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5 Ways Government Could Cut Gasoline Prices Quickly

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By JOHN MERLINE, INVESTOR’S BUSINESS DAILY 
Posted 03/08/2012 08:02 AM ET

When sky-high gasoline pricestalks about today’s sky-high gasoline prices, he almost always laments that there’s little anyone can do in the short term to bring them down.

“There is no silver bullet” is his common refrain, one he used again at his press conference on Tuesday.

But as gasoline prices reach historic highs — they’ve shot up more than 28 cents a gallon in just the past month — the government could make a dent.

That’s because, while the global price of oil determines most of the cost of gasoline, several federal and state government policies artificially add to the cost before it reaches the gas station.

Among them:

Taxes. The most obvious government-imposed costs are state and federal taxes and fees. Combined, these average 45.7 cents a gallon (the federal portion is 18.4 cents). New Yorkers pay the highest rate, at a combined 67.4 cents a gallon. California and Connecticut tie for second at 67 cents. Alaska is lowest at 26.4 cents, according to the Tax Foundation.

The weak dollar. Several analysts note that the Fed‘s devaluation of the dollar has led to higher oil prices, which in turn is adding as much as 56 cents per gallon, according to the congressional Joint Economic Committee.

“From the first day the Fed began engaging in quantitative easing back in early 2008, the impact on gas prices has been profound,” noted Eric Parnell, an economics professor at West Chester University, in a recent blog post. “What is even more irksome is that much of this rise in gasoline prices has occurred during a time when gasoline consumption has been falling. Have the laws of supply and demand been repealed? No, they’ve just been severely distorted by policy action.”

Boutique fuels. Thanks to federal and state rules, there are about 18 separate gasoline markets in the country, each with specific requirements about what can and can’t be in their gasoline, mainly to deal with local air quality issues. But the result is higher gasoline prices.

A Government Accountability Office report found that “the proliferation of special gasoline blends has made it more complicated to supply gasoline and has raised costs.” Refiners also have to switch each season between summer and winter blends, which boosts costs.

Sen. Roy Blunt, R-Mo., has offered up a Boutique Fuel Reduction Act that would give the EPA more flexibility to waive these local fuel rules.

Environmental rules. In addition to creating local blends, refiners must also meet a long list of costly environmental rules. In late 1999, for example, the EPA required refiners to drastically cut the amount of sulfur in gasoline and diesel, which cost the industry almost $5 billion upfront and $1.5 billion each year to meet, according to the agency.

Strict environmental rules also can drive smaller refiners out of business, resulting in less competition, tighter supplies and higher prices.

Four refineries recently closed on the East Coast, for example. “That’s going to make gasoline more expensive in the region,” said John Hofmeister, the former Shell Oil CEO who has since started Citizens for Affordable Energy.

And as early as next year, the EPA could add dramatically to refinery costs, requiring them to meet new standards to reduce greenhouse gas emissions. The petroleum industry figures this “regulatory tsunami” will add 25 cents to each gallon of gasoline and shutter seven more refineries.

Ethanol mandate. January marked the end of a 45-cent federal subsidy for each gallon of ethanol refiners added to gasoline. The subsidy cost taxpayers $6 billion a year, but ending it could end up adding as much as 4.5 cents a gallon, since gasoline now includes 10% ethanol.

Congress also left in place a 2007 law requiring increasing amounts of ethanol (including so-called advanced biofuels) in gasoline, rising to 36 billion gallons by 2022. The ethanol industry argues that expanded use of ethanol cuts pump prices, pointing to a study saying it’s lowered them 25 cents a gallon on average. Others argue that because ethanol provides 30% less energy than gasoline, it’s actually more expensive on a per-mile basis.

“Any time you force the industry to do something they wouldn’t do otherwise, by definition you must be increasing costs somewhere,” said Michigan State University economist Soren Anderson, who studies the fuel industry. “If ethanol really were cheaper, you wouldn’t need the mandate.”

In any case, the law has cost refiners almost $7 million in fines this year after they failed to add 6.6 million gallons of “advanced biofuels” as required. The problem is these advanced biofuels don’t exist commercially, and nobody’s sure when they will, which means even bigger industry fines going forward as the mandated use increases.

Over the long term, meanwhile, federal restrictions on access to domestic supplies of oil cut production and to some degree affect the price of oil down the road. According to the Institute for Energy Research, the U.S. has huge oil reserves, thanks to new finds and advances in drilling technology that let companies retrieve once-inaccessible deposits. The IER estimates that there are 1.4 trillion barrels of “technically recoverable” oil in the U.S., which is more than the proved reserves of all OPEC countries combined.

New pipelines — such as the Keystone XL line that President Obama recently blocked — could help get a glut of oil from the northern U.S. and Canada down to Gulf Coast refiners.

“We can’t fix the world price of oil today,” says Ken Green, an energy expert at the American Enterprise Institute, “but there are things the government does that it could stop doing to lower the cost of gasoline.”

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