Federal Deregulation Could Cut Gas Prices

Federal Deregulation Could Cut Gas Prices
May 1, 2004

Everyone knows the recent rise in the price of oil has had an effect at the pump, but something less well known is also affecting gasoline prices. It is something the federal government could reduce, since the federal government created it in the first place. It is gasoline regulations.

Until the mid-1990s, the feds did not micro-manage the recipe for gasoline, the only exception being the phase-out of lead in the 1970s. But that changed with the 1990 amendments to the Clean Air Act, which began to take effect a few years later.

As a result of those provisions, we now have a bewildering variety of gasoline requirements. One-third of the nation uses reformulated gasoline, designed--very imperfectly, as it turned out--to address summer smog in the nation's most polluted metropolitan areas. We also have oxygenated gas in several areas to combat high wintertime levels of carbon monoxide, a problem that was rapidly disappearing even before the provisions took effect. In addition, conventional gasoline is also subjected to a number of requirements, which can vary by geographic location and time of year.

Several states also have come up with their own unique gasoline blend requirements, often in order to obtain required federal approval of their pollution-fighting plans.

Some of these measures have helped reduce vehicle emissions and improve air quality, while others have not. All, however, have succeeded in driving up the cost at the pump. In addition to the compliance costs of each regulation, the fact that we have gone from an efficient, national market in gasoline to a patchwork of regional, state, and local ones adds to the logistical costs for meeting the nation's fuel needs.

The impact of these regulations, some of which are still being phased in, has become especially noticeable in recent years. During periods when high oil prices boost gasoline prices, the total effect can be very punishing on working families.

Gasoline in the more expensive cities (mostly in California) currently costs as much as 75 cents per gallon more than in the cheapest cities. Clearly there is more going on than an increase in the price of oil, which is the same everywhere. Not coincidentally, the most expensive cities also have the most onerous regulatory requirements.

Gas usually gets pricier heading into the summer months, as demand picks up and even tougher regulations designed to fight smog take effect. Given today's starting point of $1.77, which is unusually high for March, this summer could prove to be very costly. Breaking the inflation-adjusted record of $2.90 per gallon set in 1981 seems out of reach, but it's far from impossible.

Policy Implications

When gas price spikes occur, the policy debate never fails to focus on the high cost of crude--the regulatory burden generally gets ignored. True to form, Washington has yet to do anything substantial to reduce the regulatory burden. despite the specter of $50 summertime fill-ups just months before the fall elections.

There is little the feds can do, at least in the short term, to address high crude oil prices. Opening up the Arctic National Wildlife Refuge and other U.S. sites to drilling would help, but would take several years. Tapping the 600 million barrels of oil in the Strategic Petroleum Reserve (SPR) is a short-term option, but the SPR was meant for national emergencies that disrupt oil supplies to the U.S. If used now simply to temporarily reduce today's high prices, the reserve would not be available later until it is replenished.

By contrast, streamlining the regulations could do some good, even in the short term, but doing so is politically difficult. The necessary changes to the Clean Air Act's gasoline requirements would spark loud environmentalist opposition.

If anything, policymakers may be heading in the wrong direction. The proposed energy bill, currently stalled in Congress, is at best a mixed bag on gasoline. It would modestly streamline a few of the fuel regulations, but also would add new ones, in particular a mandate that ethanol be added to gasoline.

According to the Department of Energy's Energy Information Administration, once fully implemented the energy bill may actually add up to three cents to the price per gallon.

Washington's relative indifference to the problem of high gas prices may not last long. While comparable gas price spikes occurred in 2000, 2001, and 2003, none lasted more than two months. When prices fell, so did the public outcry for Congress to do something.

By contrast, if today's high prices persist well into the summer--especially the summer of an election year--we may see some serious efforts to tackle the federal red tape strangling the nation's gas pumps.


Ben Lieberman is a senior policy analyst at the Competitive Enterprise Institute. His email address is blieberman@cei.org.