Source:  Oil Price Information Service

The recent rise in gasoline prices to more than $2 a gallon in some Midwestern cities has prompted numerous Congressional hearings, a Federal Trade Commission investigation into the oil companies, criticism of the Environmental Protection Agency's Phase 2 reformulated gasoline program and calls for a national energy policy.

In addition, there is growing interest in eliminating the federal gasoline tax as a means of addressing the gas price issue, although an amendment suspending the tax was defeated on the Senate floor. Several states including Illinois and Indiana have acted to temporarily waive the state's gasoline tax to provide immediate relief to consumers.

According to a June 28 report by the Congressional Research Service, the price increase in the Midwest was mainly the result of supply and demand, with supply being extremely tight. "The price increases driven by supply-demand pull, are so large and out of proportion to any likely higher manufacturing costs associated with the reformulated gasoline sold there that it is unlikely that manufacturing-related 'cost push' would be a factor," the report states.

Since June 19, wholesale gasoline prices in Chicago for both reformulated gasoline and conventional gasoline have fallen 40 cents a gallon. The report, "Midwest Gasoline Prices: A Review of Recent Market Developments," notes that the 2-8 cents per gallon additional cost attributable to the use of reformulated gasoline is now on track with the rest of the nation.

In defense of the reformulated gasoline program, Environmental Protection Agency Administrator Carol Browner said the cost of producing reformulated gasoline does not account for the extremely high price differentials experienced in the Chicago and Milwaukee areas. "As Environmental Protection Agency reviewed the various requests for waivers from the reformulated gasoline program, factors such as the pipeline, tank turnover and [Unocal] patents were examined. We do not believe that these factors adequately explain the price differentials that we have seen in the Chicago and Milwaukee areas," testified Browner, later adding, "We know ethanol is not the problem."

"Ethanol was no more the cause of the price increases than it can be credited for the falling wholesale costs of both conventional and ethanol reformulated gasoline in the Midwest," said Eric Vaughn, President of the Renewable Fuels Association. The only change in the region has been the increased supply of gasoline, he said.

Federal Trade Commission Investigation

On June 15, Environmental Protection Agency Administrator Carol Browner and Energy Secretary Bill Richardson formally requested an investigation by the Federal Trade Commission into possible oil company price gouging. House Judiciary Committee Chairman and Illinois Representative Henry Hyde and Wisconsin Representative Jim Sensenbrenner made a similar request on June 7.

Responding to negative comments about ethanol made by the American Petroleum Institute to lay the blame for high gasoline prices on the use of ethanol in reformulated gasoline, Iowa Governor and Coalition Chair Tom Vilsack and Coalition Vice Chair, Nebraska Governor Mike Johanns sent a letter to President Clinton, stating, "We find it unacceptable that the American Petroleum Institute is attempting to lay the blame for higher prices in the Midwest on the region's use of ethanol in Phase 2 Reformulated Gasoline."

"The evidence suggests that with the price of crude oil at more than $32 a barrel, there has been little incentive for refiners to build adequate gasoline inventories, despite the fact that we have entered the busiest driving season of the year," they said. "Meanwhile, ethanol prices have remained steady and supplies plentiful. Ethanol is clearly part of the solution, not the problem."

In addition to calling for an Federal Trade Commission investigation, the governors urged the Administration to proceed with proposed regulatory changes designed to recognize the carbon monoxide benefit of ethanol fuels.