Oil prices have dropped 60%, but a gallon of gas is down only 25%. Why? Regulation isn’t cheap

See Gas Prices Ought to Be Lower by Jacob Borden. Mr. Borden is an assistant professor of chemical engineering at McNeese State University and formerly principal engineer for BP Biofuels. Excerpts:

"Multiple and overlapping regulatory barriers prevent refiners from moving to alternative sources of crude and from entering markets to fill supply shortages. The result: a regulatory price premium in every gallon of gas."

"the price you pay at the pump for a gallon reflects local constraints, not merely the price of oil. No two refineries are designed identically, and no new world-scale refinery has been built in the U.S. since 1976."

"Some refineries are limited by the amount of asphalt they can accept in their crude, while others are limited by their capacity to remove sulfur. Only a handful of U.S. refiners have so far elected for the extensive upgrades and regulatory approvals needed to process large amounts of unconventional crude. Thus the regulatory burdens are leaving the American refinery fleet largely inflexible. That’s why crude-oil processing has become specific to the design details of each refinery."

"On Aug. 9 the BP refinery in Whiting, Ind., was forced to run at 40% of capacity for more than two weeks due to an unplanned outage in one of three crude-distillation units. Already among the most expensive in the country, gasoline prices in nearby Chicago jumped almost $0.70, to $3.37 a gallon.

Meanwhile, 60 miles south in Kankakee, Ill., the price at the pump held steady at $2.65. Kankakee County sits right outside a zone that the Environmental Protection Agency deems “nonattainment,” which means that retail gasoline must be “reformulated” to minimize the potential for smog emissions. But not every gallon of gasoline is equally amenable to reformulation, which shrinks the pool of fuel available. These areas end up with higher prices as the remaining reformulated fuel is rationed among nonattainment zones.

This is exacerbated by the renewable-fuels mandate, which requires blending nearly all gasoline with ethanol. Ethanol, when mixed with gasoline, increases the tendency for the lightest molecules to evaporate and contribute to urban smog. Gasoline therefore has to be stripped of so-called light-ends, increasing refining costs while reducing the yield of marketable fuel."

"And so this regulatory patchwork builds a price premium into every gallon, essentially to compensate refiners for providing fuels that meet ever-increasing regulatory and production demands. The result: When oil prices rise, the rise is reflected in retail fuel prices. But when oil prices fall, the relief you feel at the pump is limited.

In the mid-1980s and ’90s, the cost of crude oil accounted for about 45% of the retail price of gasoline. By August 2004, when a barrel of oil first touched $40, only 40% of the cost of retail gasoline was attributable to oil. Today, oil accounts for a mere 35% of the retail price of gasoline. Simply breaking down such regulatory barriers would reduce gas prices by about $0.60 a gallon"