Mixing gasoline and policy

Getting the right blend into the gasoline barrel isn't always easy - and this year, it's getting more complicated because of economic and environmental policy decisions influencing the mix. Many in the U.S. are wondering why gasoline prices are skyrocketing, while Congress continues to study the issue,

Crude prices fall; pump prices rise

Although the price you pay at the pump has jumped over the past few years, it isn't too close to the all-time high. The average retail price of gasoline reached $1.74/gal on May 7 - the highest price in 16 years. According to the American Petroleum Institute (Washington, D.C.), it is important to keep the price in perspective. With the record high being $2.62 in 1981, the real cost of gasoline to consumers has fallen by 88 cents/gal. The 88 cents reduction is mainly due to a decline in the cost of crude oil, which is 58 cents/gal today [in early May], down by $1.05/gal from the 1981 peak of $1.63. The combined costs to manufacture, distribute and market gasoline have increased by only 3 cents/gal since 1981, while the taxes collected on gasoline are up by 14 cents. Today, the total tax averages 42 cents/gal; the Federal portion accounts for 18.4 cents.

If taxes remain constant, then gasoline prices will naturally be sensitive to supply and demand. And supply is lower. A number of factors are contributing to this reduced stock. First, gasoline demand is up nearly 2% and imports are down by 7% vs. last year. Also, a colder-than-- expected winter resulted in refiners' making winter heating fuels for a longer time before switching to producing summer-grade gasoline. When summer-grade fuels are first being produced, they cannot be pumped into the storage tanks holding any winter-grade gasoline; mixing of the two grades is not allowed, and it takes time to use up the winter fuels and clean the tanks.

Supply is complicated by the crude oil market's being uncertain with OPEC production cut and the U.S.'s importing 57% of its crude, according to Mary Hutzler, director of the Office of Integrated Analysis and Forecasting of the Energy Information Administration. With U.S. refinery production at near full capacity, a recent refinery fire in southern Illinois caused an immediate price increase in the Midwest "because supplies are tight," according to the Associated Petroleum Industries of Michigan.

House Rep. Conference Chairman J. C. Watts, Jr. (R-- OK), says the lack of Clinton energy policy brought us to this point. Former Energy Secretary Bill Richardson did admit that the Clinton/Gore administration had been "caught napping" on energy policy. On the other hand, some Democrats are suggesting that collusion among oil companies is a key factor, since their profits are increasing.

Bush takes the long-term view

Widespread and immediate solutions may not be in sight for Americans in the near term. "All of the solutions from building more refineries... - take years to bring any payoff," and there "is no magic wand to reduce gas prices," stated White House press secretary Ari Fleischer in mid-May. Meanwhile, Vice-President Cheney emphasized that "the solution for us is to try to deal with these issues on the long-term basis, so we get more supply."

One short-term policy option would be suspending the Federal gasoline taxes. President Bush has stated that he is opposed to any "quick fixes" such as reducing this tax. Energy Secretary Spencer Abraham said that any cut in the Federal gasoline tax was unlikely. Little mention has been made of states' reducing their taxes.

The White House press secretary said that the Administration has no intention of asking Americans to dramatically reduce their gas use. Fleischer stated, "The President believes that it's an American way of life, and that it should be the goal of policy makers to protect."

However, some quick help seems to be underway from the EPA. Administrator Christie Todd Whitman noted that EPA officials have been meeting with Midwest petroleum refiners, and that the Agency will monitor the air quality situation closely and may allow "blend flexibility" to relax the Clean Air Act requirements. These call for each part of the country to use a specific formulation at different times of the year. Thus, some reformulated "boutique" blend requirements may be eased to keep supplies at a higher level. An example is the Chicago/Milwaukee mix, which may have an increased level of ethanol.

Those in Congress facing re-election may fear a voter backlash; some have suggested it was the long gasoline lines in the late 70s that contributed to a one-term presidency for President Carter. With short-term policy options unlikely and the continued uncertainty in the supply of foreign crude, many feel that Congress will have a difficult task ahead in keeping gasoline prices below the $2.00 level in the near term. And the task could become more complicated once an outcome is reached on MTBE additions.