Analysis of an Oily Situation

by Don Boudreaux on August 22, 2012

in Crony Capitalism, Energy, Environment, Regulation, Seen and Unseen

In today’s Wall Street Journal, Andy Morriss and I explain some of the causes and unfortunate consequences of the U.S.’s unnecessarily fragmented market in refined fuels.  Here’s a slice:

For most of the 20th century, the United States was a single market for gasoline. Today we have a series of fragmentary, regional markets thanks to dozens of regulatory requirements imposed by the federal Environmental Protection Agency (EPA) and state regulators. That’s a problem because each separate market is much more vulnerable than a national market to refinery outages, pipeline problems and other disruptions….

….

The role of regulators in fuel formulation has become increasingly complex. The American Petroleum Institute today counts 17 different kinds of gasoline mandated across the country. This mandated fragmentation means that if a pipeline break cuts supplies in Phoenix, fuel from Tucson cannot be used to relieve the supply disruption because the two adjacent cities must use different blends under EPA rules.

To shift fuel supplies between these neighboring cities requires the EPA to waive all the obstructing regulatory requirements. Gaining permission takes precious time and money. Not surprisingly, one result is increased price volatility.

Another result: Since competition is a key source of falling gas prices, restricting competition by fragmenting markets reduces the market’s ability to lower prices.

UPDATE: Jonathan Adler adds further background information.

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