I’ve been meaning to post this link for a few days, but have been in somewhat flighty-chicken mode … Skip Sauer at the Sports Economist had this good post on petroleum refining and environmental regulation. He links to an article in the Houston Chronicle that gives some good information, and makes the following observations:
My sense is that conditions in the gasoline market will get much worse before they’ll get better. And the culprit is environmental regulation. Consumer anger at gasoline prices is usually focused on “greedy oil companies.” How will consumers respond when they realize that environmental regulations are responsible for high prices?
To be sure, there are many factors at work in the gasoline market. Crude prices are up. Energy demand in China is growing inexorably. OPEC production decisions are paramount. But if more severe environmental regulations in the U.S. play an important role, U.S. gasoline prices should have risen relative to prices in the rest of the world. That’s testable, and my hunch is its correct.
Two things are important here. First, the opportunity cost of the money that refiners spend retrofitting and adapting their production processes. The Chronicle article discusses this point explicitly, suggesting that money spent on meeting regulations is money that could have been spent increasing refining capacity. I think NIMBY and other such factors put a limit on that, but there are ways to increase capacity other than building more refineries. Second, do we really know that we are getting the environmental benefit we think we are getting with this money the refiners are spending to meet the regulations, and with the attendant higher gas prices we pay? I think for many non-advocacy folks, the jury is still out on the science of the particular way we’ve implemented air quality regulations for mobile sources.