With crude oil prices near the lowest they’ve been in five years, Americans have been enjoying the benefits of low prices at the pump. But, surprisingly, gas prices could actually be cheaper.
McNeese State University chemical engineer Jacob Borden reminds us that even with low oil prices, a labyrinth of government regulations is keeping gasoline prices quite a bit more expensive than they would otherwise be.
“Multiple and overlapping regulatory barriers prevent refiners from moving to alternative sources of crude and from entering markets to fill supply shortages,” Borden wrote in a Wall Street Journal oped. “The result: a regulatory price premium in every gallon of gas.”
“Simply breaking down such regulatory barriers would reduce gas prices by about $0.60 a gallon, saving consumers more than $250 billion every year,” he added. “Given the global economy, U.S. consumers could use every penny.”
Federal, state and local regulations make the refining industry much less flexible than the market needs, meaning the specifics of individual refineries become more important in delivering gasoline to local markets. When one refinery goes out, it could mean huge price increases for select communities across the country.
That’s only the tip of the regulatory iceberg; EPA regulations are also strangling refiners’ flexibility and causing prices to be higher. The EPA has clean air regulations which force refiners to use more costly methods of producing fuel and then requires them to mix in biofuels.
“Gasoline therefore has to be stripped of so-called light-ends, increasing refining costs while reducing the yield of marketable fuel,” Borden wrote. “A similar set of regulatory constraints is affecting the retail price of diesel … Meeting the new specifications has left refiners with three options: use only the lightest and sweetest crudes, operate equipment harder and sacrifice yields, or invest to maintain capacity.”
“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,” Borden wrote. “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.”
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