Jay Reding.com

Bravely Slaying Non-Existent Dragons

BusinessWeek reports on the recently-passed House bill which bans so-called “price gouging” by oil companies:

The legislation would penalize individuals or companies for taking “unfair advantage” or charging “unconscionably excessive” prices for gasoline and other fuels.

Opponents said the language was too vague and that the Federal Trade Commission, which would enforce the law, has not clearly defined price gouging.

“I don’t know what `unconscionably excessive’ means,” said Rep. Joe Barton, R-Texas.

The bill’s chief sponsor, Democratic Rep. Bart Stupak of Michigan, said he had no doubt the FTC would be able to determine price gouging once the agency had a law to uphold.

The measure would establish the first federal law against energy price gouging. The FTC now can investigate price manipulation under antitrust laws. Currently, 29 states have price gouging statutes; enforcement varies widely.

A Congress which has been passing budget-busting spending bills and stuffing every piece of legislation with more pork than a Carolina barbecue is the last arbiter of what defines “unconscionably excessive” pricing for anything.

The New York Times has an excellent piece on why such “price gouging” is less about greedy oil companies and more about years of bad policy:

The Federal Trade Commission has been skeptical about accusations of price-gouging on gasoline prices. In 2004, the agency studied price changes in gasoline from 1991 through late 2003. It concluded that about 85 percent of the price variability — both up and down — reflected changes in crude oil prices.

To be sure, this year is different. Crude oil prices are actually a bit lower right now, at the onset of the summer driving season, than they were at this time last year. But gasoline prices are slightly higher than they were a year ago.

The Energy Information Administration is predicting that crude oil prices will average about $66 a barrel this summer, versus $70 last summer. But it predicts that gasoline will average about $2.95 a gallon this summer, up from an average of $2.84 last summer.

INDUSTRY executives say the anomaly reflects a temporary drop-off in refinery activity, partly because of scheduled maintenance and partly because of unscheduled interruptions. On top of that come ethanol prices, which have soared, because refiners now blend a small percentage of ethanol into standard gasoline.

The broader issue is that refinery capacity has not kept up with American demand for gasoline. Oil companies, caught with vast amounts of excess refining capacity in the early 1980s, systematically reduced capacity during the long lean years when energy prices and profit margins were the pity of Wall Street.

There are three main reasons why gas prices are so high right now, none of them having anything to do with oil company greed. The first is that there are so many regional gasoline blends required by state laws that supply issues are complicated. The GAO found:

The increasing numbers of special gasoline blends have made it more complicated and costly to supply gasoline, elevating the risk of localized supply disruptions. Producing special gasoline blends can require changes at refineries, making it more complicated and costly to produce gasoline. Special blends also add to the number of fuels shipped through pipelines, reducing the efficiency of the pipelines and raising costs. In addition,
because the tanks at the fuel terminals were often built before the proliferation of blends, they are often too large and too few to efficiently handle the increased number and smaller size batches of special gasoline blends and, as a result, total storage capacity has fallen. Further, in some cases, the proliferation of blends has reduced the supply options available to some retailers, making them more susceptible to supply disruptions.

These special requirements cause major problems with inefficiencies which raise the cost of gasoline for everyone — including states which don’t mandate their own special gasoline blends.

Secondly, there is the high cost of ethanol which is frequently added to even normal gasoline. This is causing major disruptions in the price of corn, which increases not only the costs of corn-based ethanol, but also meat, dairy, and other products which rely on corn-based animal feeds. Using corn for fuel is a horrendously bad idea — unless you’re a corn farmer who can make a windfall on the increased price of corn. For the rest of us, it increases the cost of both our food and our fuel as the cost of corn-based ethanol continues to rise.

Finally, there’s the big issue: this nation simply doesn’t have enough refining capacity. Building a new refinery is an expensive proposition, and if biofuels really are the wave of the future, it makes little sense to make the decades-long investment of a new conventional refinery when the industry has shifted towards alternative energy production. For an oil company to build a new refinery, they have to navigate a sea of bureaucratic red tape, find a location that won’t attract protesters, and then actually be able to recoup their investment. That simply isn’t a viable strategy these days — nobody wants an oil refinery next door, and oil companies can’t pour billions into a new refinery that produces a blend of gasoline that may not be legal in 10 years.

These problems aren’t going to go away. We need more refining capacity, we need fewer fuel requirements, and we need a more realistic policy towards the usage of biofuels. However, Congress seems more interested in grandstanding over “price gouging” than in actually fixing the problems that plague our nation’s oil supplies. As long as Congress has their priorities dangerously out of whack, it’s likely that gas prices will continue to rise, and the only ones doing the gouging will be Congress and the special interests that control them.

2 responses to “Bravely Slaying Non-Existent Dragons”

  1. Mark says:

    “Finally, there’s the big issue: this nation simply doesn’t have enough refining capacity. ”

    Actually, the really big issue is that the energy companies have shut down 50% of existing refineries in the last quarter century and have no interest in building new ones regardless of environmental laws. They like $250 billion per quarter profits just fine as is, thank you very much. Why on Earth would they want to increase supply when existing supply generates the windfall that it has? The energy companies hide behind the “environmental regulations stymie refinery growth” canard knowing that people like you will parrot the company line simply because they’re the Republican Party base….and therefore “the good guys”.

    And while the oil companies don’t directly control prices at the pump the way some like to believe, they have methodical ways of manipulating the market. For instance, the timing of last fall’s “massive new find of oil in the Gulf of Mexico”, a couple of months before the midterm election, was pretty darn convenient. Of all the times that “huge new oil discoveries” could be made, driving down the futures market along with short-term prices at the pump, and they just happen to announce the discovery of this new find less than two months before a national election when gas prices were at a near all-time high. It’s a miracle!!!!

  2. Jay Reding says:

    Actually, the really big issue is that the energy companies have shut down 50% of existing refineries in the last quarter century and have no interest in building new ones regardless of environmental laws.

    Because A) in 1998 oil was at $11/barrel and the oil companies couldn’t afford the capacity and B) environmental laws increased the cost of operation for refineries as well. Again, how much trouble is it to do a little basic research?

    The current refinery squeeze has been building for years. For the past two decades, deregulation and low profits have combined to push the industry into consolidation. Partly because of environmental regulations, it was cheaper to expand existing refineries than to build new ones. In 1981, the US had 324 refineries with a total capacity of 18.6 million barrels per day, the Department of Energy reports. Today, there are just 132 oil refineries with a capacity of 16.8 million b.p.d., according to Oil and Gas Journal, a trade publication.

    Why on Earth would they want to increase supply when existing supply generates the windfall that it has?

    Um, gee, I don’t know, maybe because they’d make more money with excess capacity? It makes no sense to sit on oil, which isn’t cheap to store and doesn’t make them much money when it isn’t turned into something useful. The idea that the oil companies are conspiring to keep supplies low is an argument that is economically illiterate. The oil companies don’t make money by the scarcity of oil — it’s an inelastic commodity. 85% of the price of gas is based on crude oil, and much of the rest is based on regulatory and other fixed costs.

    Oil companies make money by volume, and they’re making money now because they’ve paid off most of their fixed costs, can’t expand any more, and sell a commodity that everyone needs. The idea that they’d make more money by selling less in an industry that thrives on volume is an idea that only an economic illiterate would espouse.

    And while the oil companies don’t directly control prices at the pump the way some like to believe, they have methodical ways of manipulating the market. For instance, the timing of last fall’s “massive new find of oil in the Gulf of Mexico”, a couple of months before the midterm election, was pretty darn convenient.

    Except for the fact that it takes decades to prove a reserve, and years more to establish it. The idea that there’s some sinister cabal of oil companies secretly working to keep the GOP in power is ridiculous — the GOP would probably do better if it had that sort of competent management.