Gasoline price answers neglect elevated costs

Bob Tippee

To the question "Why are gasoline prices so high?" gushes much attention these days, not enough of it focused on an important part of the answer.

Explanations about the price of gasoline usually concentrate on intrigues of the moment: the rising price of crude oil and the exporter politics behind it, hurricanes in the Gulf of Mexico, changing currency values.

They tend to obscure a plodding but important trend that shouldn't be forgotten: Gasoline is a lot more expensive to make than it used to be.

To meet fuel-performance and environmental requirements, refiners have had to boost gasoline octane first without adding tetraethyl lead and later without relying heavily on severe reforming. They have had to increase gasoline's oxygen content and lower its vapor pressure, remove toxins and cut sulfur content. They have had to tailor gasoline to local specifications and produce blendstocks able to accommodate ethanol. They increasingly must meet oxygen requirements without processing the preferred oxygenate, methyl tertiary butyl ether. And they have to do it all while meeting toughening requirements for other petroleum products and while reducing emissions of pollution from their refineries.

Because of all this, gasoline is a much better motor fuel and environmental performer than it used to be. But it also costs more to make. Inevitably, the elevated costs show up at the pump. They're doing so now.

A destructive myth prevails that cost increases need not affect fuel prices because refiners can opt to not pass on the burden to consumers.

In fact, many modern regulations took effect when refiners could not recover all their costs because of capacity excesses in a chronically demand-limited market.

Those days are gone, partly because demand has risen, partly because the past inability to pass along costs forced many refineries to close. The consequently supply-limited market of the present in effect reimburses stored regulatory costs.

Air quality improvements justify most such costs—but not those of unnecessarily strict performance standards or content mandates that make no sense. Excesses like those are common in refining regulation.

They're costs with no benefit. Ultimately, they all get passed along.

(Online July 22, 2005; author's e-mail: bobt@ogjonline.com)

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