Gasoline consumers in the US have two reasons to worry. Prices of the oil product they use at steadily growing rates are rising in a strong trend. And state attorneys general meeting this week in Washington, DC, will distract attention away from rational explanations for the increase.
The market signs are clear. Growth in demand for gasoline is straining supply. In the first 2 months of the year, average demand exceeded the 2003 average for the same period by 3.2%. The average for January-February 2002 was up from the prior year by 2.2%.
While demand is growing, US refining capacity is not. In the past 2 years, increases in total capacity from plant modernization have nearly ceased. With refineries already using capacity at nearly maximum rates, supply increasingly must come from inventories and imports. Product inventories, however, are abnormally low. US inventories of refinery feedstock are even lower against norms because the global market for crude oil is tight, too. And the rising call on oil from abroad occurs in a period of sagging value of the US dollar.
New costs
In a market characterized by rising demand, static processing capacity, low inventories, and depreciating currency, prices rise. Because markets always adjust, to say price increases will continue indefinitely would be facile. But there's more to the recent increases than market fundamentals.
Regulation is steadily increasing the cost of making gasoline. At the start of the year, requirements for cuts to the sulfur content of gasoline began to phase in. As part of a successful national effort to fight air pollution, the regulation is warranted. But as part of a much larger mosaic of regulations in which the federal government and many of its state counterparts too frequently select the costliest options, it's a much larger burden for refiners than it would be alone.
The federal government, for example, acts determined to require more than a doubling of the amount of heavily subsidized ethanol blended into gasoline, pandering to agricultural interests at the expense of motorists. States with no smog problems have opted into the federal program for reformulated gasoline, which mainly addresses ozone smog. And in a move likely to raise fuel prices soon, Connecticut and New York have followed California's lead in banning the gasoline oxygenate methyl tertiary butyl ether. The ban necessitates the last-minute mixing of ethanol with a blendstock different from finished gasoline. In late April or early May, refiners will begin removing volatile components of the blendstock to suit summertime requirements. Problems of supply and distribution are likely. Unless the market reverses course between now and then, gasoline prices in the MTBE-free areas are likely to spurt.
In a strained market into which regulation continuously adds cost, no one should be surprised that gasoline prices are rising. But Florida's attorney general, Charlie Crist, can't make sense of the obvious.
On Mar. 9, Crist sent a letter to chief executives of six major oil companies calling for a meeting Mar. 18 "regarding the spike in gas prices." That's the day after the 3-day spring meeting in Washington, DC, of the National Association of Attorneys General, where gasoline prices, Crist assured the oil executives, "will be an important agenda item."
In neither meeting can the potential for enlightenment be considered high. To the oil chiefs, Crist wrote, "No significant factors are dramatically affecting output, but, for some reason, the industry seems unprepared for extraneous events." These are not the words of someone likely to listen much at the Mar. 18 get-together, especially after his politically motivated colleagues have squeezed the subject for as much attention as they can attract.
Better question
"The fuel industry is led by some of the most experienced and knowledgeable minds in the world," Crist wrote. "This leads us to question why many recurring or expected market conditions are not addressed and not planned for in a more proactive manner." For gasoline consumers, a better question is why politicians never learn anything.
Crist's perplexity is misplaced. Reasons for high gasoline prices are painfully clear. Too many of those reasons relate to errant governance. Instead of inflaming public suspicion every time gasoline prices rise, politicians should address the manifold problems they've created for consumers with their own mistakes.
