Order Code IB10134
CRS Issue Brief for Congress
Received through the CRS Web
Gasoline Prices: Policies and Proposals
Updated April 7, 2005
Carl E. Behrens and Carol Glover
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Policy Options
Major Oil-Related Issues for the 109th Congress
Ethanol and MTBE
ANWR
CAFE
Other Oil and Gasoline Measures
LEGISLATION
FOR ADDITIONAL READING
CRS Issue Briefs
CRS Reports

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IB10134
04-07-05
Gasoline Prices: Policies and Proposals
SUMMARY
As Congress continues to consider major
H.R. 6, was reported out of conference and
energy legislation following the failure to pass
approved by the House, but several issues kept
a bill in the 108th Congress, the high price of
the bill from passing the Senate. Among the
gasoline remains an issue to be considered.
most controversial were provisions regarding
The legislative proposals have contained
the use of ethanol and the additive methyl
numerous provisions that would affect gaso-
tertiary butyl ether (MTBE) in motor fuel,
line supply and demand.
proposals to open up part of the Arctic Na-
tional Wildlife Refuge (ANWR) to oil and gas
A large number of factors combined to
development, measures concerning corporate
put pressure on gasoline prices, including
average fuel economy (CAFE) standards, and
increased world demand for crude oil and U.S.
proposals to aid construction of new refineries
refinery capacity inadequate to supply gaso-
and to harmonize state “boutique fuels” stan-
line to a recovering national economy. The
dards.
war and continued violence in Iraq added
uncertainty and a threat of supply disruption
The gasoline price surge heightened
that added pressure particularly to the com-
discussion of energy policy, but the urgency of
modity futures markets.
previous energy crises has been lacking. In
part this may be due to the fact that there has
Numerous provisions in legislative pro-
been no physical shortage of gasoline, and no
posals in the 108th Congress addressed per-
lines at the pump. In addition, the expectation
ceived problems in the oil and gasoline mar-
of former crises, that prices were destined to
kets. A comprehensive energy policy bill,
grow ever higher, has not been prevalent.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
Crude oil prices rose again to the mid-$50 per barrel range in early March 2005, driven
by projections of continued strong world demand and uncertainty about OPEC’s production
policies and capabilities. Gasoline followed suit later in the month, surging past $2.00 per
gallon, as it had twice before the previous year. The trend continued into April. On April
5 Federal Reserve Chairman Alan Greenspan warned that the oil “price frenzy” would have
a negative effect on the economy.
On March 9, 2005, the Senate Budget Committee issued a budget resolution that
assumes $2.5 billion of revenue from leases in the Arctic National Wildlife Refuge (ANWR).
On March 17 the Senate passed the budget resolution (S.Con.Res. 18) after voting 49-51 the
previous day to reject an amendment by Senator Cantwell to remove the ANWR provision.
On April 5 and 6 the House Energy and Commerce Committee held mark-up sessions
on a “Committee Print of the Energy Policy Act of 2005,” which contained many of the
provisions included in the comprehensive energy legislation considered in the previous
Congress.
BACKGROUND AND ANALYSIS
The run-up of gasoline prices that began 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. In 2004 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.
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Figure 1. Average Daily Nationwide Price of Unleaded Gasoline, January
2002 - April 2005
2.40
2.20
2.00
llon
a
1.80
r G
s pe
1.60
llar
o
D
1.40
1.20
1.00
r
ct
r
ct
l
ct
r
'02
pr
Ap
Jul
O
'03
Ap
Jul
O
Ju
05
n '04
A
O
n '
Ap
Jan
Jan
Ja
Ja
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 12-18 months
leading up to the crisis, these events included:
! 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
accentuated the upward price pressure and appeared to continue high prices longer than
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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 and again in October, and continued high into the new
year.
Just as a number of factors led to increased crude prices, a combination of features in
the U.S. refinery industry contributed to an increase in gasoline prices.
! 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.
! 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.
1 “Abraham criticizes high cost of oil,” Washington Times, July 7, 2004, p. A1.
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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 However, persistent
high crude prices pushed gasoline prices over $2.00 again in October, and yet again in March
2005. By April 2005, Caruso was suggesting that increasing world demand for oil might
keep the price of crude above $50 per barrel through 2006.3
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 had declined from the high levels of the 1970s and early 1980s. 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.
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.
2 Caruso, Guy. Statement before the Senate Committee on Energy and Natural Resources, June 15,
2004.
3 “EIA: Oil to remain above $50 through ‘06.” Oil Daily, April 8, 2005, p. 1. Report of a speech by
Guy Caruso at the National Press Club in Washington, D.C., April 7, 2005.
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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.
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 failed 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 were introduced in the 108th Congress. Most of these measures were included in the
“Committee Print” legislation currently in mark-up by the House Energy and Commerce
Committee.
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 legislative climate of the 108th
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Congress, balancing the various interests involved proved too difficult a task, despite the
influence of a nationwide energy crisis in an election year.
A policy debate that did not have a legislative component involved the Strategic
Petroleum Reserve (SPR). The Bush Administration continued to add to the SPR during the
period when the price of crude oil has been rising. This policy 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
resumed. 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. By November 2004
a total of 5.4 million barrels of crude had been delivered to four refiners that had been
affected by hurricane-caused shortages.
Several versions of omnibus energy legislation were before the 108th Congress, but none
was approved by both houses. 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. A number of the energy tax measures were
included in two tax bills that became law, the Working Families Tax Relief Act (H.R. 1308,
P.L. 108-311) and the American Jobs Creation Act (H.R. 4520, P.L. 108-357).
Major Oil-Related Issues for the 109th Congress
A number of issues have been major barriers to passage of omnibus energy legislation,
and will remain to be resolved in any move to take up the legislation in the 109th Congress.
Some of these issues do not involve oil; provisions to continue the restructuring of the
electric power industry, for instance, 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 issue
involving ethanol as an automobile fuel, and the related problems involving the 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.
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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 declared opposition to any bill that did not contain a safe harbor provision.
The “Committee Print” energy policy legislation currently being marked up by the
House Energy and Commerce Committee contains essentially the same provisions regarding
ethanol and MTBE as the conference version of H.R. 6 in the last Congress.
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
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 kept the measure from
the floor, however, and it was dropped from the conference version of H.R. 6.
In the 109th Congress, Senate supporters of ANWR development have moved the issue
to the budget process, where it can be approved by a simple majority vote. On March 9,
2005, the Senate Budget Committee issued a budget resolution that assumes $2.5 billion of
revenue over five years from leases in ANWR. On March 16 the Senate rejected an
amendment by Senator Cantwell to strike the ANWR provisions, by a vote of 49-51. The
next day the Senate passed the budget resolution (S.Con.Res. 18).
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,
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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 measure prohibiting NHTSA from analyzing or undertaking such a ruling. That prohibition
was dropped in the FY2004 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 H.R. 6 would merely have amended slightly the criteria
NHTSA must follow in its rulemaking and authorized appropriations of $2 million annually
through FY2008 for that purpose.
Other Oil and Gasoline Measures. Other provisions in H.R. 6 related to
petroleum would have authorized:
! The federal government 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 to be lowered or
terminated.
! Regulatory requirements to 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 to be amended.
! The amendment of statutes concerning alternative-fueled vehicles.
! Steps to discourage the proliferation of state “boutique fuels” requirements.
Additionally, a study of “harmonization” of current fuel controls would have
been mandated.
Most of these provisions are contained in the “Committee Print” version of energy
legislation currently being marked up in the House Energy and Commerce Committee.
In addition to H.R. 6, the House in June 2004 passed H.R. 4517, the U.S. Refinery
Revitalization Act, which would have eased regulatory requirements for construction of new
refineries in areas of high unemployment. It also debated H.R. 4545, the Gasoline Price
Reduction Act, which would have acted 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.
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LEGISLATION
109th Congress
S.Con.Res. 18. An original concurrent resolution setting forth the congressional budget
for the U.S. government for FY2006 and including the appropriate budgetary levels for
FY2005 and FY2007 through FY2010. Contains instructions to the Committee on Energy
and Natural Resources that assume revenues from the sale of ANWR leases. Passed Senate
March 17, 2005.
108th Congress
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 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 IB10143. Energy Policy: Legislative Proposals in the 109th Congress, by
Robert L. Bamberger and Carl Behrens.
CRS Issue Brief IB10054. Energy Tax Policy, by Salvatore Lazzari.
CRS Issue Brief IB87050. Strategic Petroleum Reserve, by Robert Bamberger.
CRS Issue Brief IB10136. Arctic National Wildlife Refuge (ANWR): Controversies for the
109th 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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