Energy & Entrepreneurs #4 

Gouging and Biofuels

by Raymond J. Keating

Let's take a look at a few issues regarding the price of gasoline that many of our elected officials - who are so outraged over prices at the pump - would prefer go unnoticed.

First, columnist George Will wrote an excellent piece last week about the general economic and political silliness behind political declarations about energy independence, and price gouging legislation. Will also lays out how government keeps prices high at the pump.

Will writes: "Pelosi announced herself ‘particularly concerned' that the highest price of gasoline recently was in her San Francisco district -- $3.49. So she endorses H.R. 1252 to protect consumers from ‘price gouging,' defined, not altogether helpfully, by a blizzard of adjectives and adverbs. Gouging occurs when gasoline prices are ‘unconscionably' excessive, or sellers raise prices ‘unreasonably' by taking ‘unfair'' advantage of ‘unusual' market conditions, or when the price charged represents a ‘gross' disparity from the price of crude oil, or when the amount charged ‘grossly' exceeds the price at which gasoline was obtainable in the same area. The bill does not explain how a gouger can gouge when his product is obtainable cheaper nearby. Actually, Pelosi's constituents are being gouged by people like Pelosi -- by government. While oil companies make about 13 cents on a gallon of gasoline, the federal government makes 18.4 cents (the federal tax) and California's various governments make 40.2 cents (the nation's third-highest gasoline tax). Pelosi's San Francisco collects a local sales tax of 8.5 percent -- higher than the state's average for local sales taxes."

Second, the New York Times ran a front-page story on May 24 titled "Oil Industry Says Biofuel Push May Keep Gas Prices High".  A few points are worth noting:

• "And some oil executives are now warning that the current shortages of fuel could become a long-term problem, leading to stubbornly higher prices at the pump. They point to a surprising culprit: uncertainty created by the government's push to increase the supply of biofuels like ethanol in coming years." But that should be surprising to no one. Government interference in the marketplace often causes problems, including creating uncertainties that discourage or restrain private-sector investment.
• The Times story does a fairly good job in laying out the problem: "In his State of the Union address in January, President Bush called for a sharp increase in the use of biofuels, along with some improvement in automobile fuel efficiency to reduce America's use of gasoline by 20 percent within 10 years. Congress is considering legislation calling for a nearly fivefold increase in the use of ethanol. That has forced many oil companies to reconsider or scale back their plans for constructing new refinery capacity." It continued: "In hearings before Congress last year, oil executives outlined plans to increase fuel production by expanding existing refineries. Those plans would add capacity of 1.6 million to 1.8 million barrels a day over the next five years, for an increase of 10 percent, according to the National Petrochemical and Refiners Association. But those plans have since been scaled back to more than one million barrels a day, according to the Energy Information Administration, an arm of the federal government. ‘If the national policy of the country is to push for dramatic increases in the biofuels industry, this is a disincentive for those making investment decisions on expanding capacity in oil products and refining,' said John D. Hofmeister, the president of the Shell Oil Company. ‘Industrywide, this will have an impact.'"
• And others have voiced these concerns, as the news report pointed out: "The concerns were echoed in a recent report by Barclays Capital, which said the uncertainty about the ethanol growth ‘will do little to accelerate desperately needed investment in complex United States refining units.'" That Barclays analysis added: "Indeed, it is likely to deter and further delay investment, if not rule out many refinery investments completely."
• The Times story later adds: "Lawrence Goldstein, an energy analyst at the Energy Policy Research Foundation, an industry-financed group, has been warning for nearly a year that the government's twin goals of encouraging refiners to increase production and promoting increased supplies of biofuels work against each other. ‘These two policies are not complementary,' Mr. Goldstein said. ‘These policies are in conflict.' In addition, Mr. Goldstein said, an emphasis on ethanol might lead to increased volatility in fuel prices. ‘If we get a bad corn crop, we will end up paying for it at the pump and on the food shelves,' he said. ‘We are not buying security. We are increasing volatility.'"

Third, earlier this month, the Hudson Institute's Diana Furchtgott-Roth wrote a piece titled "Get Pumped". She lays out the grim facts about limited U.S. refinery capacity.  Consider a few points:

• "Preoccupied with forcing auto companies to meet unrealistic targets for fuel efficiency, Congress is failing to address this kink in our gasoline supply. ... Congress has discouraged the construction of new refining capacity through proposed legislation that punishes refiners when prices rise, that gives extensive and expensive permit requirements for construction of new refineries and expansion at existing sites, and that allows for tort risk. These policies need to be reversed."
• "The spring season usually sees a spike in gasoline prices when refineries change their mix of output from winter to summer blends of gasoline to satisfy clean air mandates. Refiners shut down their plants and clean the tanks. This customarily results in a price rise, but the 2007 price bump is much higher than usual because of low inventories. An obvious remedy would be to build new refineries, expand existing plants, and import more gasoline. But it's impossible to find a community that will approve a new refinery. People like to fill cars up at low prices, but they don't want a refinery close to home. Why don't we import more gasoline? According to Mr. Pugliaresi, ‘Refineries abroad are expanding, but they can't expand fast enough to meet global demand. Exxon builds a refinery abroad every 3 years.' There's nothing wrong with importing gasoline from abroad, but if more refineries were built here, our workers would get the jobs and our supplies would be more secure."
• "The former commissioner of agriculture for New York State, Nathan Rudgers, recommends ethanol to alleviate gasoline shortages. According to Mr. Rudgers, ‘Numerous studies show that corn ethanol has a solid renewable energy return on its fossil energy investment, from nearly 1.4 units in energy out for each unit of energy in.' But a physicist and president of Light-Spin Technologies, David Salzman, commented: ‘We're stuck with gasoline for at least the next two decades. Ethanol produces horrible quantities of greenhouse gases and, with current technology, costs almost as much energy to make as it releases. All-electric cars actually increase the demand for oil, because losses from batteries and distributing electricity over the grid exceed the energy savings from burning oil.'"

Taxes, CAFE standards, fuel mandates - all of these governmental actions cause far more problems than they solve.  Our elected officials need to focus on letting markets, and U.S. businesses, do their work.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.