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Why Gasoline Prices Are Volatile

Andrew Morriss and Donald Boudreaux have an op-ed in today’s WSJ explaining why gasoline prices have become more volatile. The short version: Boutique fuel requirements have balkanized the gasoline market, magnifying the effects of local supply disruptions.

For most of the 20th century, the United States was a single market for gasoline. Today we have a series of fragmentary, regional markets thanks to dozens of regulatory requirements imposed by the federal Environmental Protection Agency (EPA) and state regulators. That’s a problem because each separate market is much more vulnerable than a national market to refinery outages, pipeline problems and other disruptions. . . .

The role of regulators in fuel formulation has become increasingly complex. The American Petroleum Institute today counts 17 different kinds of gasoline mandated across the country. This mandated fragmentation means that if a pipeline break cuts supplies in Phoenix, fuel from Tucson cannot be used to relieve the supply disruption because the two adjacent cities must use different blends under EPA rules.

To shift fuel supplies between these neighboring cities requires the EPA to waive all the obstructing regulatory requirements. Gaining permission takes precious time and money. Not surprisingly, one result is increased price volatility.

Another result: Since competition is a key source of falling gas prices, restricting competition by fragmenting markets reduces the market’s ability to lower prices.

While most of the fuel standards were adopted in the name of the environmental protection, many are actually the result of special interest pleading. Producers of various products, ethanol in particular, sought fuel content mandates or performance requirements that would benefit their particular product. (I detailed part of this history in “Clean Fuels, Dirty Air,” in Environmental Politics: Public Costs, Private Rewards.) Worse, some of the content requirements are irrelevant for new cars due to modern pollution control equipment. Federally imposed boutique fuel requirements have outlived whatever usefulness they ever had.

Cross-posted at The Volokh Conspiracy.

Comments

  1. Loosen the noose, Get the GOVT out of the way

  2. Kevin Beck says:

    It would be too simple to expect the political solution to follow the path of the logical solution. But this will not happen as long as the EPA or any other government agency that doesn’t produce/refine gasoline has a say in how gasoline is to be refined.

  3. you are apparantly concluding that deregulation is the solution. The real solution is a uniform federal regulation. The problem in this case is big business lobbying for their own special interests at the expense of public welfare. TR had it right . . that when the welfare of the public is in conflict with the welfare of a corporation that it is the interests of the public which must prevail.

    • Dennis, agree with the track you are on; however, there’s much more to it. With today’s hugh government bureaucracies (such as EPA), they have become special interest groups too. They benefit by growing their budgets, increasing the scope and complexity of regulation, thereby needing larger staffs, and continually intruding into areas never intended by the original legislation so as to extend their influence and importance,etc. So, in my opinion they no more act in the public’s interest than the businesses do.

      The diabolical part of this is too many people assume that the profit motive of business is the only incentive in play. Nothing could be further from the truth. We all act in our own best interest including regulatory bodies and especially politicians.

      Although I agree with TR’s comment, I do not equate the interests of the public with the interests of the state. I’ll bet TR really meant that it was HIS interest which must prevail.

  4. That is why we need to vote for a new President of the U.S. one who will remove so many regulations. My vote goes for Mitt Romney.

  5. Understand the regulations exist, don’t understand why cities so close need different blends. If different blends are required for close geographical areas are so necessary why when we travel does gasoline from all areas perform the same? Methinks the govmt. regs are 90% Bu77Shi*, mostly an excuse to create higher gas prices!

  6. Ifthis is right then why is it that when there is aprobem at a refinery that gas prises go up eveywhere.

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