Editorial: The gasoline hearing

Sept. 5, 2005
There has never been a better time for a Senate committee to hear testimony on the rising price of gasoline, and there has never been a worse time.

There has never been a better time for a Senate committee to hear testimony on the rising price of gasoline, and there has never been a worse time. There has never been a better opportunity than the one at hand to act constructively on a matter of supreme national importance, and there has never been greater potential for official misstep.

A decade and a half of low vehicle fuel prices ended before Hurricane Katrina devastated the Gulf Coast, idling frightfully much oil and gas production and refining capacity. It was a decade and a half of growth in the national economy, in personal incomes, in vehicle size; a period of steady growth in demand for gasoline and diesel fuel; a period in which US refining capacity failed to keep pace with demand for refinery products; a period in which the environmental performance of vehicles and their fuels improved greatly while the cost of making those fuels rose. It was a decade and a half of conditions sure to end.

Reactive system

Low product prices. Rising demand. Limits on the ability of manufacturing capacity to grow. Imposed increases in manufacturing costs. A system shaped by that combination of forces has to change. Eventually, demand reaches limits on the system’s ability to generate supply. The system becomes reactive to any increase in the cost of its raw material and to disruption to any of its processes.

The US fuels market was approaching capacity constraint when crude oil prices began to climb in 2002. Demand continued to grow. Subsequent increases in gasoline and diesel prices were inevitable. So was the Aug. 19 announcement that the Senate Committee on Energy and Natural Resources would hold a hearing Sept. 8 on gasoline price behavior. Then Katrina slammed ashore on Aug. 29.

The scale of the storm’s effects on the oil market is difficult to fathom, partly because the market effects coincide with unfathomable human suffering. Some benchmarks:

• The oil output shut in because of the storm is roughly equivalent to the world’s spare production capacity. Saudi Arabia, which controls most of that supply cushion, says it will produce what’s necessary as long as it must to compensate. To the extent it does, an already thin supply cushion will shrink.

• With US refineries working at essentially full capacity, fuels markets have been vulnerable for months to the unexpected shutdown of any refinery, anywhere. Katrina affected the operations of 13 refineries, eight of which remained idle at this writing. Ironically, the amount of paralyzed refining capacity is roughly equivalent to the world’s spare production capacity before Katrina.

• The extent of the crisis depends greatly on durations of production, pipeline, and refinery outages. Some production will be restored quickly. Some will take longer because of equipment damage. All of it will be subject to a transportation bottleneck until electrical power returns to pipelines. Restart of refineries also depends on damage and power availability. Timing is unpredictable.

Under these extraordinary conditions, prices of crude oil and the fuels made from it will rise. Predictions about how high gasoline and diesel prices might climb can be only guesses. What’s certain is that the oil market has entered uncharted territory. Clear reasons exist for fuel prices to scale uncomfortable heights. An acrimonious inquisition into why prices are rising would be a monumental waste of time.

Education vs. outrage

What the US needs from Congress about gasoline prices is levelheaded education, not the vacuous outrage too many lawmakers exploit when they meet on this subject in front of television cameras. With vehicle fuels, the US faces an immediate crisis and longer term challenges. Its government can’t make proper decisions in an atmosphere polluted by assumptions that some mythical cabal of oil company executives sets gasoline prices and that all price increases in a supply emergency represent gouging. Those beliefs are manifest now as prices rise in response to market dislocations that should be easy to comprehend.

The Senate gasoline hearing is a chance for lawmakers to illuminate for a change instead of fulminate as usual. It’s a chance that must not be squandered for the US to jettison antique suspicions and learn something about a fuel essential to its economic health.