The story behind high fuel prices

May 30, 2001

Free Market Foundation

Fuel prices are up for a variety of reasons, say U.S. experts, including soaring demand, tight capacity and environmental regulations.

Fuel-hungry sports-utility vehicles, minivans and pickups make up 43 percent of vehicles on American roads today, up from 30 percent in 1990 a trend that has dragged down overall fuel efficiency.

U.S. fuel demand has risen about 2 percent so far this year and currently stands at a strong 8.6 million barrels a day.

Price and supply problems are most severe on the West Coast and in the third of the country where Environmental Protection Agency (EPA) regulations require the sale of lower-emission gasoline which is harder and more costly to produce.

The states have adopted more than a dozen different recipes for the gasoline which means that states can’t swap and share as they did in the past when supplies get tight.

Some gasoline manufacturers have balked at paying licensing fees to Unocal Corp., which holds patents on the blending methods on some lower-emissions gasoline. That has tightened supplies in some regions, such as the Northeast.

Some oil companies have moved away from refining where profits averaged a paltry 4 percent in the 1990s.

While demand for refined products has grown 11 percent since 1995, refinery capacity has grown only 8 percent.

Refineries are operating at 96 percent of capacity leaving precious little room for unplanned outages.

Building new refineries costs about $3 billion today, including $300 million in environmental equipment and they take at least five years to build. Just to get an expansion permit from the EPA takes from six to 18 months.

Source: Alexei Barrionuevo, Shock at the Wheel: Wonder Why Gas Prices Suddenly Got So High? Wall Street Journal, May 14, 2001.

For WSJ text (requires subscription)
http://interactive.wsj.com/articles/SB989789032526456661.htm
For more on Energy http://www.ncpa.org/pd/budget/budget-7.html