Order Code IB10134
CRS Issue Brief for Congress
Received through the CRS Web
Gasoline Prices: Policies and Proposals
Updated October 7, 2004
Carl E. Behrens and Carol Glover
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Policy Options
Status of Legislation
Major Oil-Related Issues
Ethanol and MTBE
ANWR
CAFE
Other Oil and Gasoline Measures
LEGISLATION
FOR ADDITIONAL READING
CRS Issue Briefs
CRS Reports


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Gasoline Prices: Policies and Proposals
SUMMARY
In the spring of 2004 gasoline prices
reported out of conference and approved by
increased rapidly to record high levels (in
the House, but several issues have kept the bill
nominal terms) of over $2.00 per gallon. The
from passing the Senate. Among the most
increase took place as the Congress continued
controversial are provisions regarding the use
consideration of major energy legislation
of ethanol and the additive methyl tertiary
containing numerous provisions which would
butyl ether (MTBE) in motor fuel, proposals
affect gasoline supply and demand.
to open up part of the Arctic National Wildlife
Refuge (ANWR) to oil and gas development,
A large number of factors combined to
measures concerning corporate average fuel
put pressure on gasoline prices, including
economy (CAFE) standards, and proposals to
increased world demand for crude oil and U.S.
aid construction of new refineries and to
refinery capacity inadequate to supply gaso-
harmonize state “boutique fuels” standards.
line to a recovering national economy. The
war and continued violence in Iraq added
The gasoline price surge heightened
uncertainty and a threat of supply disruption
discussion of energy policy, but the urgency of
that added pressure particularly to the com-
previous energy crises has been lacking. In
modity futures markets.
part this may be due to the fact that there has
been no physical shortage of gasoline, and no
Numerous provisions in current legisla-
lines at the pump. In addition, the expectation
tive proposals would address perceived prob-
of former crises, that prices were destined to
lems in the oil and gasoline markets. A com-
grow ever higher, has not been prevalent.
prehensive energy policy bill, H.R. 6, has been
Congressional Research Service ˜ The Library of Congress

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10-07-04
MOST RECENT DEVELOPMENTS
Crude oil futures prices in early October continued to react upward in response to
worries about supply and other negative indicators, climbing over $50 a barrel on the New
York Mercantile Exchange. Gasoline prices, which had been relatively stable for several
months, began to approach the $2.00-per-gallon mark again.
BACKGROUND AND ANALYSIS
The run-up of gasoline prices in spring 2004 (see Figure 1) climaxed a period of almost
five years during which gasoline prices demonstrated a great deal of regional volatility but
less of an increase at the national level. This year a large number of factors combined to
exert pressure on gasoline prices in all parts of the country. Some of these factors have
affected the price of crude oil, and others the cost of producing and marketing gasoline.
Figure 1. Average Daily Nationwide Price of Unleaded Gasoline,
January 2002 - October 2004
2.2
2
1.8
1.6
1.4
1.2
1Jan '02 Apr
Jul
Oct
Jan '03
Apr
Jul
Oct
Jan '04
Apr
Jul
Oct
Note: Prices include federal, state and local taxes.
Source: Daily Fuel Gauge Report, American Automobile Association, [http://www.fuelgaugereport.
com], compiled by CRS.
Past energy crises have demonstrated that oil is traded in a world market, in which
events in remote areas affect the price of crude for almost everyone. In the past 12-18
months, these events have included:
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! Decisions by the Organization of Petroleum Exporting Countries (OPEC)
cartel, after having reduced production quotas in 2002, to raise them only
slowly and reluctantly;
! Unexpected demand growth in China;
! Disruptions in oil production in major exporters, including Venezuela, Iraq
and Nigeria;
! Decline in the value of the U.S. dollar, the currency in which oil is traded in
the world market, compared to other major currencies, particularly the Euro.
! Uncertainty and fear of major disruptions in Iraq and Saudi Arabia, in the
context of the war in Iraq and the threat of terrorism.
As often happens when commodity prices are volatile, speculation in futures contracts
has accentuated the upward price pressure and appeared to continue high prices longer than
would be expected as market fundamentals push toward lower prices. Secretary of Energy
Spencer Abraham, criticizing speculation in oil markets, asserted in July that the price of oil
was $10 per barrel too high because of the possibility of disruptions in supply.1 Nevertheless,
the price went even higher in August before beginning a decline after August 20.
Just as a number of factors have led to increased crude prices, a combination of features
in the U.S. refinery industry has made production of gasoline costly.
! U.S. demand for gasoline has increased as economic growth has resumed.
! Domestic refining capacity has declined, both in number of refineries —
from 324 in 1981 to 153 in 2002 — and in total capacity — from 18.62
million barrels per day (mbd) in 1981 to 16.78 mbd in 2002.
! The structure of the refining industry has changed. In 1981 most refining
capacity was owned and operated by integrated oil companies that supplied
their own crude oil, refined it, distributed it, and marketed the products.
Refining was only one part of the company’s profit-making operation, and
frequently was not an important profit maker. Now the refining industry is
characterized more by independently owned, nonintegrated firms. When
refineries are the sole source of revenue to the owners, it becomes more
important that the operation be profitable, leading to pressure to raise prices.
! The refining industry has been operating with lower inventories of both
crude oil and gasoline, as a means of cutting costs. The side effect has been
reduced ability to meet unanticipated demand, leading to greater price
pressure.
1 “Abraham criticizes high cost of oil,” Washington Times, July 7, 2004, p. A1.
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! Gasoline markets are fragmented regionally because air quality requirements
have led to numerous different formulations to meet varying standards. In
meeting demand for these regional formulations, called “boutique fuels,”
refiners lose flexibility to meet local variations in demand elsewhere,
leading to increased price pressure.
! With domestic refining capacity constraints, a greater proportion of gasoline
demand is being met with imported products. Foreign refiners typically
manufacture products designed to sell in the international market, not the
special product “boutique fuels” demanded by a significant share of the U.S.
market.
! Refiners have had increased costs in the past year to comply with new
requirements to limit sulfur content and to switch from the oxygenate
additive MTBE to ethanol.
These various factors pushed the nationwide average price of gasoline over $2 per
gallon in May 2004. By mid-June, Energy Information Administrator Guy Caruso was able
to note a slight decline in prices, and tell a Senate Energy Committee hearing that, “absent
major disruptions, oil and gasoline markets may be turning a corner.”2
The price surge intensified discussion of energy policy and led to further calls for
passage of energy legislation. However, the urgency of previous energy crises has been
lacking. In part this may be because, although the price of gasoline in nominal terms set a
record, in real terms it was less than in the Iranian crisis years of the early 1980s. (See Figure
2
.) Further, unlike the earlier crises, there was no physical shortage of gasoline, and no lines
at the pump. In addition, as Figure 3 indicates, the proportion of consumer expenditure on
oil and gasoline remained low compared to the earlier years. Perhaps most important, the
common view during the earlier crises was that oil prices not only were high, but were
destined to become ever higher in the coming years. This view is no longer prevalent, and
the general expectation has been that the run-up of prices in 2004 is a temporary
phenomenon.
2 Caruso, Guy. Statement before the Senate Committee on Energy and Natural Resources, June 15,
2004.
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Figure 2. Nominal and Real Price of Gasoline,
1973-2003 and May 2004
3
2.5
2
1.5
1
0.5
0
1973
1977
1981
1985
1989
1993
1997
2001
Nominal Price
Real Price (2003 Dollars)
Source: EIA, Monthly Energy Review, July 2004, Tables 1.6 and 9.4, calculated by CRS.
Figure 3. Consumer Spending on Oil as % of GDP, 1970-2000
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
2000
Source: EIA, Annual Energy Review 2002, Table 3.4.
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Policy Options
The several energy crises of the past led to major legislative action, twice in the 1970s
and once following the 1991 Gulf War. The current legislative situation differs from the
previous actions because the Congress had been considering major energy legislation for
three years before the crisis became a nationwide concern. The various versions of a
comprehensive energy bill, which now appears unlikely to pass in the 108th Congress, all
contain measures addressing some of the problems putting pressure on gasoline prices. In
addition, a number of stand-alone legislative proposals to deal with the some of the specific
problems noted above have been introduced.
As in previous legislative energy debates, a major policy divide exists between those
who view the gasoline-fueled automobile as a temporary necessity to be tolerated only until
a substitute fuel or alternative means of transportation can be developed, and those who
expect oil to be the same dominant transportation fuel in the indefinite future that it is at
present. Compromise agreements have been reached via a combination of measures that
enhance the development of alternatives or restrain the growth in demand for oil, on the one
hand, and those that increase production or reduce the cost of supplying that demand, on the
other. However, individual measures often carry with them complicating features that make
consensus more difficult. In addition, major legislation often becomes the vehicle for
measures that typically would not find enough support to pass as individual bills, or which
may be added to gain support for the whole measure. In the current legislative effort,
balancing the various interests involved has so far proved too difficult a task, despite the
influence of a nationwide energy crisis in an election year.
A policy debate that has not had a legislative component involves the Strategic
Petroleum Reserve (SPR). The Bush Administration has continued to add to the SPR during
the period when the price of crude oil has been rising. This policy has led to calls in some
quarters to stop the fill and even to draw down the reserve to ease upward price pressure. In
September, after Hurricane Ivan disrupted production and crude oil imports in the Gulf of
Mexico, DOE announced that it would negotiate with some oil refiners to lend “a limited
amount” of crude from the SPR, to be paid back in kind when normal crude delivery volumes
resume. Under terms of a swap, refiners return slightly more than they borrow. Energy
Secretary Spencer Abraham said the move was consistent with authority to use the SPR to
mitigate supply disruptions, including those caused by natural disasters.
Status of Legislation
Several versions of omnibus energy legislation are before the Congress, but none
appears likely to be approved by both Houses during the current session. The House passed
its version of the bill, H.R. 6, in April 2003, and the Senate went to conference after passing
the text of a bill approved in the previous Congress. The conference committee reported a
bill in November, and the House quickly approved the conference report, but in the Senate
an attempt to invoke cloture on debate on the conference bill failed. In February 2004
Senator Domenici introduced a bill, S. 2095, dropping some provisions that had been
controversial, but the bill did not gain enough support to make it to the floor. The Senate
then attached a number of tax provisions in the omnibus bill to another tax measure.
Meanwhile, the Republican House leadership led an “Energy Week” campaign in June,
voting again to approve the conference bill.
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Major Oil-Related Issues
A number of issues have been major barriers to passage of omnibus energy legislation.
Provisions to continue the restructuring of the electric power industry have been and continue
to be controversial. Among oil-related issues, proposals to open part of the Arctic National
Wildlife Refuge (ANWR) to oil and gas development, and measures concerning Corporate
Average Fuel Economy (CAFE) standards have stimulated major debate. But the primary
stumbling block has been the issues involving ethanol as an automobile fuel, and the
problems involving a gasoline fuel additive MTBE.
Ethanol and MTBE. The roots of the controversy lie in the Clean Air Act
Amendments of 1990, which mandated that “reformulated” gasoline required in some
localities to improve air quality contain 2% oxygen. This requirement could be met by
adding ethanol to gasoline, but it could also be achieved by adding a substance called methyl
tertiary butyl ether (MTBE), which had been produced in small quantities for many years as
an octane enhancer. Because MTBE was cheaper than ethanol and was easier to mix and
transport than ethanol, many refiners began using it to meet the new standards.
However, as its use spread, it became apparent that MTBE tended to escape easily from
its fuel carriers and storage tanks, and contaminate water supplies, imparting a taste and odor
that was unpalatable even in small quantities. This development led to moves to restrict and
prohibit the use of MTBE. It also led a number of communities to sue refiners for the cost
of decontaminating their water supply. At the same time, evidence began to accumulate that
oxygenating gasoline was not necessary to achieve the air quality benefits of reformulated
gasoline.
The omnibus energy bills addressed this changing situation by repealing the
oxygenation requirement in the Clean Air Act, but adding a new mandate that gasoline have
an increasing amount of renewable fuel, presumably ethanol. Consumption of ethanol in
gasoline in 2002 was 2.1 billion gallons. Under the Renewable Fuel Standard, the amount
required to be consumed would be 3.1 billion gallons in 2005 and 5.0 billion gallons by
2012. This would still be a small proportion of the total amount of gasoline consumed,
which was close to 150 billion gallons in 2004, but was expected to stimulate the ethanol
industry and the agricultural sector that supplies it. It was opposed by oil industry interests,
who complained of the mandated increase in consumption of ethanol, which receives a
substantial tax credit. Some suggested that it would raise prices locally, despite the subsidy.
The most controversial measure in the bills was a so-called “safe harbor” provision from
product liability lawsuits for producers of MTBE and renewable fuels. The measure was in
the original House version of H.R. 6, and remained in the conference bill, where it was a
major factor in the failure to invoke cloture in the Senate. It was dropped from S. 2095 in
an attempt to get the bill through the Senate, but on the House side supporters of MTBE
producers have declared opposition to any bill that does not contain a safe harbor provision.
ANWR. Oil and gas exploration and development of part of the Arctic National
Wildlife Refuge have been controversial for many years. This was part of the early proposals
for legislation that eventually became the Energy Policy Act of 1992, but was dropped in the
face of strong opposition in both houses. Support for action grew gradually through the
decade, along with technological developments that advocates claimed would reduce the
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environmental impact of development, and the House included a development measure in
its version of an omnibus energy bill in August 2001. A similar measure was part of the
House-passed H.R. 6 in the 108th Congress. Opposition in the Senate has kept the measure
from the floor, however, and it was dropped from the conference version of H.R. 6.
CAFE. Fuel economy standards also have a long history of controversy, going back to
their establishment in the 1970s. Proposals to mandate new standards were also considered,
but dropped, early in the development of the 1992 Energy Policy Act. In the mid-1990s the
National Highway Traffic Safety Administration (NHTSA) was considering a rulemaking
that would result in increased standards for light duty trucks (including sports utility
vehicles), but for several years the Congress included in its annual appropriation for NHTSA
a prohibition to analyze or undertake such a ruling. That prohibition has been dropped in
current NHTSA appropriations, and a final rule issued by NHTSA in April 2003 requires a
boost in light truck fuel economy to 22.2 miles per gallon by Model Year 2007. Early
versions of the omnibus energy legislation mandated specific increases in light truck fuel
economy, but the current versions of H.R. 6 merely amend slightly the criteria NHTSA must
follow in its rulemaking and authorizes appropriations of $2 million annually through
FY2008 for that purpose.
Other Oil and Gasoline Measures.
Other provisions in H.R. 6 related to petroleum include:
! The federal government would be allowed to continue to receive physical
quantities of oil and gas as royalty-in-kind payments instead of cash
payments for royalties on leased federal property.
! Royalties for certain types of leases such as marginal wells could be lowered
or terminated.
! Regulatory requirements would be eased for some oil and gas activities such
as hydraulic fracturing and construction of exploration and production
facilities.
! The system of leasing and permitting access to federal lands for oil and gas
development would be amended.
! Several provisions would amend statutes concerning alternative-fueled
vehicles.
! Proliferation of state “boutique fuels” requirements would be discouraged
and a study of “harmonization” of current fuel controls would be mandated.
! Several tax provisions would aid production for some oil and gas properties,
such as marginal wells. Tax credits for hybrid vehicles would be continued.
In addition to H.R. 6, the House in June passed H.R. 4517, the U.S. Refinery
Revitalization Act, which would ease regulatory requirements for construction of new
refineries in areas of high unemployment. It also debated H.R. 4545, the Gasoline Price
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Reduction Act, which would act to reduce the proliferation of boutique fuels, under
suspension of the rules, but the 236-194 vote failed to gain the two-thirds majority required
for passage.
Another bill, H.R. 4529, the Arctic Coastal Plain and Surface Mining Improvement Act,
would have authorized drilling in ANWR and designate revenues from bonuses and leases
there to fund the health benefits program of retired mineworkers. However, the United Mine
Workers of America opposed the bill as too risky a funding source for the health benefits
program, and the bill was not taken up on the floor.
LEGISLATION
H.R. 6, House Version (Tauzin)/H.R. 6, Senate Version (Domenici)
Omnibus Energy Bill. Introduced April 7, 2003; referred to Committee on Energy and
Commerce and several other committees. Passed House, amended, April 10. Senate version
incorporates text of omnibus energy bill (H.R. 4) that the Senate adopted in the 107th
Congress. Passed Senate July 31, in lieu of S. 14. Conference reported (H.Rept. 108-375)
November 18. House approved November 18. Senate cloture motion failed (57-40)
November 21.
H.R. 4517 (Barton)
To provide incentives to increase refinery capacity in the United States. Introduced
June 4, 2004; referred to the House Energy and Commerce Committee. Passed House,
without amendment June 16, 2004. In Senate, referred to the Committee on Environment and
Public Works, June 16, 2004.
H.R. 4529 (Pombo)
To provide for exploration, development, and production of oil and gas resources on the
Arctic Coastal Plain of Alaska, to resolve outstanding issues relating to the Surface Mining
Control and Reclamation Act of 1977, to benefit the coal miners of America, and for other
purposes. Introduced June 9, 2004; referred to the House Resources and House Ways and
Means Committees. June 15, 2004 Rule H.Res. 672 providing for consideration of H.R. 4529
passed House.
H.R. 4545 (Blunt)
To amend the Clean Air Act to reduce the proliferation of boutique fuels, and for other
purposes. June 14, 2004 Introduced and referred to the House Energy and Commerce
Committee. June 16, 2004 Failed of passage/not agreed to in House: On motion to suspend
the rules and pass the bill Failed by the Yeas and Nays: (2/3 required): 236 - 194.
S. 2095 (Domenici)
To enhance energy conservation and research and development and to provide for
security and diversity in the energy supply for the American people. February 23, 2004, read
the second time. Placed on Senate Legislative Calendar under General Orders. Calendar No.
432.
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FOR ADDITIONAL READING
CRS Issue Briefs
CRS Issue Brief IB10116. Energy Policy: The Continuing Debate and Omnibus Energy
Legislation, by Robert L. Bamberger.
CRS Issue Brief IB10054. Energy Tax Policy, by Salvatore Lazzari.
CRS Issue Brief IB87050. Strategic Petroleum Reserve, by Robert Bamberger.
CRS Issue Brief IB10111. Arctic National Wildlife Refuge (ANWR): Controversies for the
108th Congress, by M. Lynne Corn, Bernard A. Gelb, and Pamela Baldwin.
CRS Reports
CRS Report RL32343. Gasoline Price Surge Revisited: Crude Oil and Refinery Issues, by
Lawrence Kumins and Robert Bamberger.
CRS Report RL32358. The Strategic Petroleum Reserve: Possible Effects on Gasoline
Prices of Selected Fill Policies, by Robert Bamberger and Robert L. Pirog.
CRS Report RL32248. Petroleum Refining: Economic Performance and Challenges for the
Future, by Robert L. Pirog.
CRS Report RL31361. “Boutique Fuels” and Reformulated Gasoline: Harmonization of
Fuel Standards, by Brent D. Yacobucci.
CRS Report RL32042. Energy Tax Incentives in H.R. 6: The Conference Agreement as
Compared with the House Bill and Senate Amendment, by Salvatore Lazzari.
CRS Report RL32204. Omnibus Energy Legislation: Comparison of Non-Tax Provisions in
the H.R. 6 Conference Report and S. 2095, coordinated by Mark Holt and Carol Glover.
CRS Report RL32583. Gasoline Supply: the Role of Imports, by Lawrence Kumins.
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