Friday, April 21, 2006
In the News - Why gas prices are rising
As if rising prices weren't enough, the tanks have run dry at some Philadelphia-area service stations in the last few days as the refining industry stumbles through a change in the formulation of gasoline.
Oil refiners are phasing out a petrochemical that makes gasoline burn cleaner but which also has been found to contaminate groundwater. Refiners are switching to corn-based ethanol.
The changeover is creating supply-chain bottlenecks because much work must be done at fuel terminals and service stations to handle ethanol.
Ok, contaminates groundwater. So the oil companies are doing this because they care about us and the environment. Right? Well,
The conversion to ethanol was prompted by the federal Energy Policy Act of 2005, which left refiners vulnerable to groundwater contamination suits and mandated greater use of renewable fuels. The use of ethanol forced gasoline retailers to clean their tanks, remove all water from them and install extremely fine filters on their pumps.
You see, it's all George Bush's fault. If he wasn't such a coward, he would veto something. But seriously, this article is good as it actually explores causes and effects of the rise of gas prices. And who would have though that environmental regulation could be expensive (other than every intellectually honest economist ever)! Here's what has to be done:
Ethanol is a solvent that picks up any gunk in tanks and readily blends with water. Those properties could ruin a 9,000-gallon tank of gasoline at a huge cost to a retailer.
It costs up to $1,500 to clean tanks, said Kevin S. Kan, president and chief executive officer of American Auto Wash Inc. in Malvern, which operates 18 stations in the region, including 13 BPs that have converted to the ethanol blend.
Ethanol is logistically more complicated than the petrochemical it replaced - MTBE, or methyl tertiary butyl ether. Refiners could blend MTBE into gasoline at the refinery and send the finished gasoline through pipelines to terminals.
But ethanol must be blended into gasoline at the terminal because it would mix with water if it were sent through pipelines, ruining the fuel. So, fuel terminals have to go through a similar process of cleaning tanks to store ethanol before it is blended.
They must also install blending equipment.
Yep. People who have had basic econ (Econ 103 at GMU) know that prices are a means of spreading information. There was a sharp decrease in supply, and the rising prices are designed to minimize the effects of that; you'll probably be more careful with your gas at $3 per gallon.
Now that we know the true cause of the rise in gas prices, what does that tell us about Congress when we see this:
During a news conference Tuesday, Schumer said he expects there will be hearings on the matter in Congress and possible sanctions. He believes the four major oil producers, such as Exxon-Mobile, have a monopoly on oil production. Mergers that created just four major oil producers should be broken up, he added.
Now, one can certainly make the argument that MTBE was causing a problem, particularly in the high amounts in which it was used (which was incidentally due to another environmental regulation). But if that's the case, then the cost of higher gas prices is one that must be taken on, as it is a response to a supply shock. Perhaps someone should look into why the government doesn't warn consumers of the costs of regulation, no matter how safe it makes us.
And as some Philadelphia gas tanks run dry, it is obvious that there are multiple gas tanks in Philadelphia, so consumers will just have to go to another one (because E means extra 10 miles). But this is not a shortage; there is still gas to be bought. If it's too expensive, carpool, or use public transport if available. You can even walk or bicycle, which gives you exercise too. If that's not worth it, then you're still as best of as you could driving and paying a lot for gas; your consumer surplus just shrank.
Labels: Economic Stuff, Politics
