Problems in the U.S. wholesale gasoline market have played a relatively minor role in the
gasoline price increases of the last few years. But this is one part of the problem that we
created all by ourselves and can fix all by ourselves.
As a result of the Clean Air Act Amendments of 1990, the EPA developed several
programs for the nation’s most polluted areas. The reformulated gasoline program was
designed to reduce ozone and toxic emissions, and the oxygenated fuels program reduces carbon
monoxide. Since the cleanest burning fuels are also the most costly to produce, the programs
were only mandated for the most severely impacted communities. Less impacted communities were
allowed to develop separate, less restrictive standards to achieve some of the benefits of
cleaner fuel without the full cost.
The above map shows the nature of the resulting proliferation of fuel standards. It
indicates that you could drive through 7 contiguous counties in Arizona, California, and Nevada,
and be required by law to put a different formulation of regular gasoline in your vehicle in
The proliferation of standards raises refining costs and introduces logistical challenges in
keeping the different formulations separated at each point of the distribution and storage chain
before the product gets to the final consumer. By reducing the available supply that could be
legally provided to any given locality, it also makes the price in local markets much more
volatile in the event of any unexpected changes in either local supply or demand.
An even bigger concern may be the effect that this market segmentation has in combination
with two other developments. The first is the fact that over the last quarter century, half the
refineries in America have shut down and no new ones have been built. The second is the number
of mergers and acquisitions that we have seen in the petroleum industry over the same period.
The result of the three developments together is that there are substantially fewer suppliers of
wholesale gasoline available to any particular local market.
The claim that reduced competition in the wholesale gasoline market has raised the price to
consumers should not be interpreted as suggesting that all or even a major part of the gasoline
price increases over the last few years is due to price gouging by the oil companies. Certainly
the rising cost of crude is by far the most important reason that prices of gasoline at the pump
have gone up. Notwithstanding, a study last
year by the General Accounting Office concluded that reduced competition raised the price to
consumers by one cent a gallon on the east coast and seven cents a gallon in California.
Though the problem in southern California in particular has been going on for some time, it
is only recently getting the attention it deserves from the Los Angeles Times. In part of an
ongoing series, the Times noted correctly this weekend
that “California refiners are simply cashing in on a system that allows a handful of players to
keep prices high by carefully controlling supplies. The result is a kind of miracle market in
which profits abound, outsiders can’t compete and a dwindling cadre of gas station operators has
little choice but go along.”
It is interesting to note who’s complaining and who isn’t about the present system. The
Association of Convenience Stores and the Society of Independent Gasoline
Marketers of America, whose members make their livelihood in part by finding cheap
suppliers to help them undercut the market, have been protesting loudly, as, understandably, has
American Trucking Association. By contrast, the National Petrochemical and Refiners
Association argues that the current system seems to be working reasonably well.
Identifying the problem is much easier than fixing it. Imposing a uniform fuel standard
everywhere in the U.S. that is somewhere in the middle of the current system would raise
pollution in some communities and raise costs in others. However, some have argued that overall
gains in efficiency could outweigh either of these. A recent
study by Ujiyant Chakravorty and Celine Nauges concluded that the potential efficiency gains
were sufficiently large that, even if we required all consumers nationally buy the highest
quality reformulated gasoline, consumers in some states would still see the price they pay fall
on average as a result of the more favorable competitive structure produced by standardization,
despite the fact that the reformulated gasoline is more costly to produce.
Fortunately, we are likely to get at least some improvements in the present system in the
energy bill currently being debated in Congress. Exactly what form that will take and how much
relief that will bring remains to be seen.