A Conspiracy of Bad Policy-Fuel Prices are Impacted by Restrictions on Supply, Government Mandates, Lack of New Refineries

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With prices hovering close to their record high, and predictions of even higher prices there are few things generating as much interest among average citizens this summer as the retail price of gasoline.

Following Hurricanes Katrina and Rita the average retail price of regular unleaded gasoline increased sharply. Those who would like us to believe the conspiracy theories assert that “Big Oil” was using these natural disasters as a chance to reap windfall profits and take advantage of the American consumer. The facts, however, tell a different story.


Primarily, fuel prices have been most impacted by restrictions on supply, the lack of new refineries, government mandates for blended fuels that also impact the refineries and our own high demand for fuel.

The largest factor impacting fuel prices is the price of international crude oil which has risen as a result of disruptions in the supply and because of growing demand from the growing economies in China and India that have increased the competition for crude oil. The problem with competition for crude oil could be alleviated substantially if the U.S. were to take advantage of our own oil deposits. Along the Outer Continental Self alone the Interior Department estimates that there are 102 billion barrels of oil available, enough to fuel 85 million cars for 35 years.

But even if we substantially increased the amount of crude oil coming in we still would have a problem because of a lack of refining capacity. Currently, U.S. refineries are operating at approximately 98% of their designed capacity. The 2% of unused capacity is due to routine maintenance and other issues that would cause a slight disruption in operations. For all practical purposes, 100% capacity is unattainable.

We have a demand for refined products in this country equal to 21 million barrels of oil per day. Our current refining capacity is 17 million barrels per day leaving us with an average daily shortage of 4 million barrels which means we are forced import refined fuels. Though some existing refineries have increased their capacity to try to meet the demand, no new refineries have been built in the United States in nearly 30 years.

The lack of new refinery construction is due to regulatory uncertainty, bureaucratic delays, and permitting costs. But the biggest obstacle to new refinery construction is opposition from the politically powerful radical environmental activists and neighborhood groups that have opposed construction of refineries.

The lack of refinery capacity is made worse by state mandates for 17 different formulas of blended fuel that slow refinery production. In addition, last year’s major spike in gasoline prices was largely the result of the fairly severe disruptions of refinery operations in Texas and Louisiana caused by hurricanes.

Of the 144 operating refineries in the United States 42 (29%) are located in Texas or Louisiana. These 42 refineries account for 7,401,214 barrels per calendar day or 43.2% of the total refining capacity with many of the country’s largest refineries located in these two states. Katrina and Rita impacted a significant number of these refineries causing at best a temporary shut down and at worst significant damage. The supply of gasoline, especially in areas directly served by Gulf Coast refineries, was immediately and significantly impacted and, if we remember basic economics we remember that, when supply decreases, prices increase.

Many people still hold on to the idea that the price hike was the result of a conspiracy by the “Big Oil” companies to increase their profits. But the fact is, the hike in prices was primarily the result of a conspiracy of bad public policy that has limited both our access to domestic sources of crude oil as well as the restrictions against building new refineries that have limited our refined fuel capacity, all of which became painfully apparent after Katrina and Rita.

We do have options for bringing down fuel prices. In the short term we could alleviate some of the refinery capacity issues by mandating a reduction in the number of formulas for blended fuel and we could drive less and give up our SUVs for more fuel efficient vehicles. Since we are not likely to drive less or drive more fuel efficient vehicles, the best short term option is a reduction in the number of mandated blended fuel formulas.

In the long term, our best options are to expand our supply of crude by opening up areas in the U.S. that are now closed to drilling, building more nuclear facilities, developing alternative fuels, and building new refineries.

Opening up new domestic sources for crude oil such as the offshore sites along the Gulf Coast will eventually help reduce our dependence on foreign suppliers and will provide a hedge against reductions in the supply of crude oil, and it should eventually help bring down fuel prices. But even with access to new domestic supplies of crude oil, gasoline prices and the price of fuel oil and other petroleum products will remain high until we either reduce demand or increase the supply. And to increase supply we must also construct new refineries.

”’J. Bart Fletcher, C.A.E.,is vice president – advancement of the Alabama Policy Institute, a non-partisan, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.”’

”’This column is a copyrighted feature distributed free of charge by the Alabama Policy Institute. For information or comments contact: J. Bart Fletcher, Alabama Policy Institute, 402 Office Park Drive, Suite 300, Birmingham, Alabama 35223, (205) 870-9900, mailto:bartf@alabamapolicy.org”’