Natural Resources

Foolish Fuel Follies

Why anti-gouging laws and windfall profits taxes won't lower gas prices

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Gasoline prices rose to historic highs this week and Americans are feeling all of that pain at the pump. Trilby Lundberg, the head of the California-based fuel market research firm, the Lundberg Survey, calculates that the national average price per gallon of regular gasoline is now $3.18. In inflation adjusted dollars this price breaks the all-time high record price of March 1981 by three cents. In 1981, regular gasoline sold for $1.35 per gallon which would be $3.15 in today's dollars. So what's going on?

The natural villain for high prices is, of course, Big Oil. And Congress is rushing yank the industry's greasy hands from our pockets. Chairman of Congress' Joint Economic Committee, Sen. Charles Schumer (D-N.Y.) held a hearing this week on whether or not the Big Oil companies should be broken up. Also on Wednesday, the House of Representatives passed the Federal Price Gouging Prevention Act which makes it "unlawful for any person to sell, at wholesale or at retail in an area and during a period of an energy emergency, gasoline or any other petroleum distillate … at a price that is unconscionably excessive; and indicates the seller is taking unfair advantage of the circumstances related to an energy emergency to increase prices unreasonably." The act does allow that it would not be gouging if the price "was substantially attributable to local, regional, national, or international market conditions." And according to Lundberg that's exactly what has been happening in the past two months.

"Record breaking prices are the result of a record breaking number of refinery shutdowns and extended delays in returning to production from scheduled maintenance," says Lundberg. She points out that since March there have been over 30 events in which refineries have been shutdown or experienced maintenance delays. For example, three refineries were shut down when their power supplies were shorted out by a snake, a raccoon and an opposum. "We estimate the total effect of U.S. capacity use reductions to be at least 42 million barrels of gasoline," says Lundberg. "The lost barrels amount to approximately 7.4 percent of total 2007 U.S. gasoline production through May 11." So while supplies were falling, the demand for gasoline unexpectedly increased by 1.9 percent over last year. Falling supplies and rising demand equal higher prices.

Another factor affecting supplies is the increased complexity of refining modern gasoline.
"Today's gasoline is not your father's gasoline," says Mark Routt, a senior consultant with Energy Security Analysis Inc. For example, in 1981 half of all regular gasoline was still leaded. Since 2004, refiners have been required to produce ultra-low sulfur gasoline and in 2006, they were obliged by Congress to blend ethanol into their fuels. These ingredients are more expensive and producing them makes the refining process more finicky and prone to breakdown. Nevertheless, as Lundberg notes that as a result of high gasoline prices, refiners' margins are now "golden." On the other hand, she points out that the margins are only "golden" for those refineries that are actually producing gasoline. They don't make any money if they don't make any gasoline.

Earlier this week, Democratic presidential hopeful Sen. Hillary Clinton (D-N.Y.) called for a two-year tax on oil company profits. "What do you think oil companies are doing with their profits?," asks Routt. "They're doing what they should be doing—they're investing it to produce more fuel." Recent high gasoline prices may be finally persuading oil companies and other refiners to invest in and build the first new refineries in the U.S. since the 1970s. For example, Shell Oil will be spending $3 billion to double the capacity of its refinery in Port Arthur, Tex.

With regard to Congress' anti-gouging legislation, officials in the Office of Management and Budget (OMB) say that they would urge President Bush to veto it if it passes in the Senate. "I heartily and urgently agree that it should be vetoed," says Lundberg. "The idea of gouging is dangerously subjective." She fears that the legislation could essentially create a price cap on gasoline prices that would produce actual shortages. Routt laughs, "Why doesn't Congress set the price of green beans at the Winn Dixie and Piggly Wiggly while they're at?" OMB is right when the agency pointed out, "Gasoline price controls are an old—and failed—policy choice that will exacerbate shortages and increase fuel hoarding after natural disasters, denying fuel to people when they most need it." If you think that high prices are bad, just wait until you can't fill up at any price.

So what's going to happen to prices this summer? Lundberg and Routt both admit that they were wrong when they predicted that gasoline prices were about to peak back in March. However new trend may help lower prices. Routt notes that high prices have recently reduced the growth in the demand for gasoline. And Lundberg points out high prices have begun to bring more offshore gallons that will help rebalance supply. Lundberg says that her most recent survey of retail gasoline stations found that prices have actually fallen in some markets in California and other western states. Lundberg believes that we may now be near the peak and that prices could begin to fall after Memorial Day. However, if crude oil prices rise, and refineries continue to experience shutdowns, all bets are off. Whatever happens to the price of gasoline this summer, Lundberg's bottom line is "the worst thing that U.S. authorities could do is to 'fix' the gasoline market."

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

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