Government Policies Partly To Blame For High Gas Prices

DALLAS (November 15, 2007) – Government policies have contributed to high gas prices, by reducing refining capacity.  Yet instead of seeking to alleviate the problem, Congress is debating ways to make matters even worse, according to a new report released by the National Center for Policy Analysis (NCPA).

“Politicians complain about the U.S.’s increasing dependence on foreign oil but they continue to promote policies that increase that dependence,” said NCPA Senior Fellow H. Sterling Burnett, who co-authored the report.  “While they talk, we’ve nearly doubled our dependence on gasoline refined and imported from other nations.”

According to the report, gasoline demand has increasingly outstripped domestic supply:

  • In 1981, the 18.6 million barrels per day (b/d) capacity of U.S. refineries exceeded the nation’s daily consumption of slightly more than 16 million barrels. 
  • Between 1981 and 2005, U.S. oil consumption grew 29.7 percent to nearly 21 million b/d.
  • But refinery capacity in 2005 was 17.1 million b/d – 8.1 percent less than in 1981.

Building new oil refineries or expanding existing ones is among the most affordable, effective and reliable ways to increase supplies and lower prices.  However, no new refineries have been built in the U.S. in almost 30 years due to clean air regulations, boutique fuel mandates and mandates for ethanol that have raised the cost of building new refineries.

  • Amendments to the Clean Air Act in 1990 and 1997 required refineries to limit emissions of air pollutants and to make cleaner reformulated fuel.  This forced refiners to install expensive pollution-control technology.  This high price tag led to the closure of additional refineries.
  • Gasoline sold in the US has been fractionated into about 17 different boutique fuels in order to fulfill various air pollution reduction plans.  With three grades of gasoline per fuel, refiners are producing over 50 separate blends. The Government Accountability Office notes that producing these gasoline blends requires the installation of expensive equipment and the different blends must be transported separately.  As a result, refinery capacity becomes severely constrained seasonally, resulting in gas price spikes.
  • The 2005 energy bill mandated the annual use of 8 billion gallons of ethanol in gasoline blends, and an energy bill recently passed by the U.S. Senate would increase the mandate to 36 billion gallons.  Petroleum refiners have responded to existing and proposed expanded ethanol mandates by cancelling 40 percent of planned expansions in capacity, reducing potential new output from 1.6 million b/d to less than 1 million b/d.

“Absent government intervention in the market, refinery capacity would be expected to expand, reducing consumer prices,” said D. Sean Shurtleff, an NCPA graduate fellow who co-authored the report. “More economical and secure energy supplies are available if government will get out of the way.”