That said, the empowerment in this particular case is by no means overwhelming. The bill, which would encourage construction of new refineries, passed the House of Representatives by a mere two votes. Not a single Democrat voted for it and the bill only passed because two Republicans agreed to change their vote at the last minute. The “Gas Act” still faces an uphill battle in the Senate, where the Republicans cannot afford a single defection if they expect to enact this legislation.

To be sure, public concerns have also shifted since Katrina. Guaranteeing supply is no longer nearly as prominent a concern as the price of gasoline. Those prices are dropping now but the surge that occurred in recent months has resulted in more talk about windfall profit taxes than about building new refineries. Whatever momentum the oil industry gained for new refineries after the hurricanes – assuming the oil industry actually intends to build new refineries – has quickly dissipated.

Our comments on the impact of the Gas Act must therefore be understood in context. A Senate version of the bill may likely be very different from what the House approved and, at the end of the day, there may be no new legislation signed into law. Yet commentary and analysis at this juncture are still worthwhile, simply because there will be related legislation of some sort in the future, whatever happens now, and the issues before us today will still be debated tomorrow.

As guidance for future discussion and legislation, it is likewise important to realize why the impact of the Gas Act will, if passed, be less substantial than many of its supporters and opponents might think.

First and foremost, from an economic standpoint, it is simply more cost-effective to expand existing refineries on an incremental basis than to build new ones.

Companies such as Marathon, Motiva, ConocoPhillips, and Valero have already announced plans to do just that (and some are planning very ambitious expansions). These expansions are essentially intended to “de-bottleneck” supplies by adding additional processing units at existing refineries to increase their output. That said, there is actually no evidence that refiners in any significant numbers are now seriously thinking about building new refineries in the aftermath of the House passing this legislation.

A First Step

The key provision of the Gas Act is to streamline presumably labyrinthine EPA permitting requirements for expanding or building refineries. In addition, the bill requires the President to identify federal lands open for construction, including at least three closed military installations, and to do so within 90 days.

Supporters of the bill claim that it will facilitate the completion of new refineries within a year. That may be an overstatement, but there is no doubt that streamlined permitting is a step in the right direction.

Yet there are two basic realities that would still confront new construction, and that no streamlining extenuates.

First, the easier permitting process does not eliminate potential environmental concerns. If anything, a more streamlined process could encourage activists to be doubly vigilant and doubly aggressive. They would see the streamlined permitting as a clear and present danger, and they would respond more resolutely than if the process had never been simplified.

Second, people who in principle support deregulated development of any sort may be less inclined to do so when the development occurs on federal property close to where they live, and who cherish the status quo for whatever reason. It’s called NIMBY: Not in My Back Yard. The likelihood of opposition from both environmentalists and the NIMBIES increases when there are rivers on those properties – and that is a great likelihood, since water access is always preferred for refinery development because of the convenience with which crude can be transported in and refined petroleum products transported out.

Other measures of the Gas Act seem directly responsive to recent public concerns, particularly shortage crises like the one we just experienced after Katrina. For example:

• The Secretary of Energy would be required to issue regulations compelling the owners or operators of crude oil or refined petroleum product pipeline facilities to ensure sufficient backup energy capacity in areas historically subject to natural disasters. The Secretary would formally report on the adequacy of that backup to Congress.

   

• The Gas Act requires the development, within 12 months, of a list of six gasoline and diesel fuels (dubbed the “Federal Fuels List”), including one Federal diesel fuel, one other diesel fuel, one conventional gasoline, one reformulated gasoline (RFG), and two additional gasolines with Reid Vapor Pressure (RVP) controls for use in ozone non-attainment areas. Note that the proposed six fuels are down from the current number of 17. With this shorter list, operators can better transfer and sell excess fuel from one part of the country to others that are experiencing shortages.

   

• The law would require the Federal Trade Commission (FTC) to investigate nationwide gasoline prices in the aftermath of Hurricane Katrina and outlaw price gouging in gasoline or diesel fuel sales. A House amendment stipulates that price gougers be fined up to $11,000 per day of violation.

It may be expected that these particular provisions could survive a Senate revision of the bill or, if the bill is rejected, may be introduced in other legislative venues.

Long-term Issues: Imports

Critics of the Gas Act say that it will do little if anything to decrease our dependence on foreign oil or decrease the costs of gasoline nationwide. They’re quite right.

Any future legislation that would effectively deal with U.S. dependency on imports must be significantly more far-reaching than this current legislation. U.S. demand for petroleum products exceeds 20 million barrels per day, while available domestic petroleum refining capacity is only 17 million barrels per day. Not only are we at least 3 million barrels short, but the hurricanes showed how fragile our domestic sources can be.

If opposition to the current Gas Act, with its relatively limited provisions, almost torpedoed the bill in the House, it’s a safe guess that it will be commensurately harder to pass a stronger law to generate 3 million barrels of oil per day. To stand a chance, the industry’s political arguments would have to hit harder on the ongoing consequences of imports. There are, of course, the obvious consequences, like the leverage that imports provide hostile foreign governments. But an informational campaign would also have to emphasize economic adversity as we outsource manufacturing jobs and incur higher transportation costs for refined products.

The prospects of such legislation are probably very long-term at best. The oil industry could not have passed legislation to secure an additional 3 million barrels per day when President George W. Bush was at the height of his popularity. The chances of doing so are probably zero now that both the President and the industry are unpopular.

One arrow that the oil industry may have in its quiver is the fact that many foreign refineries do not produce gasoline that meets U.S. standards. In the aftermath of Katrina, President Bush relaxed those standards to maximize import supply. Looking ahead, we cannot be assured that larger volumes of acceptable gasoline will be available unless other countries build more export-oriented refineries. So far, they have not faced real pressure to do so and, if we remain as significantly short in our total daily supply as is now the case, it’s unlikely they ever will.

The political possibility is that, by emphasizing the need for cleaner oil, the industry might be able to sway some critics (if not the hardened activists) whose environmental concerns have opposed them to most industry initiatives in the past. The unsuitability of many foreign oil imports is not, in any event, a message point that the U.S. oil industry or its political allies have sufficiently underscored.

Longer-term Issues: Cost

It’s a measure of just how sensitive the public and its representatives are to oil prices that debate over the effect of the Gas Act on gasoline cost was a spirited one even though the per-gallon price numbers had already begun to go down.

In fact, the $3+ per gallon price right after Katrina is now much closer to $2, although consumers may need to be forewarned that the final stabilized per-gallon cost will go up again, certainly higher than before the hurricanes. Prices for heating oil and natural gas will be significantly higher than they were last winter, and with little or no relief in sight.

It’s been said often enough, but we need to keep saying it: The most cost-effective step that consumers can take is to alter their patterns of demand. The prospects that they will do so are slim, but there are a few straws to grab. For example, while “energy conservation” is not always welcomed by consumers, we did see a small reduction in gasoline consumption following the price spikes at the pumps.

Demand has never really been a powerful factor in determining oil cost for the simple reason that the demand in the U.S. has historically been relatively inelastic with respect to price. Americans like their homes warm and their SUVs in gear. In any event, the economy is expanding and the extra dollars spent on energy are not likely to check that expansion. However, for the working poor, the impact of rising energy costs mean fewer dollars to spend on health care, meals, and education.

As we’ve suggested, the ultimate importance of The Gasoline for America's Security Act of 2005 may well be that it frames the debate for future and possibly more impactful legislation. If it passes the Senate in some form, the Gas Act may create precedent for additional regulatory relaxation in the energy industry and, for that matter, in other industries as well.

By and large, however, the enduring legacy of this bill, whatever the outcome, is that it shows how much more needs to be done than law-makers are now willing to even attempt.

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