Seeing Red Over High Gas Prices? Don’t Blame the Greens

The mystery of $2-per-gallon gasoline prices in the Midwest should seem like deja vu all over again to Californians who have suffered similar pump-shock since greener fuel was introduced in 1996. Oil industry executives in both regions have blamed new clean-burning fuel requirements, but the real culprit in California has been price manipulations by in-state refiners that seized the opportunity of fuel reformulation to reap record profits.

California has the toughest clean-burning fuel requirements in the nation and, until lately, some of the highest gasoline prices. A recent California attorney general’s investigation into gas-price spikes found that the extra manufacturing costs associated with cleaner fuel was not the reason San Francisco Bay Area residents were paying $2 per gallon for their gas. Rather, the study pointed to price manipulation by six California refiners that supply 90% of the state’s gasoline and also own more than half the service stations. The refiners’ profits have been among the highest in the nation, increasing most during supply shortages.

There is a one-time cost associated with retrofitting refineries for greener gas. The real problem in the Midwest and California is that the oil companies are using the lack of a uniform national clean-burning fuel standard to manipulate supplies and create inventory shortages that drive up prices without going so far as to create lines at the stations. Unlike times past, when such a jump in price would result in gasoline flooding the market, outside competitors cannot get fuel into the high-price areas because of the unique specifications of the environmental cleanup requirements. In short, the local refiners have used the clean-fuel mandates to create a barrier of entry for outside competitors.

If there was just one specification for clean-burning fuel, there would be one national fuel market instead of 50. In-state refiners would no longer be able to manipulate gas supply and pump prices because they would have to compete with out-of-state suppliers. A representative of Finland’s national oil company testified before the California Attorney General’s Gas Pricing Task force that the difficulty in meeting varying specifications for fuel is the reason for the limited gas imports to California.

California’s clean-burning fuel has reduced smog-forming emissions from vehicles by 15% and cancer risk from vehicle toxins by about 40%. All states should enjoy similar health and environmental benefits.

“Cleaner air and cheaper gas” should make a great presidential campaign platform, except that some environmentalists may be as hostile as the oil companies to uniform green-fuel standards.

For decades, oil companies and environmentalists have both tried to convince Americans that they had to choose between clean air and affordable gasoline. Many environmentalists believed sticker-shock at the pump would lead to significant conservation. At the same time, oil companies coordinated slick public relations campaigns that grossly inflated estimates of retrofitting and manufacturing costs to justify the higher pump price for greener fuel.

Americans could do both: have cleaner air and avoid being gouged at the pump by the oil companies. All it would take is for environmentalists to open their minds and help convince politicians of the need for a uniform national gasoline standard that would assure all Americans the benefit of less deadly air pollution. If combined with tax and other subsidies for small companies to assist in retrofitting independent refineries, such a plan would also help stop the larger oil companies from manipulating supplies to create huge price spikes.