The Consumer Federation of America's disquisition on what its title calls "the gasoline price spiral" arrived in time to be torpedoed by the market. The academically detailed case for nationalization of the US refining industry frets vigorously over "the upward spiral of gasoline prices," which are now spiraling downward.
The CFA analysis is more sophisticated than most such appeals for government action. But it overlooks too much and makes ludicrous recommendations.
It also contains outright howlers. For example, it proposes to resolve the presumed inadequacy of US refining capacity by restarting 15 of the 50 plants estimated to have been shuttered during the 1990s. "Placed in the context of redevelopment of recently abandoned facilities or expansion of existing facilities," it says, "the task of adding refinery capacity does not appear to be daunting." The observation should amuse anyone now considering refinery investment.
Undeserved attention
The CFA study could be ignored if US energy interests were not now so vulnerable to superheated politics. Election-minded congressional Democrats have begun investigations of gasoline pricing, exploiting misconceptions reflected last week in a Harris Poll report that 81% of 1,246 adults surveyed believe oil companies are "ripping off the public." In this environment, the CFA report will receive more attention than it deserves.
Beyond that, the report performs a disservice by claiming to refute arguments that blame clean-air regulations for recent increases in gasoline prices. CFA instead cites "inadequate capacity and inadequate competition in the industry."
It argues that low stocks, demand increases in excess of gains in refining capacity, and industry concentration resulting from shrinking numbers of companies and refineries have combined to enable surviving suppliers, under certain conditions, to manipulate price. Therefore, it says, the government should:
- Restore "reserve margins" by toughening vehicle fuel-efficiency standards and adding 1.5 million b/d of refining capacity.
- Expand gasoline storage and stocks by, for example, requiring suppliers to hold inventories equal to specified shares of sales, providing incentives for stock-holding, directly underwriting stocks, and possibly establishing regional inventories.
- "Take the fun and profit out of market manipulation" through investigation and "windfall profit" taxes.
- Promote a "workably competitive market" by resisting industry concentration, discouraging marketing practices such as zone pricing and franchise restrictions, and unifying product requirements.
- Index low-income assistance payments to energy prices.
In other words, make the gasoline market work better by placing government in the middle of it. Such help, consumers don't need.
Two of the report's many oversights are fatal.
One of them is the pattern of troughs in price cycles. CFA rivets its attention to price peaks since 1999 and claims to see a noncyclic increase borne of repeatedly cited "business decisions," such as those to close plants and limit inventories. From this and recent gains in refining profits CFA deduces manipulation warranting intrusion by the state. In its analysis of stock behavior, CFA never mentions development of derivative markets, which make physical supply buffers less necessary than before. And it ignores the low product prices and low profitability typical through most of the late 1980s and 1990s.
The other fatal oversight is the difference between distillation and processes downstream of crude towers. To be sure, demand chronically exceeds the US industry's ability to distill crude oil. But an equally important bottleneck has developed in the processes needed to match product demand under ever-toughening environmental requirements.
Role of regulation
CFA's lapse in this area is evident in the way it dismisses environmental regulations as factors in capacity trends. It cites a US Department of Energy study estimating that through the mid-1990s Clean Air Act requirements had only minor effects on refinery operating costs. Those effects, in fact, are less important to refiners than the imposed need to invest heavily in processing capacity just to stay in business. Many refiners in the past decade chose not to do so. Environmental regulations not yet in effect create further pressures to close plants, consolidate operations, or both.
It is unrealistic to brush off the regulatory factor as CFA does, treat business decisions as sources of suspicion rather than responses to competition, and channel the analysis into allegations of price manipulation. Contrary to CFA's basic assumption, the market works. It's why prices are falling now.
