Different Types of Mandated Gasoline Reduce Competition

August 29, 2012

After years of bureaucratic meddling, the market for gasoline has become intertwined with regulations and politics. Today we have a series of fragmentary, regional markets thanks to dozens of regulatory requirements imposed by the U.S. Environmental Protection Agency (EPA) and state regulators, say Andrew P. Morriss, a professor of law at the University of Alabama, and Donald J. Boudreaux, a professor of economics at George Mason University.

Each market for gas is different due to different standards set by the EPA. This is a cause for concern because the fragmented markets are more vulnerable to supply shortages or price shocks than a single market. For instance, if a pipeline in Phoenix were to burst and prevent supplies to the city, Phoenix could not look to Tucson for supplies because there are different EPA standards for the blend of fuels they each use.

A look at the history of our fuel market shows the necessity of removing government interference in favor of a free-market approach that has worked in the past.

  • In the 1920s and 1930s, oil companies began to compete to decrease the cost and improve the quality of their product. This led to 100-octane fuel that sold for $25 a gallon to be sold for 25 cents a gallon a decade later.
  • Refiners started to complain that they could not compete with cheaper oil from the coast and foreign imports.
  • Rather than allowing the market to determine the efficient size of refineries, the 1959 Mandatory Oil Import Program favored small refineries.
  • The program insulated small refineries from competition by creating different fuel standards so that they could sell their product to whoever met their standard.
  • Today, there are 17 different types of gasoline mandated across the country, according to the American Petroleum Institute.

The effect of these different types of fuel is that there is no incentive for producers to lower their price or improve quality because there is no competition in the market. If a producer wanted to shift their supply from one city to another, it would require a waiver from the EPA which takes time and money and leads to increased price volatility.

Source: Andrew P. Morriss and Donald J. Boudreaux, "A Coca-Cola Solution to High Gas Prices," Wall Street Journal, August 22, 2012.

 

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