How To Lower Gas Prices

Why have gas prices spiked to $2.39 per gallon in the Midwest? There are several reasons, according to an ExxonMobil “op-ad” in today’s New York Times:

But most important is the impact of new federal regulations to improve urban air quality. These new regulations required that a cleaner-burning reformulated gasoline (RFG II) be available in service stations in selected cities on June 1, the start of the summer driving season. RFG II is more difficult and expensive to make and requires more crude oil for each gallon produced.

The American Petroleum Institute’s Web site is more emphatic about the ill effects of government regulation on gas prices:

[W]hat we are seeing today is a direct result of a government policy that imposes layer upon layer of uncoordinated regulations that not only drive up costs, but also take away the flexibility the industry needs to respond to new demands. The industry has consistently warned the government that such consequences would be the result of such policies.

According to a new report by the Congressional Research Service (it requires Adobe Acrobat, but a summary can be found here), the oil industry is exaggerating when it says regulation is the main culprit. Once you factor out high crude oil prices (which account for 48 cents of the current price), the most expensive components of the oil price rise are the cost of the RFG rule (25 cents) and the cost of a recent oil spill in the upper Midwest that’s disrupted distribution (also 25 cents). While the RFG rule can certainly be tagged “government regulation,” oil spills fall under the rubric “private enterprise.” (For the record, the Environmental Protection Agency claims the cost of its RFG rule is more like 5 cents to 8 cents per gallon.)

[Correction, 6/26: As Paul Krugman pointed out inhis June 25 New York Timescolumn, the Midwestern pipeline disruptions were caused by an oil spill and a fire–not just by an oil spill. But since fires fall under the rubric “private enterprise” just as oil spills do, Chatterbox’s argument is unaffected.]

Government regulation can drive the price of gasoline up–and, arguably, that’s a good thing. Whether the EPA’s reformulated gasoline regulations themselves are reducing pollution significantly is a matter of some debate. But if people drive their cars less because gasoline costs too much, you get less smog and less global warming. Indeed, from an ecological standpoint, it may not matter much whether it’s the government or industry itself that’s responsible for the price spike. The Federal Trade Commission, egged on by Al Gore, is investigating “whether inflated prices consumers are seeing at the pump result from any violation of federal antitrust laws,” according to a statement from Chairman Robert Pitofsky. But if oil companies really are price-gouging, they may be doing the planet a favor! Indeed, this may be an example where government regulation, far from raising gas prices, lowers them. Assuming oil companies take at all seriously the threat that the FTC will throw the antitrust book, they’ll price gas more conservatively.

Another, more environmentally friendly path to reducing gas prices via regulation would be to raise fuel-efficiency standards. The further a gallon of gasoline takes you, the less gasoline you need; the less gasoline you need, the less gasoline you buy; and the less gasoline you buy, the less oil companies can charge you for a gallon of gas. Unfortunately, the federal requirement for “corporate average fuel economy,” the sales-weighted measure popularly known as “CAFE,” has not risen for a decade, and since 1995 the Transportation Department has been forbidden by the Republican Congress not only to raise CAFE standards but even to study the effects of raising CAFE standards. (For a more detailed explanation of how CAFE works, click here.) A June 15 Senate vote maintained the ban on raising CAFE standards, but lifted the research ban–a move that the Sierra Club jubilantly proclaimed a major victory.

In the decade after CAFE standards were first enacted in 1975, fuel efficiency doubled. But the Reagan administration had little enthusiasm for the program. Bill Clinton proclaimed during the 1992 campaign that he wanted to raise CAFE to 40 or 45 miles per gallon–then, as now, it was 27.5 miles per gallon–but never pushed the issue when he had a Democratic Congress. Meanwhile, the ‘90s trend in the auto market toward SUVs, which are classified as “light trucks” and are required only to get 20.7 miles per gallon, drove down overall consumer-vehicle fuel efficiency to about where it was in 1980. At the moment, overall consumer-vehicle fuel efficiency is one of the very few environmental indexes that has gotten notably worse during the past 15 years.

Although the oil industry isn’t wild about seeing oil prices fall, it isn’t the main impediment to raising CAFE. That would be the auto industry. Even Bill Ford, the bleeding-heart-enviro chairman of Ford Motor Co., who’s lately beaten his breast about how his company’s SUVs are contributing to global warming (he quoted the Sierra Club calling the Ford Excursion the “Ford Valdez” in a Ford “corporate citizenship report“), remains firmly opposed to raising CAFE. That the auto industry is headquartered in the Midwest makes it particularly poignant that the region currently paying the most for a gallon of gasoline is also … the Midwest.

(To read a follow-up to this article, click here.)