such as China, coming
                                                              on top of supply disruptions and “inadequate investment
Gasoline and Oil Prices                                       to meet demand growth.”
                                                                 The causes of supply disruptions are fairly obvious
by Kenneth P. Green                                           — for instance, the September 11, 2001, terrorist attack,
    The national average price of gasoline is approach-       and the wars in Afghanistan and Iraq all undoubtedly
ing the record high of $3.21 per gallon (adjusted for         played a role. In 2003, Iraq contributed 2.6 million bar-
inflation) set in 1981. [See the figure.] The public is         rels per day to the world oil market, an outflow already
upset, and politicians are scrambling to find ways to          lowered by United Nations sanctions before the war. At
reduce the pain of high prices or, failing that, to ap-       the end of 2005, however, total Iraqi oil exports amounted
pease their constituents by investigating, penalizing or      to only 1.2 million barrels per day.
punitively taxing oil companies.                                 Moratoria on Exploration and Production. Accord-
    The price pinch                                                                                   ing to the Interior
at the pump is caus-                                                                                  Department, there
ing serious con-                          U.S. Retail Gasoline Prices                                 are 102 billion bar-
sumer discomfort.                            (monthly average, 2005 Dollars)                          rels of oil under the
An April 2006 poll                                                                                    Outer Continental
by CNN found 69                                                                                       Shelf of the lower
percent of respon-                                                                                    48 states and Alas-
dents felt that high                                                                                  ka — enough oil
gasoline prices were                                                                                  to fuel 85 million
causing them hard-                                                                                    cars for 35 years.
ship, and 59 percent                                                                                  Regrettably, most
said high gasoline                                                                                    of that oil has been
prices were affect-                                                                                   placed off-limits
ing their ability to                                                                                  to production by
                                                                                                      presidential, con-
maintain their cur-                                                                                   gressional and state
rent standard of                                                                                      moratoria on explo-
living. The CNN                                                                                       ration and develop-
results were re-                                                                                      ment. For exam-
inforced by an April                                                                                  ple, had Congress
10, 2006, Washing-                                                                                    opened the Arctic
ton Post /ABC News                                                                                    National Wildlife
poll that showed 70                                                                                   Refuge to develop-
percent of respond-                                                                                   ment 10 years ago,
ents felt recent gaso-                                                                                it would already be
line price hikes have                                                                                 producing a million
caused them some Source: Energy Information Administration.                                           barrels per day of
hardship.                                                                                             domestic oil, or
    Why Are Gaso-                                                                                     about 6 percent of
line Prices High? The primary reason for high gasoline        total U.S. consumption.
prices is simple: demand for oil and gasoline is high, and       Boutique Fuel Requirements. Another factor increas-
the available supply is limited.                              ing gasoline prices, according to the Federal Trade Com-
                                                              mission, is the proliferation of boutique fuels. In order
    Supply Disruptions and the Demand for Oil. By far,        to fulfill various air pollution reduction plans, gasoline
the largest factor determining prices at the pump is the      sold in the United States has been fractionated into about
international price of oil. About 85 percent of the fluctua-   17 different boutique fuels sold in dozens of discrete
tions in gasoline prices over the last 20 years were due      markets. With three grades of gasoline per fuel, refiners
to changes in the price of crude oil in the world market,     are producing over 50 separate blends. The situation will
according to the Federal Trade Commission. Accord-            only get worse as the Environmental Protection Agency’s
ing to the Energy Information Administration, world oil       (EPA) new ozone standards force more areas to require
prices have risen sharply since 2000 due to strong demand     reformulated gasoline.

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                                                                                                                 BRIEF ANALYSIS
                                                                                                                 No. 557
                                                                                                                 Page 2

    According to the U.S. Government Accountability                             requirements of four different agencies or departments. It
Office, producing these blends requires the installation                         should be streamlined to a one-stop process that simplifies
of expensive new equipment. The different blends of                             access and increases the predictability that applications
gasoline must be transported separately, which has limited                      for exploration and eventual development of offshore
pipeline and storage capacity, as well as the number of                         reserves will be successful.
suppliers. Furthermore, it is difficult to replace supplies                          Lift Federal Boutique Fuel Requirements Permanently.
when there are disruptions, since the required blends of                        Removing all reformulated gasoline requirements could
gasoline may be located hundreds of miles away.                                 eventually lower the cost of gasoline as well as smooth
    Ethanol Mandate. The supply of gasoline has been                            regional spikes in gasoline prices. Due to improving
further constrained recently by congressional actions                           technology, air pollution levels will continue to decline,
mandating the rapid substitution of ethanol — a scarce                          independent of reformulated gasoline requirements.
and expensive fuel additive — for MTBE (methyl                                      The federal government can remove its own boutique
tert-butyl ether). Congress passed an energy bill in the                        requirements easily, but to eliminate all boutique fuel
summer of 2005 mandating the use of 7.5 billion gallons                         markets, the federal government would have to curtail
of ethanol by 2012. As a result, the cost of ethanol has                        the ability of California and other states to set higher
risen 91 percent. Ethanol is produced in a number of                            environmental standards than the EPA does under the
countries, but tariffs on ethanol — currently $0.54 per                         Clean Air Act.
gallon — raise the price of imports.                                                Terminate the Ethanol Mandate and Tariffs. Congress
    Lack of New Refineries. Another factor contribut-                            should eliminate the requirements in the Energy Policy
ing to the increased price of gasoline is the reduction in                      Act of 2005 for increased ethanol use. It should also
the number of operating refineries in the United States                          end tariffs on ethanol imports. This would help regions
over the last 30 years. The number and capacity of U.S.                         which continue to use ethanol-blended gasoline to acquire
refineries peaked in 1981. Since then, 171 plants have                           it at the least cost.
closed, although the remaining plants have increased                                Reduce Regulatory Barriers to Building and Expand-
output (through on-site expansion and improved levels                           ing Refineries. The administration should convene a task
of operating efficiency) to partially offset the loss of                         force specifically mandated to find and implement realistic
production. In addition, extremely tight environmen-                            short-term measures to reduce the negative impacts of
tal restrictions and opposition from local communities                          environmental compliance procedures and opposition
have hampered the ability to site new refineries and sig-                        to new facilities on the petroleum refining industry, thus
nificantly increased the costs of building new ones.                             allowing market forces to determine refinery growth.
    Steps to Increase Supply. There are a number of                             Such measures could include streamlining the regula-
steps Congress and the administration could take to re-                         tory process and allowing new refineries to be located
lieve short- and long-term pressure on oil and gasoline                         on federal lands, possibly on already-polluted Superfund
prices.                                                                         sites or closed military bases.
    Open ANWR to Development. Opening the Arctic                                    Conclusion. Instead of wasting time and causing
National Wildlife Refuge (ANWR) for exploration and                             speculative distortions in the market for gasoline with talk
eventual oil production would not lower gasoline prices                         of addiction, attacking Iran, windfall profit taxes, price
in the short-term but over time would increase supplies                         gouging, executive compensation, alternative fuels and
to the world market, thus providing a buffer against price                      so forth, Congress and the administration should focus
fluctuations.                                                                    on removing impediments to supply and production, and
    Facilitate Exploration and Development of Offshore                          ending actions that raise the cost of energy.
Oil Reserves. Modern technology allows environmen-                                  Kenneth P. Green is a visiting fellow at the Ameri-
tally conscientious offshore oil and gas exploration and                        can Enterprise Institute and an NCPA E-Team adjunct
production. Congress and the president should end their                         scholar. A longer version of this article was published
separate moratoria that preclude exploration in coastal                         by the American Enterprise Institute and is available at
areas. In addition, the current approval process for                  ,pubID.24336/
offshore exploration requires satisfying the regulatory                         pub_detail.asp.

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