Nothing infuriates Americans more than volatile, spiking gasoline prices. Often the causes given for gasoline price hikes seem contrived. Iran and Israel trade harsh words in press reports and before the ink is even dry of the page oil prices tick up. Word of a fire at an oil refinery is enough to send prices shooting up as high as the flames on the cracker — and just as fast.
Those price spikes never seem to come down nearly as fast as they shoot up. Politicians are quick to blame oil companies for gouging customers, speculators for manipulating markets, traders for withholding supply.
The truth about gasoline price volatility is both a little more complicated and yet quite simple. The factors that seem to have the most impact on gasoline prices include:
[Read More From Oilprice.com: Will India Change the Future of Energy?]
Global Oil Swing Productive Capacity. While the world has plenty of oil overall, prices are set by the amount of excess capacity at the daily margins. That is how much oil is left over when all the contracts for delivery are met. How much oil is available if something goes wrong? If some refinery shuts down? If some pipeline bursts? If some war breaks out? This marginal oil quantity has traditionally been controlled by Saudi Arabia’s ability to ratchet up or ratchet down the amount of oil pumped each day. This control over swing productive capacity is what gives OPEC its market power and drives the rest of us crazy.
The Refinery Business Model. The oil refining business is a hard way to make a living. These plants are enormously complicated. They require skilled precision to keep them operating at optimal performance and many things can — and do go wrong. Yet it is almost impossible to build new refineries in the U.S. today because of the environmental regulation, high capital costs and the NIMBY pressures in every potential location. We live close the edge of full refining capacity, yet refining margins are very thin because the costs of operation are so high.
Boutique Fuels Mandates Create Monopoly Markets. A recent fire at the Chevron refinery near my home in the San Francisco Bay area adversely affected the supply of the blends of gasoline used in many of the Western States. A pipeline rupture in the Midwest reduced the supply of oil to refineries serving Chicago. While do these incidents have such a major impact on gasoline supply and price? Because the environment restrictions on fuels has created a system of boutique fuel blends that are virtual monopolies in many markets. The gasoline produced in the Richmond Chevron refinery is specifically designed for the Western market and no other gasoline products can be shipped in from other states to make up for a supply shortfall when a fire or other supply chain problem happens. So having reasonable gasoline prices requires that virtually EVERYTHING must work perfectly in the gasoline production supply chain — or else.
[Read More From Oilprice.com: Russia Spars with Romania Over Energy]
It does not have to be this way, but Congress passes laws without the slightest regard to how they will be implemented or enforced in practice. Congress takes credit for Clean Air but allows bureaucrats to impose regulations that have costs or impacts far beyond what the law intended. This happens because our environmental laws are written to ignore the cost while taking credit for the benefits. Our laws allow Federal agencies to set their own standards for measuring benefits. They are not subject to any burden of proof. The laws allow comment periods on rulemaking proposals but the bureaucrats do not have to accept the comments. The system is one-sided and so are the costs!
A more balanced and reasonable approach to environmental regulation would require Congress to approve major rulemakings by a Federal agency so it cannot avoid the accountability for imposing the costs. Existing regulations should be subject to sunset provisions and forced to be reconsidered regularly to reflect changes in technology and other factors. New laws requiring regulations should not go into effect until the final rules to implement the law are approved by Congress. Just as environmental advocates can sue in Federal Court to enforce environmental laws, those subjected to them should be able to sue over the reasonableness of the impacts of the law and rules to force the government to own its burden of proving that the benefits outweigh the costs and do not constitute an unreasonable taking of private property for which just compensation is required.
These changes in our regulatory regime won’t get more refineries built, but they would inject some common sense into the regulatory process and force the Federal agencies that dream up all these rules that the benefits are worth the cost and the practical application of proposed rules is reasonable and in the public interest.