Gas Prices Ought to Be Lower

Thanks to a global economic slowdown, the price of oil has plunged 60%—to $40 a barrel from $96 in August 2014. Yet the price of gasoline across the U.S. has fallen by only 25% over the same period. What gives? Multiple and overlapping regulatory barriers prevent refiners from moving to alternative sources of crude and from entering markets to fill supply shortages. The result: a regulatory price premium in every gallon of gas.

Some refineries are limited by the amount of asphalt they can accept in their crude, while others are limited by their capacity to remove sulfur. Only a handful of U.S. refiners have so far elected for the extensive upgrades and regulatory approvals needed to process large amounts of unconventional crude. Thus the regulatory burdens are leaving the American refinery fleet largely inflexible. That’s why crude-oil processing has become specific to the design details of each refinery.

This is exacerbated by the renewable-fuels mandate, which requires blending nearly all gasoline with ethanol. Ethanol, when mixed with gasoline, increases the tendency for the lightest molecules to evaporate and contribute to urban smog. Gasoline therefore has to be stripped of so-called light-ends, increasing refining costs while reducing the yield of marketable fuel.

And so this regulatory patchwork builds a price premium into every gallon, essentially to compensate refiners for providing fuels that meet ever-increasing regulatory and production demands. The result: When oil prices rise, the rise is reflected in retail fuel prices. But when oil prices fall, the relief you feel at the pump is limited.

In the mid-1980s and ’90s, the cost of crude oil accounted for about 45% of the retail price of gasoline. By August 2004, when a barrel of oil first touched $40, only 40% of the cost of retail gasoline was attributable to oil. Today, oil accounts for a mere 35% of the retail price of gasoline. Simply breaking down such regulatory barriers would reduce gas prices by about $0.60 a gallon, saving consumers more than $250 billion every year. Given the global economy, U.S. consumers could use every penny.


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