Order Code IB10134
CRS Issue Brief for Congress
Received through the CRS Web
Gasoline Prices: Policies and Proposals
Updated September 1, 2005
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
Major Oil-Related Issues for the 109th Congress
Ethanol and MTBE
ANWR
CAFE
The NOPEC bill
Other Oil and Gasoline Measures
LEGISLATION
FOR ADDITIONAL READING
CRS Issue Briefs
CRS Reports


IB10134
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Gasoline Prices: Policies and Proposals
SUMMARY
The high price of gasoline was a major
aid construction of new refineries and to
consideration during the debate on major
harmonize state “boutique fuels” standards.
energy legislation, which ended August 8 as
the President signed the Energy Policy Act of
In the 109th Congress, the House passed
2005, H.R. 6. However, prices continued to
a comprehensive bill, H.R. 6, with many of
surge, spiking at the end of August when
the same provisions of the bill considered in
Hurricane Katrina shut down refining opera-
the previous Congress. As before, MTBE and
tions in the Gulf of Mexico.
ANWR, included in the House-passed bill,
remained controversial. In the Senate version
A large number of factors combined to
of H.R. 6, the MTBE safe harbor provision
put pressure on gasoline prices, including
was omitted, and the measure was dropped in
increased world demand for crude oil and U.S.
conference. The Senate bill contains a provi-
refinery capacity inadequate to supply gaso-
sion, not in the House-passed version, direct-
line to a recovering national economy. The
ing the President to take measures to reduce
war and continued violence in Iraq added
total demand for petroleum by one million
uncertainty and a threat of supply disruption
barrels per day (mbd) by 2015, but that mea-
that added pressure particularly to the com-
sure also was dropped in conference. Sup-
modity futures markets.
porters of ANWR development are pursuing
the measure as part of the budget process.
Numerous provisions in legislative pro-
posals in the 108th Congress addressed per-
The gasoline price surge heightened
ceived problems in the oil and gasoline mar-
discussion of energy policy, but the urgency of
kets. A comprehensive energy policy bill was
previous energy crises has been lacking. In
reported out of conference and approved by
part this may be due to the fact that there has
the House, but several issues kept the bill
been no physical shortage of gasoline, and no
from passing the Senate. Among the most
lines at the pump. In addition, the expectation
controversial were provisions regarding the
of former crises, that prices were destined to
use of ethanol and the additive methyl tertiary
grow ever higher, has not been prevalent.
butyl ether (MTBE) in motor fuel, proposals
However, the persistence of high gasoline and
to open up part of the Arctic National Wildlife
oil prices into a second summer has raised
Refuge (ANWR) to oil and gas development,
alarms over the economic consequences of the
measures concerning corporate average fuel
situation.
economy (CAFE) standards, and proposals to
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09-01-05
MOST RECENT DEVELOPMENTS
With passage of the Energy Policy Act of 2005 (H.R. 6), signed by President Bush
August 8, most congressional initiatives concerning gasoline demand and supply have been
dealt with. One remaining issue was the proposal to open part of the Arctic National
Wildlife Refuge (ANWR) to oil and gas development, which is expected to be included in
the budget reconciliation act to be considered after Congress returns from the August recess.
Meanwhile, passage of the energy bill appeared to have little immediate effect on oil
and gasoline prices. The price of crude oil was in the range of $70 a barrel on the New York
Mercantile Exchange in late August, and the price of gasoline surged close to $3.00 a gallon.
A major factor pushing prices higher was Hurricane Katrina in the Gulf of Mexico,
which caused shutdown of refining capacity and closed some pipelines as well as disrupting
oil and gas production offshore. (For details see CRS Report RS22233, Oil and Gas: Supply
Issues After Katrina,
by Robert L. Bamberger and Lawrence Kumins.)
The Senate Energy and Natural Resources Committee scheduled a hearing for
September 6 on gasoline costs and factors contributing to current high prices, such as global
oil demand, constraints on refinery capacity and increased speculation in the futures market.
The House Energy and Commerce Committee plans a hearing September 7 on the energy
consequences of Hurricane Katrina.
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.
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.
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! Uncertainty and fear of major disruptions in Iraq and Saudi Arabia, in the
context of the war in Iraq and the threat of terrorism.
Figure 1. Average Daily Nationwide Price of Unleaded Gasoline, January
2002 - September 2005
2.80
2.60
2.40
on
2.20
ll
a

2.00
r G
pe

1.80
llars
o

1.60
D
1.40
1.20
1.00
t
t
r
l
ct
l
t
'02
pr
pr
pr
A
Jul
Oc
'03
A
Jul
Oc
'04
Ap
Ju
O
'05
A
Ju Sep
Jan
Jan
Jan
Jan
Note: Prices include federal, state and local taxes.
Source: Daily Fuel Gauge Report, American Automobile Association,
[http://www.fuelgaugereport.com], compiled by CRS.
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
would be expected as market fundamentals push toward lower prices.
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
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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.
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.”1 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 2006.2
1 Guy Caruso, statement before the Senate Committee on Energy and Natural Resources, June 15,
2004.
2 “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 2. Consumption of Motor Gasoline, 2000 - July 2005
10
9.5
y
a
9
r D
s pe
el
rr 8.5
Ba
ion
8
ill
M
7.5
7
Jan
Jul
Jan
Jul
Jan
Jul
Jan
Jul
Jan
Jul
Jan
Jul
'00
'01
'02
'03
'04
'05
Monthly Averages
Annual Averages
Source: EIA, Monthly Energy Review, January 2003, January 2004 and August 2005, Table 3.4.
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. Throughout the period, U.S. gasoline consumption has continued to rise, although
the usual summer peak in consumption appears to have been somewhat blunted in 2004, as
shown in Figure 2. 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 3). Further, unlike the earlier crises, there was no physical shortage of gasoline,
and no lines at the pump. In addition, as Figure 4 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, although lasting longer than expected.
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Figure 3. Nominal and Real Price of Gasoline,
1973-2004 and March 2005
3
2.5
2
1.5
1
0.5
0
1973
1977
1981
1985
1989
1993
1997
2001
Mar '05
Nominal Price
Real Price (2004 Dollars)
Source: EIA, Monthly Energy Review, May 2005, Tables 1.6 and 9.4, calculated by CRS.
Figure 4. Consumer Spending on Oil as % of GDP, 1970 - 2001
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
2000
Source: Calculated by CRS with data from EIA, Annual Energy Review 2005, Table 3.5. GDP
from Bureau of Economic Analysis, Department of Commerce.
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As shown in Figure 5, gasoline prices historically have increased less than the general
rate of inflation, as measured by the Consumer Price Index (CPI). After the surge in 1973,
and again after the 1979-1980 run-up, gasoline prices grew very slowly and even declined,
dropping sharply in 1986. A sudden increase in 2000 was similarly followed by slow or
declining prices. During the current run-up, for which data are not yet available, gasoline
price increases have far outpaced the general CPI increase.
Figure 5. Percent Change in Gasoline Prices Compared to the
Consumer Price Index, 1973-2003
30
20
10
0
-10
-20
-30
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Source: EIA, Annual Energy Review 2003, Table 5.24. CPI from the Bureau of Labor Statistics.
Calculated by CRS.
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.
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
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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,
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 pursued the goal again, this time successfully.
Major Oil-Related Issues for the 109th Congress
A number of issues were major barriers to passage of omnibus energy legislation, and
had to be resolved in the 109th Congress. 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 stimulated major debate.
A primary stumbling block was 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. The Senate version of H.R. 6 did not contain the safe-harbor provision, and an
attempt by Representative Barton, chairman of the conference committee, to craft a
compromise was unsuccessful. The safe harbor provision was dropped, buth the repeal of
the oxygenation requirement and the renewable fuel mandate were retained.
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 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). Supporters of the measure
expect to include it in the budget reconciliation bill, to be taken up by the Congress after the
August recess.
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 merely
amends slightly the criteria NHTSA must follow in its rulemaking and authorizes
appropriations of $2 million annually through FY2008 for that purpose. During floor debate
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on H.R. 6, an amendment to increase fuel economy standards to 33 miles per gallon over 10
years was defeated by a vote of 177-254.
A more general amendment to the House bill, requiring 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. The measure
was included in the bill reported out by the Senate Energy Committee, but was dropped in
conference.
The NOPEC bill. Frustration with high gasoline prices was reflected in adoption, as
an amendment to H.R. 6, of Senator DeWine’s No Oil Producing or Exporting Cartel
(NOPEC) Act of 2005, S. 555. The bill would declare limiting production or setting prices
of oil by a foreign state as illegal in U.S. courts, deny sovereign immunity to such states, and
authorize the Attorney General and the Federal Trade Commission to bring action against
them. The amendment was adopted by voice vote June 21. The measure was dropped in
conference.
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.
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. The measure
remained in the final bill.
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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.
H.R. 6 (Barton)
Energy Policy Act of 2005. Introduced April 18, 2005. Passed by the House April 21,
2005 (249-183). Passed the Senate June 28. Reported out of conference July 26 and passed
by both Houses July 28 and July 29. Signed by the President August 8.
S. 10 (Domenici)
The Energy Policy Act of 2005. Introduced June 9, 2005. Approved by the Committee
on Energy and Natural Resources May 26 (21-1). Adopted as an amendment in the nature
of a substitute to H.R. 6, June 16.

S. 555 (DeWine)
The No Oil Producing and Exporting Cartel (NOPEC) Act of 2005. Introduced March
8, 2005. Adopted by voice vote as an amendment to H.R. 6 in the Senate, June 21. Not
included in the final version of H.R. 6.
FOR ADDITIONAL READING
CRS Issue Briefs
CRS Issue Brief IB10143. Energy Policy: Comprehensive Energy Legislation (H.R. 6) 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.
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IB10134
09-01-05
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 Provisions
in H.R. 6, 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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