Let's hope I'm wrong
By James Aaron Cooke, Executive Editor -- Logistics Management, 7/1/2004
Just like the big oil companies I like to profit from current events, and that's why the other day I made a bet with Jim Haughey, one of the economists here at Reed Business Information. Haughey predicted that gasoline prices would fall back to $1.25 a gallon within two years. Always willing and eager to take someone else's money, I bet against his prediction.
The way I view things, high prices for gas and diesel are here to stay. Even if OPEC opens up the spigots and oil pours out of every derrick in Iraq, leaving the world awash in petroleum, U.S. consumers will still be faced with high fuel prices.
That's because the volume of crude oil isn't the only thing constricting gas and diesel prices. For starters, as more manufacturing moves to low-cost producers like China, those countries are increasingly competing with the United States for petroleum products—and when demand matches or exceeds supply, prices go up. But although China's appetite for oil may be partly to blame for recent fuel price hikes, there are plenty of things to point a finger at right here at home.
The United States lacks an ample supply of refined oil products, and that's a recipe for high prices at the pump. According to the American Petroleum Institute, there has not been a new oil refinery built in the United States since 1976. The reason: It costs too much to meet environmental regulations. The institute estimates that it would cost $1 billion to build a new refinery today.
Like most U.S. industries, the oil business has streamlined its operations, leaving only its most efficient refineries running. The United States has less than half the number of refineries it had 25 years ago; according to the National Petrochemical and Refiners Association, there are only 149 refineries today, compared to 321 in 1981.
Supplies from offshore refineries could offset diminished domestic production, but here too there's a rub: To meet clean-air rules, some states and regions require their own formulations for gasoline and diesel. The American Petroleum Institute says there are at least 17 different environmentally mandated blends for gasoline and at least three for diesel. There's little incentive for foreign producers to increase their production costs to make a blend for one state's market.
Haughey says that speculation and fear have raised the price of petroleum in world markets; in his view, today's high pump prices reflect the "cost of violence." He believes that there's enough petroleum available to sell gas for $1.50 a gallon and that in most cases, enough diesel could be imported to maintain adequate supplies. "If nobody shoots at anybody, then the cost will go down," he contends.
Maybe. But I wouldn't touch any bet about a date for achieving world peace. Meanwhile, until that day arrives, we as a nation will have to bear the ripple effect from higher petroleum costs: Higher fuel costs result in higher freight rates that lead to higher costs for consumer goods.
For the sake of a sound economy, the federal government needs to step in and fix the problem created by its own clean-air laws. Congress should prohibit states from requiring their own blends of diesel and gasoline and mandate one national fuel formulation. I'm not optimistic about Congress coming to the rescue of shippers, carriers, or consumers anytime soon. Hence I'm still betting that the average price for a gallon of gas will hover around $2 a gallon for the foreseeable future.
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