American Automobile Fuel Consumption Debate


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The immediate reason for increase in gasoline prices is the hike in crude oil prices. I doubt that refiners have much to do with that. See here for an explanation from API. There is also speculation, that a weak dollar is what is causing the rise in crude oil prices as the price is euros has essentially remained constant.

This graphic explains the more systemic issues at the heart of gasoline price increase in the US. They do indicate that the refinary capacity is constrained. However, it is not true that no new refinery capacity has been added in the past thirty years. Not many new refineries may have been added (in fact many have closed down). However increased capacity utilization the has made it possible to match capacity with demand.



Thanks for those insights. I agree that, of course, this is largely due to higher crude prices.

I guess I let my post get a little unfocussed because it is such a rich topic at the moment with all the political drama. The reason I wrote this was to ask why hasn't the refinery capacity expanded along with demand?

I got an insightful email in response from my friend David Knapp (AkA. Doc), Editor of Oil Market Intelligence, and former head of Oil Markets at the IEA

Here's what he had to say:

Basically its classic NIMBY along with company resistance primarily because
of such a massive Environmental Impact filing requirment as to put them off
from attempting to site new refineries. There is only so much expansion that
can be done at existing sites as well as optimization to increase overall
flows in general and gasoline yields in particular. Add to that the fact
that our elected official fancy themselves to be better chemist than the oil
companies in dictating how much of what needs to go into gasoline -- rather
than setting emissions standards and letting the oil companies figure out
how to meet them, ideally with some ability to trade-off between different

Refinery profitability has also been very spotty, which eroded the perceived
economics of long-term investment in refineries. Tightening product quality
specifications substantial increase costs, as due direct air and water
standards for refinery emissions. Independent refiners have little control
over their feedstock cost (generally crude oil) and are sporadically
squeezed between tight crude markets and less tight product markets.


I guess I wonder what kind of incentives we'd have to put in place to correct these market failures.


Like clockwork, the Bush administration has its answer to the problem of constrained refining capacity. Reuters describes why the EPA is "mulling" the idea of temporary exemptions from the oxygenate standard.

I am wondering why this is suddenly an issue, after thirty years of no capacity growth. I understand high prices are the driver, but I don't remember high prices pushing the capacity button before. Not sure if relieving environmental laws is better or worse than trying to undermine OPEC, given the possibility for hostility.

Also, Adam, the capacity shortage doesn't seem to be a market failure so much as a institutional failure. As Doc says, NIMBY and regulatory solutions to the environmental problems (siting restrictions and fuel quality standards) are whats gumming up the investment.

As for policy, since Anup is outraged that we can't raise taxes, maybe we should just let prices rise, since it may in the end increase current gas tax revenues. That, of course, was tongue-in-check, but not far from my true instincts. I'm starting to lean towards an Ashford viewpoint here. Somebody somewhere will come up with a better technological solutions (provoked by the strict enviro standards) and be able to site or expand plants. If not, we let the price rise until it makes economic sense for somebody.



The increase in crude prices is partly a function of a weak dollar (i.e. $1 buys less when that dollar is weak relative to other currencies). The dollar did strengthen in today's trading on the back of the better than expected labor report and will undoubtedly help crude prices. However, given the interdependencies of substitute fuel prices (not to mention politics), an attempt to create regulatory / protectionist mechanisms may further convolude the markets.

Take today's trading as an example. Natural Gas rallied early this morning, and crude continued its sell off. But by the end of the day crude had rallied back to positive ground, and Gas closed up less than a nickel. Crude broke support yesterday, and the morning's continued sell off was not unexpected. The fact that it closed the day slightly positive will set up a bullish chart formation coming into Monday, but a lot of the price action is going to depend on President Bush, and his ability to take the lead in reigning in energy prices.

Gasoline has been all over the headlines lately, and Bush has to be feeling the pressure. Keep an eye on the market through the close on Tuesday for an indication of the direction of the next move in oil. $33.30 through $32.50 should be very tough support for oil. Gas will need some warmer weather to get back through $5.60 on the down side. Upside should be limited in both gas and oil. Basically, it seems that the other Adam Smith's invisible hand is at work here.


The Daily show on the high gas prices!


Today the market when, up, down, left, right. Phew. Despite the fantastically clever Adam Smith/Adam Smith analogy - regulations do seem to have had an effect. Here's an explainer on summer-blend gasoline from Slate. Talks about what this summer blend actually is, the reasons behind it, and why its jacking up prices.

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