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Refining the Argument

Here’s a letter to the Wall Street Journal:


You nicely detail many of the reasons why prices at the pump today are much higher than they’d be in a market less burdened with the ethanol-lobby’s cronyism and less frightened by politicians’ succumbing to climate-change hysteria (“Is $6 a Gallon Gasoline Next?” June 16).

There’s at least one additional reason for high gasoline prices: the government-engineered fragmentation of the market for refined petroleum. As Andy Morriss and I explained ten years ago in your pages,

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.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030