Comments (11)

• Harry Valentine

• Excellent research Robert. Good to read pro-free market research articles of this calibre from college students. I hope that you will survive the onslaught of Keynesian brainwashing that makes up the bulk of economics education in most post-secondary instituions.

• Published: January 12, 2006 10:47 AM

• Eric H

• While I appreciate the effort in uncovering this tariff, I protest the following statement: "It is not surprising that America's refining capacity hasn't increased since the early eighties."

  According to Cato's Jerry Taylor and Peter Van Doren, that's not entirely accurate. The important measure is not capacity, it's output. And from what they've found, the geniuses that run refineries have figured out how to improve their efficiency so well that the output is up 20% since the last one was built in 1976.

  Jim Hamilton wrote about it and graphed both capacity and throughput
  here.

  Your main point still stands: removing the tariff is better for consumers than a windfall profit tax.

• Published: January 12, 2006 11:36 AM

• billwald

• For years "They" have been telling us in the Pacific North West that we pay more for gas because Alaskan crude costs more to refine. This year the same people claim price will go down if we drill in Alaska.

• Published: January 12, 2006 12:03 PM

• Michael A. Clem

• This should make a good counter-argument to the windfall profits tax. Thanks.

• Published: January 12, 2006 12:12 PM

• John Powers

• How about the tariff on imported ethanol? Per the January 9 WSJ, Brazil can make ethanol for $1.00/gallon from Sugar Cane. Imported ethanol is then hit with a $.50/gallon tariff at import to the USA, getting us $1.50 ethanol (ex-transport and retail) which is not all that competitive with oil or US (corn) ethanol.

  If our government were serious about reducing oil dependance, we certainly would not be taxing oil alternatives at a 50% rate.

  JBP

• Published: January 13, 2006 8:52 AM

• Robert Merting

• In response to Eric H.

  I will concede that throughput is the deciding factor upon how much gasoline a refinery produces. I would also like to point out that higher capacity gives companies flexiblity, and utilization rates of over 95% do not leave much room to expand production. I don't believe I could some it up any better than Jim Hamilton did in the article Eric quoted:

  Having a smaller number of refineries and far less excess capacity in the system also makes us more vulnerable nationally to events such as the damage wrought by Katrina.
  

  In addition, there is a global crunch in refining as well, particularly in the ability to process the heavy, sour crudes that are currently in much better supply on the world market.
  

  If those refineries in Yuma and Santa Fe Springs had been producing gasoline this summer, would it have made any difference? It couldn't have hurt.
  

• Published: January 13, 2006 3:45 PM

• Dr. Mark Thornton

• Robert is correct. Its capacity that is the important issue here and exactly what the government is blocking. Most industries need excess capacity to run smoothly for their customers. The classic example of this is the funeral home industry which has tremendous overcapacity and the government has been critical of the high prices they charge in order to pay for that capacity, but lets face it--when we want to have a funeral (for our deceased loved ones) we want to have it when we want it (i.e. soon!) and not wait in line for a couple of weeks.
  

• Published: January 14, 2006 4:15 PM

• John Powers

• Dr. T,
  What do I care what capacity? Let the Brazillians pay for it, and I will import ethanol as needed.
  JBP

• Published: January 17, 2006 7:18 PM

• Charles Parker

• Excellent article, but the title sucks. When was the last time we had free trade in the energy market? This, of course, IS the problem.

• Published: February 4, 2006 12:13 AM

• RICH Truxel

• 
  A good understanding of the level and direction of gasoline prices must first begin by understanding the determinants of gasoline prices, not oil prices.
  The price of gas is of course determine by the supply and demand for gas. Oil, regulations, taxes, and refining determine the cost and set a floor on pricing, but can never account for the spread between cost and price, which has surged much more than the cost - thus the increased profit.
  Demand for gas - This is not the problem, and reducing demand would be worse. Making due with less is not the road to prosperity.
  Supply of gas - With gas prices at all time highs, why aren't more refineries being built? Rather than try to answer this question I will make a few observations:
  Environmental regulations began in the 70's and became more strict throughout the following 25 years. The demand for gas soared during the same period. The price of gas fell steadily at the same time.
  Cost / Availability of capital - Interest rates are near all time lows. Inflows into equity markets remain enormous.

  Given this situation Austrian Economics (and common sense) tell us that oil refining is a good investment. Is the lack of increased capacity a market failure? No - there is no such thing. The lack of growth is in fact proof that non market forces are at play.

  Any insights into what these forces are?

• Published: February 19, 2006 5:22 PM

• RICH Truxel

• Supply Restraints - Reply to above:

  Regulation - The article blamed environmental rags as a deterrent to new refineries. I accept this as fact, but this is not the inherent result of regulations. This is the result of bad regs. Good regs would favor new investment relative to old facilities.

  - The EPA learned how to reduce pollution without causing too much market distortion. Yes, regs may have added cost, and of course these were passed on to consumers, as were the benefits of clean rivers and elimination of smog. Were the costs worth the benefit? Real prices for gas fell for years, while the price of cars certainly did not rise as much as the quality.

  Energy Regulation - The DOE is criminal in it's conduct. They have conflicting and duplicating regs that cause all kinds of distortion but provide no benefit.

  Requirements for mix of fuels required - A large company with many refineries can meet the regs without too much loss of efficiency. An independent or new refinery could never meets these regs, liming new capacity and increasing market concentration.
  These also restrict output by big companies. The amount of regular they can produce and sell is limited by the amount of premium they can sell. This further helps established firms who make greater profit margins on premium.
  

• Published: February 19, 2006 5:46 PM