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Bureaucratic Gas

To lower prices at the pump, abolish the boutique fuel regime.

Apr 2, 2012, Vol. 17, No. 28 • By STEVEN F. HAYWARD
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When Congress took up the Clean Air Act of 1990, it decided to take reformulated gasoline national. This is where the mischief starts. The infant ethanol industry saw an opening to juice up the market for its uncompetitive product if oxygenates were mandated for the entire national gasoline market, even though there is strong evidence that ethanol, though an oxygenate, actually increases ozone. No matter: The mania to promote “alternative fuels” was shoehorned into the Clean Air Act as an adjunct, and while environmentalists generally like mandates, one other party really liked this particular one: the refining industry.

 

There was nowhere near enough ethanol to satisfy the new oxygenate requirement, so most areas decided to use methyl tertiary butyl ether (MTBE). It ended up being one of the great environmental disasters of modern times, and a textbook example of the law of unintended consequences. MTBE is a potent water pollutant, and leakage of MTBE from underground tanks began showing up on a large scale. The resulting uproar—and wave of lawsuits against oil companies—meant a swift end to MTBE, leaving mostly ethanol as the replacement, and sure enough, ethanol use in gasoline has grown almost twenty-fold since 1990.

The other key aspect of the story is a feature that ironically most conservatives favor: state flexibility. Because of the variability of ozone conditions around the country, the Clean Air Act allowed the states flexibility in choosing whether to adopt reformulated gaso-line, and what kind they might use. St. Louis has two kinds of gasoline because Missouri applied to the EPA for one kind of gasoline, while Illinois applied for another, even though they share the same airshed, which would seemingly call for the same blend.

Despite the complications this presents for refiners and the petroleum product supply chain, the industry loves it: Why make just three or four kinds of gasoline when you can make a dozen and charge higher margins? A 2001 EPA review of the issue dryly notes,

A state-specific program generally leads to the secondary effect of limiting competition for the gasoline supplied to the affected market since the market for a state fuel is often small compared to the market for federal RFG. As a result, the number of refiners likely to devote production to this small state fuel market is often limited. This has been perceived as a benefit to the refiners that produce the gasoline for a state fuel market.

Translation: The proliferation of boutique gasoline suppresses competition and drives up prices.

The Government Accountability Office looked into the matter in a 2005 report, noting that the adoption of boutique blends meant that in one East Coast area the number of gasoline suppliers dropped from a dozen to three. Southeast Michigan has just two refineries and one pipeline supplying its boutique blend. After studying gasoline markets in 100 cities, the GAO concluded: “The proliferation of special gasoline blends has made it more complicated to supply gasoline and has raised costs. .  .  . Of the 100 cities we examined, most of the 20 cities with the highest prices used special blends of gasoline.” The Dallas Federal Reserve noted another anticompetitive effect of the mandate: It bars gasoline imports from other countries, which don’t produce any of our special blends.

 

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