When gasoline prices go up so does the level of agitation on Capitol Hill. It is as predictable as sunrise.
Last week, the Senate Energy and Natural Resources Committee held a hearing, ostensibly, to find out why gasoline prices are rising when domestic oil production has reached levels not seen in 20 years. It would be reassuring if the real purpose was fact gathering but based on history these hearings are more about showing constituents that members are doing something. The circumstances may be different from past such hearings but the focus stays the same—oil companies are gouging the consumer. It makes little difference that over 40 years, federal investigations have all reached the same conclusion. The market for gasoline is competitive and price is driven mainly by supply and demand. Mainly because government meddling is becoming a very important factor.
Senator Wyden demanded, “Our people want to know why the flood of new domestic crude oil isn’t lowering prices at the pump.” And Senator Cantwellasserted, “The fact that this price spike can happen without real supply and demand disruptions is disturbing,”
The head of the EIA, Adam Sieminski, told the Senators that refinery outages in the west and Midwest triggered sharp price increases regionally. Such outages are always temporary. He also countered Senator Wyden’s assertion by making clear that without increased domestic production oil prices would be even higher. Exporting crude puts more supply onto the world market which puts downward pressure on price unless other producers cut back on production.
In case no one noticed, the Middle East is more unstable now than it was several months ago and that has caused the world price of oil to rise. So far this year, the cost of domestic crude oil is up about $10 a barrel or about 25 cents per gallon. Adding to this is the cost of ethanol credits and the bottlenecks in transportation. Shipping by rail, which has increased and is projected to increase even more has added about $17 a barrel and $8 by according to some estimates. Based on these factors alone, the cost to refiners accounts for about 70% the pump price. The second biggest costs are state and federal taxes which account for 14% of the pump price. Refining, marketing, and distribution make up the remaining 16%.
If the Senate is really interested in taking action to constrain gasoline prices, it should press the Administration to approve the Keystone XL pipeline, any other pipeline projects that are in regulatory limbo, and eliminate the ethanol mandate and related requirement to purchase credits for not using quantities of ethanol that do not exist.
Today, there is another hearing in the House focusing on the Renewable Fuels Standard. The ethanol lobby is trying to blame the oil industry for gasoline price increases, asserting that it could lower prices by using more ethanol. Congress in its wisdom in 2007 mandated steadily increasing amount of ethanol to be used in gasoline until 36 billion gallons was reached in 2022, with increasing quantities to be non corn based ethanol.
The market didn’t get Congress’ message. Since 2007, gasoline demand has not steadily risen. It plateaued and then has been drifting down. As a result, ethanol use has stopped growing and the non corn based ethanol does not exist. Instead of the Administration requesting a change in the mandate or better yet its repeal, EPA has been pushing for increased use above the 10% standard and fining refiners for not using an additive that doesn’t exist. The fine is in the form of a required credit, the price of which has gone through the roof. According to the Wall Street Journal, EPA’s anti market, anti-performance credit purchase requirement has added another 10 cents to the price of a gallon of gas.
Government meddling with the gasoline market has added upwards of 50 cents to the cost of a gallon of gasoline. Who’s ripping off the consumer?
These hearings like many before them prove that when it comes to energy issues,Groucho Marx was right when he observed that “politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies”. That has been the 40 year history of energy policy.