Why Gasoline Costs So Much (And Why It's Going to Cost More) Andrew P
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Brooklyn Law Review Volume 72 | Issue 3 Article 3 2007 Market Fragmenting Regulation: Why Gasoline Costs So Much (And Why It's Going to Cost More) Andrew P. Morriss Nathaniel Stewart Follow this and additional works at: https://brooklynworks.brooklaw.edu/blr Recommended Citation Andrew P. Morriss & Nathaniel Stewart, Market Fragmenting Regulation: Why Gasoline Costs So Much (And Why It's Going to Cost More), 72 Brook. L. Rev. (2007). Available at: https://brooklynworks.brooklaw.edu/blr/vol72/iss3/3 This Article is brought to you for free and open access by the Law Journals at BrooklynWorks. It has been accepted for inclusion in Brooklyn Law Review by an authorized editor of BrooklynWorks. Market Fragmenting Regulation WHY GASOLINE COSTS SO MUCH (AND WHY IT’S GOING TO COST MORE) Andrew P. Morriss† & Nathaniel Stewart†† INTRODUCTION Virtually everyone holds an opinion on what is wrong with gasoline markets. Some critics argue that gasoline costs too much, fattening greedy oil barons at the expense of consumers.1 Some link reducing oil producers’ profits to stopping terrorism.2 Others contend that gasoline costs too little, subsidizing suburban sprawl and gas-guzzling SUVs at † H. Ross & Helen Workman Professor of Law & Professor of Business Administration, University of Illinois; Galen J. Roush Professor of Business Law & Regulation, Case Western Reserve University School of Law; Senior Scholar at the Mercatus Center at George Mason University, and Senior Fellow, Property & Environment Research Center, Bozeman, Montana. A.B. Princeton University; J.D., M.Pub.Aff. University of Texas; Ph.D. (Economics) Massachusetts Institute of Technology. The authors thank the Mercatus Center for funding the research that made this paper possible and A.F. Alhajji and Robert L. Bradley for comments. Marc Demers provided excellent research assistance. Andrew Dorchak provided his always excellent reference assistance. All errors are, of course, the sole responsibility of the authors. †† Fellow in Regulatory Studies at the Mercatus Center at George Mason University, and Roe Fellow in Law at the Property & Environment Research Center, Bozeman, Montana. B.A. Hillsdale College; M.A. John Carroll University; J.D. Case Western Reserve University School of Law. 1 See, e.g., Press Release, Congresswoman Nancy Pelosi, With Skyrocketing Gas Prices, Americans Can No Longer Afford Rubber Stamp Congress (Apr. 24, 2006), available at http://www.house.gov/pelosi/press/releases/April06/Rubberstamp.html (“With record gas prices, record CEO pay packages, and record oil company profits, Speaker Hastert and the Majority Congress continue to give the American people empty rhetoric rather than join Democrats who are working to lower gas prices now.”); Press Release, Sierra Club, Update on Congressional Action this Week on Several Environmental Fronts (Nov. 8, 2005), available at http://www.sierraclub.org/ pressroom/releases/pr2005-11-08.asp (discussing Sierra Club’s calling on Congress to “put money back in the pockets of Americans who need it, not in the coffers of multinational oil companies”); Surges in Energy Prices, The Nader Page, Mar. 13, 2004, http://www.nader.org/interest/031304.html (“The expanding volume of consumer dollars here are going to the oil industry.”). 2 See Gary S. Becker, Let’s Make Gasoline Prices Even Higher, BUS. WK., May 31, 2004, at 24, available at http://www.businessweek.com/magazine/content/ 04_22/b3885046_mz007.htm. 939 940 BROOKLYN LAW REVIEW [Vol. 72:3 the expense of the environment.3 Web sites track gasoline prices4 and grocery stores sell low-cost fuel to lure shoppers.5 Policy makers debate whether gas taxes should be cut to lower the cost of living;6 need to be increased to make drivers pay the full cost of their behavior;7 or whether gas taxes should be a user fee for highway use.8 The Federal Trade Commission (FTC), congressional committees, and a host of state governments have repeatedly investigated gasoline prices, searching for someone to blame when prices rise. These debates treat gasoline as a fungible commodity, widely traded in a national or international market. And for most Americans, gasoline gives every appearance of being just such a commodity—you can fill up in Boston or Dallas, Los Angeles or Cleveland, from pumps that look much the same from city to city, and your car will run without noticeable differences in performance regardless of where you bought gas. But Gulf Coast refinery closures in the wake of Hurricanes 3 See, e.g., Thomas L. Friedman, Seeds for a Geo-Green Party, N.Y. TIMES, June 16, 2006, at A31 (calling for a $1 per gallon gasoline tax to “increase the price of gasoline to a level that would ensure that many of the most promising alternatives— ethanol, biodiesel, coal gasification, solar energy, nuclear energy and wind—would all be economically competitive with oil and thereby reduce both our dependence on crude and our emissions of greenhouse gases”); Jacob Weisberg, I Smell Gas, SLATE, Apr. 26, 2006, http://www.slate.com/id/2140613 (“Cheap gasoline imposes its own costs on society: greenhouse gas emissions, air pollution and its attendant health risks, traffic congestion, and accidents. The ideal way to cope with these externalities would be with higher gas taxes or a carbon tax.”). 4 See, e.g., UCAN’s Gasoline Price Tracking Service, http://home.fueltracker.com/ home.html (last visited Apr. 12, 2007) (providing low gas prices for San Diego County); GasBuddy.com, http://www.gasbuddy.com (last visited Apr. 12, 2007) (locator for low gas prices in the United States and Canada). 5 Kathy Showalter, Grocers See Gold in Gas, Add Discounted Pumps, BUS. FIRST OF COLUMBUS, June 12, 2006, available at http://columbus.bizjournals.com/ columbus/stories/2006/06/12/story3.html (describing trend toward subsidized gas prices as means of luring customers to grocery stores); U.S. FED. TRADE COMM’N, THE PETROLEUM INDUSTRY: MERGERS, STRUCTURAL CHANGE, AND ANTITRUST ENFORCEMENT 42 (2004) [hereinafter FTC, MERGERS] (stating that “the FTC observed significant growth in low-price gasoline retailing by supermarkets, club stores, and mass merchandisers”). 6 See, e.g., Russell Nichols, Bill Proposes Gas Tax Cut to Save 21 Cents a Gallon, BOSTON GLOBE, May 11, 2006, at B1, available at http://www.boston.com/ news/local/articles/2006/05/11/bill_proposes_gas_tax_cut_to_save_21_cents_a_gallon (discussing proposed temporary repeal of Massachusetts gasoline tax to reduce cost of living for “working families and small businesses”). 7 See, e.g., Friedman, supra note 3 (calling for gasoline tax increases). 8 David J. Forkenbrock & Paul F. Hanley, Mileage-Based Road User Charges, PUBLIC ROADS (Mar./Apr. 2006), http://www.tfhrc.gov/pubrds/06mar/02.htm (“For almost a century, the motor fuel tax has been the mainstay of highway finance in the United States. This method has the advantage of being roughly proportional to the distance traveled and thus has the desirable attribute of being a pay-as-you-go form of user charge.”). 2007] WHY GASOLINE COSTS SO MUCH 941 Rita and Katrina highlighted the fragility of gasoline markets,9 and significant differences in gasoline prices throughout the United States over the last few years10 have raised questions about whether a national market really exists. If the gasoline market is not a national one, there are serious implications for both consumer welfare and public policy. Broad, national markets are able to absorb the impact of regulations at lower costs to the consumer than are narrow, fragmented markets. Moreover, fragmented markets offer the potential for implicit collusion among producers, collusion that can be facilitated by regulatory measures. A recent regional price spike in Phoenix, Arizona illustrated the fragmented nature of U.S. gasoline markets. On July 30, 2003, the pipeline supplying gasoline to Phoenix ruptured, cutting gasoline supplies to Phoenix by 30%.11 Phoenix gas stations sought alternate supplies from West Coast refineries, offering to pay higher prices to bid the gasoline away from California retailers. These West Coast refineries had limited gasoline supplies, however, after earlier unplanned refinery closures had left them with lower than normal inventories. Because the Environmental Protection Agency (EPA) requires Phoenix to use a special blend of gasoline to control air pollution, gasoline from nearby Tucson could not be sold in Phoenix until the EPA waived the boutique fuel requirement on August 20.12 Once the waiver was granted, 9 See U.S. CONG. BUDGET OFF., THE MACRO-ECONOMIC AND BUDGETARY EFFECTS OF HURRICANES KATRINA AND RITA: AN UPDATE 19-20 (2005), available at http://www.cbo.gov/ftpdocs/66xx/doc6669/09-29-EffectsOfHurricanes.pdf (describing impact of Hurricanes Rita and Katrina on refineries); U.S. FED. TRADE COMM’N, GASOLINE PRICE CHANGES: THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION 28-29 (2005) [hereinafter FTC, GASOLINE PRICE CHANGES] (noting that as a result of Ivan, crude oil production immediately fell by 83% and continued below normal for several months, with reductions in crude from Venezuela also occurring due to tanker delays caused by the storm). 10 CARL E. BEHRENS & CAROL GLOVER, CONG. RES. SERV. ISSUE BRIEF IB10134, GASOLINE PRICES: POLICIES AND PROPOSALS 1 (Oct. 27, 2005), available at http://fpc.state.gov/documents/organization/56862.pdf (In the five years before 2004, “gasoline prices demonstrated a great deal of regional volatility but less of an increase at the national level.”). 11 This example is drawn from FTC, GASOLINE PRICE CHANGES, supra note 9, at 1-6. 12 The delay was due to Arizona’s delay in requesting a waiver, not the EPA’s processing. The waiver was requested on August 19 and granted on August 20. Id. at 3-4. 942 BROOKLYN LAW REVIEW [Vol. 72:3 gas from Tucson was trucked to Phoenix, raising prices in Tucson but lowering them in Phoenix.13 U.S. gasoline markets are fragmented and that fragmentation stems from over a century of often inconsistent, overlapping regulations of gasoline and petroleum markets.