7/03/00 11:00 a.m.
The EPA’s Gas Problem
The Clinton administration ought to stop the blame game and look inward.

By Ben Lieberman, policy analyst, Competitive Enterprise Institute

n the ten years since enactment of the Clean Air Act, the Environmental Protection Agency has generated a steady flow of gasoline regulations. These measures have had a substantial cumulative effect on the price at the pump, but have frequently failed to deliver the promised environmental benefits. Given the public outcry over the OPEC-induced price increases earlier this year, and the unusually high costs thus far this summer, perhaps it is time to review some of the mistakes made by our own federal regulators that have exacerbated the gas affordability problem.

Take the reformulated gasoline (RFG) program, designed to fight smog. Since 1995, EPA has required the use of RFG in 10 metropolitan areas with the highest levels of ozone, the primary constituent of smog. As of June 1, 2000, strict new standards for RFG kicked in. RFG usually costs 2-8 cents per gallon more than conventional gasoline, but temporary difficulties in meeting demand for the new RFG in Chicago and Milwaukee led to a price differential exceeding 40 cents per gallon.

Throughout June, millions of midwesterners were paying over $2 per gallon. Notwithstanding the higher price, a 1999 report by the National Academy of Sciences looked into the environmental benefits of RFG and gave the program decidedly mixed reviews. Although ozone and other air pollutants have been declining nationwide, the study concluded, “it is not certain that any part of these trends can be significantly attributed to the use of RFG.” Further, according to Dr. Kay Jones, head of a Seattle-based environmental consulting firm and former senior adviser on air quality to the President’s Council on Environmental Quality, the RFG program may have already outlived its limited usefulness. “Several RFG-mandated cities are now in attainment with the federal ozone standard, and most of the rest will soon be in attainment, with or without the RFG program, “ he says.

Ironically, Chicago, the city hardest hit by sky-high RFG prices, “has been in attainment at least since 1997,” according to Jones. Worse yet, the additive MTBE, which is used in 85 percent of RFG, has caused groundwater contamination in nearly every state. Thus, the program may actually be a net minus for the environment and public health. The Clinton administration is doing its best to divert attention away from RFG and towards the oil industry, launching a Federal Trade Commission investigation to determine if, in Al Gore’s words, “big oil is gouging American consumers.”

Of course, with George Bush’s ties to the oil industry and Gore’s equally strong ties to the environmental movement, the political stakes of the blame game are quite high. It is unlikely that evidence of illegal industry behavior will emerge. Indeed, if “big oil” can manipulate prices, why would they have allowed themselves to endure nearly 20 years of low gas prices and relatively modest profits? And why single out Chicago and Milwaukee? Further undercutting the administration’s conspiracy theory is the fact that the Department of Energy essentially predicted the midwestern price spike last April. In its Summer 2000 Motor Gasoline Outlook, the agency’s Energy Information Administration (EIA) warned that the onerous new RFG requirements “raise the risk of localized shortages,” and identified the midwest as one of the most vulnerable regions.

Many other rules are in the works. For example, EPA recently proposed a new standard for sulfur in diesel fuel. Some refiners predict it will add more than 10 cents per gallon and possibly create supply problems. The agency is also working on new benzene limits for gasoline. Indeed, if the past is any guide, the flow of major new fuel regulations will continue at the rate of at least one or two per year. Individually, none of these measures will break the bank, but the cumulative impact on gas prices will be considerable, especially for the working poor. Further regulations may also lead to repeats of the spot shortages that hit Chicago and Milwaukee. EIA has cautioned that “additional clean fuels programs could make the system more vulnerable to local outages and price spikes.” Beyond tinkering with the composition of gasoline, several EPA actions have raised prices in less direct ways. For example, the agency’s aggressive enforcement of its New Source Review program has made it extremely difficult to build new refineries or even upgrade existing ones. Refining bottlenecks in California have already added to the cost of gas in that state, and the problem appears to be spreading to other parts of the country. Of course, gas taxes have also added to the retail price. In fact, federal, state, county, and city taxes now cost most Americans 40-60 cents per gallon.

For most of the 1990s, gas was so cheap that few consumers complained as these taxes crept higher, including a 1993 increase of 4.3 cents per gallon to the federal tax, for which the vice president provided the tie-breaking vote in the Senate. Now, however, drivers are clamoring for relief and politicians at all levels have begun to consider gas tax reductions. At the very least, no gas tax increases are likely anytime soon. In contrast, the per-gallon costs of environmental regulations are still growing, and will be considerably more difficult for legislatures to curtail. Whatever the costs, the benefits of EPA-managed fuel supplies are unclear. Granted, air quality has markedly improved over the past three decades, due in substantial part to dramatic reductions in motor vehicle emissions. But the lions’ share of the credit goes to improvements in the vehicles themselves, and not to the federally mandated changes in the makeup of fuels.

Over the short-term, the price of crude oil is still the primary driver of gas price fluctuations, and there is only so much our government can do to influence the actions of OPEC or any other factor that affects the global oil market. But year after year, unchecked environmental regulations are taking an increasing toll. EPA is guilty of over-regulating motor fuels, but Congress is responsible for giving the agency the power to do so. Fortuitously, the recent price spike comes just as the Clean Air Act is up for reauthorization, so Congress will soon have the chance to review the present state of gasoline regulations with an eye towards injecting some balance into the process. Given the events of the past month, substantial curtailment or even outright repeal of the RFG mandate may be politically possible. At the very least, requiring EPA to weigh the environmental benefits of further regulations against the costs to consumers would make a lot of sense those who shelled out $2 per gallon during the great gas crunch of 2000.