Resident Scholar Kenneth P. Green

Having reached the lofty height of $3.19 per gallon, the national average price for gasoline has finally broken the record high hit in 1981, when a gallon of gas sold for $1.35 ($3.15 in today's dollars). The public is upset, and politicians are scrambling to find ways to reduce the pain of high prices or, failing that, to appease their constituents by investigating, penalizing, or lambasting oil companies.

And high prices at the pump do cause consumer discomfort. An April 2006 poll by CNN found 69 percent of respondents felt that high gasoline prices were causing them hardship, and 59 percent said high gasoline prices were affecting their ability to maintain their current standard of living. The CNN results were reinforced by an April 10, 2006, Washington Post /ABC News poll that showed 70 percent of respondents felt recent gasoline price hikes have caused them some hardship.

Usually, one doesn't have to look any farther to explain high gas prices than relationship between supply and demand. When demand is high and supply is limited, prices go up. When demand is low and supplies more abundant, prices generally go down. By far, the largest factor determining prices at the pump is the international price of oil. About 85 percent of the fluctuations in gasoline prices over the last 20 years were due to changes in the price of crude oil in the world market, according to the Federal Trade Commission. But that doesn't seem to be the case at present. The price of crude oil is actually lower now than it was last summer, yet gasoline prices are considerably higher. In fact, the Energy Information Administration (EIA) predicts that crude oil prices will average about $66 a barrel this summer, $4.00 per barrel less than last summer's $70.00 price. But the EIA is predicting that gasoline will average about $2.95 a gallon this summer, up about 11 cents from last summer's average of $2.84 per gallon.

So if it's not foreign supply, what else could raise the cost of gasoline? One factor increasing gasoline prices, according to the Federal Trade Commission, is the proliferation of boutique fuels. In order to fulfill various air pollution reduction plans, gasoline sold in the United States has been fractionated into about 17 different boutique fuels sold in dozens of discrete markets. With three grades of gasoline per fuel, refiners are producing over 50 separate blends. The situation will only get worse as the Environmental Protection Agency's (EPA) new ozone standards force more areas to require reformulated gasoline. According to the U.S. Government Accountability Office, producing these blends requires the installation of expensive new equipment. The different blends of gasoline must be transported separately, which has limited pipeline and storage capacity, as well as the number of suppliers. Furthermore, it is difficult to replace supplies when there are disruptions, since the required blends of gasoline may be located hundreds of miles away.

Another factor increasing gas prices are presidential and congressional actions mandating the blending of ethanol--a scarce and expensive fuel additive--into gasoline. Congress started the ethanol bandwagon when it passed an energy bill in the summer of 2005 mandating the use of 7.5 billion gallons of ethanol by 2012. President Bush has proposed increasing that to 35 billion gallons by 2017. Not surprisingly, with the new increase in demand, the cost of ethanol has soared, taking the price of gas along with it.

Another factor contributing to the increased price of gasoline is the reduction in the number of operating refineries in the United States over the last 30 years. The number and capacity of U.S. refineries peaked in 1981. Since then, 171 plants have closed; although the remaining plants have increased output (through on-site expansion and improved levels of operating efficiency) to partially offset the loss of production. In addition, extremely tight environmental restrictions and opposition from local communities has hampered the ability to site new refineries and significantly increased the costs of building new ones. Thus, even small disruptions in refinery operations can lead to significant reductions in gasoline supply over short timeframes.

Rising gasoline prices are likely to result in another round of calls for oil company investigations, more calls to "reduce our dependency" on oil, more calls for hybrid vehicles, mass transit, and other perennial political favorites. But what Congress should do is look first to remove the price-inflating measures it has already put in place, and, dare we mention, increasing world supply (and reducing price pressures) by adding the massive oil reserves the US holds off shore and in the Alaska National Wildlife Refuge into the world's energy markets.

Kenneth P. Green is a resident scholar at AEI.