Order Code IB10134
CRS Issue Brief for Congress
Received through the CRS Web
Gasoline Prices: Policies and Proposals
Updated April 27, 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
04-27-05
Gasoline Prices: Policies and Proposals
SUMMARY
As Congress continues to consider major
development, measures concerning corporate
energy legislation, the high price of gasoline
average fuel economy (CAFE) standards, and
remains an issue to be considered. The legis-
proposals to aid construction of new refineries
lative proposals of past Congresses have
and to harmonize state “boutique fuels” stan-
contained numerous provisions that would
dards.
affect gasoline supply and demand, as does
current legislation.
In the 109th Congress, the House passed
a comprehensive bill, again numbered H.R. 6,
A large number of factors combined to
with many of the same provisions of the bill
put pressure on gasoline prices, including
considered in the previous Congress. As
increased world demand for crude oil and U.S.
before, MTBE and ANWR remained contro-
refinery capacity inadequate to supply gaso-
versial. The new version added another con-
line to a recovering national economy. The
troversial provision, giving the Federal Energy
war and continued violence in Iraq added
Regulatory Commission (FERC) overriding
uncertainty and a threat of supply disruption
authority over state entities in licensing termi-
that added pressure particularly to the com-
nals to receive and process liquefied natural
modity futures markets.
gas.
Numerous provisions in legislative pro-
The gasoline price surge heightened
posals in the 108th Congress addressed per-
discussion of energy policy, but the urgency of
ceived problems in the oil and gasoline mar-
previous energy crises has been lacking. In
kets. A comprehensive energy policy bill,
part this may be due to the fact that there has
H.R. 6, was reported out of conference and
been no physical shortage of gasoline, and no
approved by the House, but several issues kept
lines at the pump. In addition, the expectation
the bill from passing the Senate. Among the
of former crises, that prices were destined to
most controversial were provisions regarding
grow ever higher, has not been prevalent.
the use of ethanol and the additive methyl
However, the persistence of high gasoline and
tertiary butyl ether (MTBE) in motor fuel,
oil prices into a second summer has raised
proposals to open up part of the Arctic Na-
alarms over the economic consequences of the
tional Wildlife Refuge (ANWR) to oil and gas
situation.
Congressional Research Service ˜ The Library of Congress

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IB10134
04-27-05
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 production policies
and capabilities of the Organization of Petroleum Exporting Countries (OPEC). 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 21 the House passed H.R. 6, the Energy Policy Act of 2005, containing many
of the provisions in the bill considered in the previous Congress (also numbered H.R. 6),
including a “safe harbor” provision to protect producers of methyl tertiary butyl ether
(MTBE) from product liability suits.
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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IB10134
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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
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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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IB10134
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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 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 situation became a nationwide concern. The various versions of a
comprehensive energy bill, which failed to pass in the 108th Congress, all contained measures
addressing some of the problems putting pressure on gasoline prices. In addition, a number
of stand-alone legislative proposals to deal with some of the specific problems noted above
were introduced in the 108th Congress. Most of these measures were included in the 109th
Congress’s energy bill, the Energy Policy Act of 2005, H.R. 6, which passed the House April
21, 2005.
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
passage 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 Congress,
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balancing the various interests involved proved too difficult a task, despite the influence of
a nationwide energy crisis in an election year. Under the stimulation of continued high oil
and gasoline prices, the 109th Congress is pursuing the goal again, with supporters of the
legislation expressing more optimism that conflicts can be resolved.
Although major legislation did not pass in the 108th Congress, 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). However, in the 109th Congress H.R. 6 as passed by the House contains numerous
tax measures, many of them affecting the oil industry.
Major Oil-Related Issues for the 109th Congress
A number of issues have been major barriers to passage of omnibus energy legislation,
and remain to be resolved 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.
However, as its use spread, it became apparent that MTBE tended to escape easily from
pipes 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 in the 108th Congress 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.
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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. It was a major factor
in the failure of comprehensive energy legislation in the Senate in the 108th Congress.
In the 109th Congress, H.R. 6, as reported by the House Committee on Energy and
Commerce on April 13, 2005, retained the safe harbor provision; an amendment to remove
it was defeated in committee. When the bill reached the House floor, Representative Capps
brought up an amendment to strike the safe harbor language. After extended debate
specifically on the MTBE provision, the Capps amendment was narrowly defeated by a vote
of 213-219.
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 legislation in the 108th Congress. Opposition in the Senate kept the measure
from the floor, however, and it was dropped in conference.
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 FY2006 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).
The House FY2006 budget resolution (H.Con.Res. 95, passed March 17) does not
contain the ANWR provision. However, the Energy Policy Act of 2005, H.R. 6, does
authorize exploration and development of ANWR, and an amendment to strike the provision
during floor debate was defeated, 200-231.
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 sport 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.
Omnibus energy legislation proposed before NHTSA acted would have mandated
specific increases in light truck fuel economy, but in the 109th Congress H.R. 6 would merely
amend slightly the criteria NHTSA must follow in its rulemaking and authorize
appropriations of $2 million annually through FY2008 for that purpose. During floor debate
on H.R. 6, an amendment to increase fuel economy standards to 33 miles per gallon over 10
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years was defeated by a vote of 177-254. A more general amendment to require the
Administration to take “voluntary, regulatory, and other actions” to reduce oil demand in the
United States by 1 million barrels per day from projected levels by 2013 was defeated 166-
262.
Other Oil and Gasoline Measures. Other provisions in H.R. 6 related to
petroleum would authorize:
! 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 in the Gulf of Mexico, and others 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 be
mandated.
In June 2004 in the last Congress, the House 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. In the 109th Congress, the provisions of the
Refinery Revitalization Act were included in H.R. 6 as passed by the House April 21, 2005.
A new provision in H.R. 6 gives the Federal Energy Regulatory Commission (FERC)
authority over siting and licensing of facilities to import and process liquefied natural gas
(LNG). The statutory language would largely confirm FERC’s assumption of a lead role in
siting LNG facilities, which has been challenged in court by several states. An amendment
to strike the LNG provision was defeated on the House floor by a vote of 194-237.
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
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and Natural Resources that assume revenues from the sale of ANWR leases. Passed Senate
March 17, 2005.
H.R. 6 (Barton)
Energy Policy Act of 2005. Introduced April 18, 2005. Passed by the House April 21,
2005 (249-183).
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 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 RL32583. Gasoline Supply: the Role of Imports, by Lawrence Kumins.
CRS Report RL32865. Renewable Fuels and MTBE: A Comparison of Selected Legislative
Initiatives, by Brent D. Yacobucci, Mary E. Tiemann, James E. McCarthy and Aaron
M. Flynn.
CRS Report RL32575. Liquefied Natural Gas (LNG): Jurisdiction Conflicts in Siting
Approval, by Aaron M. Flynn.
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