On Tuesday Stephen Karlson asked why our seasonal gasoline price spikes persist:
The $100 bill left on the sidewalk is this: why does the transition from winter gas prices to summer gas prices continue to have this price spike, year after year. One would think there is some money to be made in the right kind of hedging and stockpiling. Or is the real cost of tankage so high as to preclude such strategies?
Stephen answered his own question, and correctly. The existing EPA fuel oxygenate requirements that arise from the Clean Air Act Amendments of 1990 require that all refiners deplete their inventories of winter fuel before restocking the tanks with the summer fuel (something to do with reducing the probabiilty of mixing). This requirement exacerbates the seasonality that is inherent in gasoline prices because of (1) changes in the demand for gasoline and (2) the price inelastic nature of the demand for gasoline. So now in addition to inelastic seasonal demand for gasoline, we have inelastic seasonal supply of gasoline. And politicians and “uninformed newscasters” wonder why we have seasonal price spikes …
In theory these price spikes should provide an arbitrage opportunity for some clever entrepreneurs. But the opportunity cost of inventory storage is very large; petroleum refining is a very aggressive oligopoly, so the profit margins are just not there to support carrying such a capital cost. Furthermore, constructing more tank farms is almost as much of a no-no from the aesthetic/NIMBY perspective as building more refineries (the last refinery built in the US was constructed in 1976, in Louisiana). So expanding storage is expensive and difficult to achieve.
That’s why it’s not a $100 on the sidewalk. But it is a deadweight loss from the ill-conceived and poorly implemented regulations to control the emissions from burning gasoline.
But is there a better way, you ask? I think the fuel oxygenate requirement is another entry in the list of bad input regulations to try to control outcomes. A much better approach is to say, “We’re gonna sniff the tailpipes of cars burning your fuel. If the pattern of their emissions of criterion polutants does not meet our emission standard, then you are susceptible to a fine. Now go and set your engineers to solving this problem.” No telling the refiners how to do their jobs, no technology mandates, no input mandates that ignore how costly it is to re-engineer your refining process to meet the mandate. You just have a goal, a desired outcome, and you use your local knowledge and your human capital to meet it.
I did a search of my archives, and found posts over the past two years on gasoline prices, if you are interested in seeing what I’ve written on them in the past.