With pump prices passing $3 a gallon in some parts of the country, President George W. Bush vowed to sniff out any manipulation of gas prices by oil companies on Tuesday, and announced some measures to ease supply.
But with world oil markets tight as a drum, and crude prices driven as much by fear as shortages, there is very little the administration can do to ease pump prices in the coming weeks--much less before the November elections.
Bush said he would halt purchases of crude for the Strategic Petroleum Reserve and relax fuel standards that produce a hodge-podge of gasoline blends throughout the country--measures that may well take a nibble out of gas prices. But the administration's announcement that it will investigate oil companies for gouging consumers is pure politics: Like the dozens of inquiries into oil industry price-gouging of the past, this one too will come up dry.
"I've seen no evidence at all that any U.S. company has the power to control the world price of oil today," says James Hamilton, an economist and energy expert at the University of California at San Diego.
Rather than manipulation by greedy oil companies, the soaring price of crude--which hit a record $75 a barrel on Friday--is to blame for sticker shock at the pump. Roaring demand from China and India combined with instability in oil-producing Nigeria mean that crude prices aren't coming down anytime soon. Talk of a U.S. invasion of Iran, which has the world's second-largest proven oil reserves, is only making things worse, as speculators have poured millions into oil futures markets in the expectation that prices will remain high.
Given these market realities, Bush may be helpless to do much about gas prices before the onset of the summer driving season. But he should be kicking himself for bowing to the ethanol lobby when he signed last year's energy bill. The new law has surely made the present situation worse by requiring refineries to use 4 billion gallons of ethanol this year. (The mandate increases by 700 million gallons a year until it hits 7.5 billion in 2012.)
Because it's corrosive, ethanol needs to be transported in trucks or barges rather than in the country's network of pipelines. It needs to be blended at the last moment with a more costly form of gasoline base. Taken alone, these factors are contributing to higher pump prices. But the mandate has also squeezed ethanol supplies, creating a bull market for the fuel additive: The price of ethanol in the New York Harbor has risen to $2.77 a gallon from roughly $1.45 a gallon this time last year.
This costly handout to the corn lobby might make sense if ethanol were any answer to America's long-term energy needs. But other biofuels and alternative energy sources hold far more promise than ethanol. "It's not even clear that it is a net energy source," says Hamilton. In other words, it may take more energy to turn out a gallon of ethanol than a gallon of the fuel produces.
As it is probably too late to unwind the ethanol mandate, a Congress desperate to appease voters in election year will turn to other remedies.
In doing so, it will likely ensure that the oil companies, which have been slow to invest their record profits, preferring to lavish them on shareholders and buy back stock, will be even more reluctant to commit to major new capital projects.
Senator Byron Dorgan, the Democrat from North Dakota, is proposing a 50% excise tax on profits from oil sold at more than $40 a barrel. Meanwhile, Senator Arlen Specter, a Pennsylvania Republican, mused last week that a windfall profits tax for the industry is "worth exploring."
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