A Self-Inflicted Energy Mess

From IBD:
Posted 4/18/2006

Energy: As gasoline prices creep beyond $3 a gallon, everyone wonders who deserves the blame. OPEC? Sure. The unstable Mideast? Absolutely. Here's one you might not have considered: the U.S. government.

It's always tempting to blame soaring energy costs on some nefarious foreign plot and be done with it. And no question, troubles in the Mideast and OPEC's inability (or unwillingness) to get a grip on prices play a big role. The showdown with Iran over its burgeoning nuclear program affects prices too.

But, as we've written before, those aren't the only things to blame. The federal government, with its balkanized gasoline requirements, its taxes and its myriad regulations, deserves a large measure of responsibility for the soaring cost of gasoline.

Every year at this time the same thing happens: Gasoline prices spike in anticipation of the dreaded summer "driving season."

In recent years, prices have risen faster, and remained higher, than before. And this year, the jump has been downright scary, with prices up about 30% since the end of 2005 .

Barring a major breakthrough on Iran, don't expect lower prices soon. Why? The U.S. hasn't built a gasoline refinery from scratch since the 1970s. Instead, we've squeezed greater efficiencies from existing plants, which now operate pretty much full out. Any disruption — an unexpected maintenance shutdown, for instance, or last year's Gulf Coast hurricanes — and prices instantly soar.

That's not to say the price of oil itself doesn't matter. It does. According to the Energy Information Administration, 59% of the price of gasoline is determined by the price of crude. When crude rises, gas goes up. When it falls, gas goes down. Simple.

Yet a big chunk of our current gasoline price pain is in fact self-inflicted. The reason, say energy economists, is simple: Regulations of all kinds have reduced the available supply of energy to U.S. markets. That's especially true for gasoline.

Just last August, Congress passed an energy bill that requires oil companies to remove the additive MBTE starting this spring. Sounds innocent enough, but it's requiring a major, costly retrofit and cleanup that's taking money off the table for other badly needed investments.

Worse, U.S. rules have made it prohibitive even for low-cost foreign companies to come here and supply our market. As oil economist Philip Verleger recently noted, "the U.S. and the European Union have erected the equivalent of trade barriers by imposing increasingly tight specifications on petroleum products."

There is, for instance, the U.S. effort to cut sulfur content in gasoline, a move that began in January 2004. The EU adopted similar rules on diesel. As a result, foreign producers can't make money selling finished petroleum products here. It costs too much to comply with our byzantine rules.

Without big changes, this problem won't go away. Gasoline prices might go up and down, but as the chart shows, the trend seems to be up. What can we do?

For one, the U.S. sits on an awful lot of oil that it chooses not to exploit. The Alaska National Wildlife Refuge is but one example. Over the past two decades, Congress has taken some 740 million acres of oil-rich federal land off the table for oil exploration and production.

In addition, we now make 18 "boutique blends" of gasoline, each of which must be crafted especially for a specific market, just to meet our tough environmental standards. Why not just one?

Everyone wants more energy, but no one wants to do what's necessary to get it. Environmentalists talk of slashing world economic growth to curb global warming. Many people are sympathetic to that. Yet they hunger for more energy, not less, and the higher standard of living it implies.

Worldwide, the International Energy Agency estimates that by 2025 $16 trillion — an amount larger than the GDP of the world's two biggest economies, the U.S. and China — will have to be spent to meet global energy demands. Given the stringent rules now in place around the world, it looks doubtful that goal can be met.

It's possible that higher prices will push consumers to cut back and encourage companies to find new kinds of energy. Already, oil companies are looking to the billions of barrels of oil locked in Canada's oil sands — an amount roughly equal to all the oil in Saudi Arabia. Other new technologies, such as hydrogen fuel cells, also hold promise for cutting our oil bills.

But at some point, we'll have to make tough decisions. More energy or more rules — and then we'll find out where people stand.