Commentary

Bad Policies Fuel Midwest Gasoline Prices

By Jerry Taylor
This article was published in the Chicago Tribune, June 21, 2000.
So exactly why are gasoline prices so high in the Chicago metropolitan area? The Clinton administration professes not to know exactly what’s going on, but proposes a commission to get to the bottom of it. But forget the commission: We know exactly who’s responsible for these prices.

The primary culprits are former President George Bush and the 102nd Congress, the proud parents of the Clean Air Act amendments of 1990. Those amendments require refiners, starting this month, to reformulate gasoline with oxygenates for select parts of the country. That’s the root of the present trouble.

The law forces refiners to dedicate their facilities to distilling one kind of gasoline or the other. It’s very costly and time consuming to retool refineries to produce different kinds of gasoline, so it’s extremely difficult for refiners to react quickly to shortages. Today, gasoline supplies in the Midwest are about 25 percent below normal, and refineries are having a hard time making up the difference. Hence, the price increase.

Why the shortage? First, several reformulated gasoline-producing refineries have been temporarily shut down for maintenance. Second, several piplelines serving the region ruptured and are temporarily out of service. Hence reformulated gasoline is in short supply and it’s difficult and expensive to transport it to the Midwestern market.

So the lack of refining capacity, particularly in the Midwest, set the stage for this mess. Why aren’t there more refineries? Because over the long run, investing in the refining business is a dubious proposition. Sure, there’s money to be made now, but will there be profits a year from now? Nobody in the industry thinks so, which is why heavy investments aren’t being made. Lack of profitability explains why a new refinery hasn’t been built in the United States in more than 30 years, and it’s no surprise that old refineries are beginning to show their age.

Is this the price we have to pay for cleaner air? No, it’s the price we have to pay for regulatory zealotry.

Oxygenated gasoline is a mixed blessing: it reduces some kinds of pollution but increases others. It’s not clear that reformulated gasoline is on balance particularly worthwhile, but the environmental lobby seems to believe that drivers should bear any burden and pay any price for even the potential of achieving marginal air quality improvements.

The farm lobby also made matters worse. Oxygenated fuel mandates are a thinly disguised handout to corn farmers, who produce the oxygenate (ethanol) relied upon by the Midwestern market. But ethanol is even more expensive to produce than other oxygenates and it can’t be shipped through pipelines. Live by ethanol, die by ethanol.

Washington’s resistance to common sense regulatory reforms is also to blame. A 1990 joint Amoco-Environmental Protection Agency study of one typical refinery, for instance, found that federal environmental standards could be met at 20 percent of current costs if refineries were allowed to adopt alternatives to EPA mandates. Unfortunately, the environmental Left reacts to anything hinting of regulatory flexibility as a vampire would to garlic, which is another major reason why the business is so unprofitable.

You can’t blame the oil industry for failing to invest “for the good of the common man.” Refineries are businesses, not welfare programs. Demonizing the oil industry, however, always pays more dividends than telling the messy and complicated truth about how policy chickens come home to roost.

Jerry Taylor is director of natural resource studies at the Cato Institute.