Gas prices are high at the moment, the highest they’ve been (adjusting for inflation) since all-time records were set back in 1981. Crude oil prices are high, too, but they were even higher last summer.
What’s up with that? The word on Capitol Hill is that refiners and gas retailers are gouging us–the House even passed a bill last week called the Federal Price Gouging Prevention Act, which would outlaw “unconscionably excessive” gas prices. But the bill is a joke, because it doesn’t address what is probably the main reason why gas is selling at such a premium over oil.
The refiners and retailers are gouging motorists, if you define gouging as raking in serious profits. Yeah, there have been some refinery breakdowns behind the latest spike in gas prices, but those breakdowns have allowed still-operating refineries to make even more money. But they’re able to do this in large part because our lawmakers and regulators have–inadvertently–made it easy for them to do so.
What anybody selling anything wants is what’s euphemistically referred to in the business world as “pricing power,” which is effectively the ability to gouge customers. You’ve got pricing power when your product is unique, or hard to transport from afar. When you’re selling a fungible commodity that’s easily transported, you usually don’t have much pricing power at all.
You’d think gasoline would be such a fungible commodity. It used to be, but it isn’t so much anymore, in large part because of state and federal rules enacted since 1990 aimed at dealing with specific pollution problems in different regions (and in some cases at helping the ethanol industry). The result is a proliferation of “boutique fuels” sold only in particular regions or states or metropolitan areas. Wrote law professors Andrew P. Morriss and Nathaniel Stewart last year:
These requirements have three primary effects on gasoline markets. First, the fuel requirements may isolate particular geographic markets from the overall gasoline market, making it harder to bring new supplies to a region or uneconomical to shift supplies out of a region. Second … additional capital investment may be needed to produce the boutique fuels, limiting the number of current plants able to produce a particular fuel, creating an incentive to exit a market, and creating a barrier to entry…. Third, they alter the path of technological change, diverting investment away from improving production processes to meet regulatory requirements.
Morriss and Stewart both strike me as guys who would hate almost any regulation. But their reasoning here is pretty persuasive. In a truly national gasoline market, refiners would be under far more price pressure from competitors than they are under the current setup.
Of course, as the EPA pointed out in its own report on boutique fuels last summer, the only way to create a truly national gasoline market without giving up air quality gains of recent decades would be to impose the rules that now apply in places like L.A. and Atlanta nationwide:
EPA’s analysis of the fuel options concluded that there are trade-offs when attempting to simplify gasoline distribution and reduce market volatility. The fuel options identified to produce the greatest benefits under these goals would also entail the greatest production costs and reductions in gasoline production capability.
So gas would still cost a lot. Maybe more than it does now. But much of the money would go to cleaning the air and (probably) improving production technologies in ways that would drive down refining costs over time. Which strikes me as a better tradeoff than the one we’re getting now.