Why Gasoline Prices Are Volatile

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Andrew Morriss and Donald Boudreaux have an op-ed in today’s WSJ explaining why gasoline prices have become more volatile. The short version: Boutique fuel requirements have balkanized the gasoline market, magnifying the effects of local supply disruptions.

For most of the 20th century, the United States was a single market for gasoline. Today we have a series of fragmentary, regional markets thanks to dozens of regulatory requirements imposed by the federal Environmental Protection Agency (EPA) and state regulators. That’s a problem because each separate market is much more vulnerable than a national market to refinery outages, pipeline problems and other disruptions. . . .

 

The role of regulators in fuel formulation has become increasingly complex. The American Petroleum Institute today counts 17 different kinds of gasoline mandated across the country. This mandated fragmentation means that if a pipeline break cuts supplies in Phoenix, fuel from Tucson cannot be used to relieve the supply disruption because the two adjacent cities must use different blends under EPA rules.

To shift fuel supplies between these neighboring cities requires the EPA to waive all the obstructing regulatory requirements. Gaining permission takes precious time and money. Not surprisingly, one result is increased price volatility.

Another result: Since competition is a key source of falling gas prices, restricting competition by fragmenting markets reduces the market’s ability to lower prices.

While most of the fuel standards were adopted in the name of the environmental protection, many are actually the result of special interest pleading. Producers of various products, ethanol in particular, sought fuel content mandates or performance requirements that would benefit their particular product. (I detailed part of this history in “Clean Fuels, Dirty Air,” in Environmental Politics: Public Costs, Private Rewards.) Worse, some of the content requirements are irrelevant for new cars due to modern pollution control equipment. Federally imposed boutique fuel requirements have outlived whatever usefulness they ever had.

 

Cross-posted at The Volokh Conspiracy.

Jonathan Adler is Professor of Law and Director of the Center for Business Law & Regulation at the Case Western Reserve University School of Law. He is a prolific scholar, publishing on such topics as regulatory takings, water marketing, fisheries management, and the judicial limits of federal environmental regulation.He is the author, editor...
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