Release date: May 10, 2005
Contact: Elaine Justice, Associate Director, University Media Relations,
at 404-727-0643 or elaine.justice@emory.edu

Emory Economist Looks at What’s Behind Higher Gas Prices

Gasoline prices may hit an all-time high this year, but in the near term, there's not much that can be done to increase the supply, says Emory University economist Ujjayant Chakravorty.

Why are we paying so much at the pump? One reason is the plethora of different environmental regulations across the country, Chakravorty says. He and colleague Celine Nauges conducted a study showing that individual states' implementation of their own clean fuel programs, which is allowed under the U.S. Clean Air Act, have led to a proliferation of fuel blends known as "boutique fuels."

"These boutique fuels cause an increase in wholesale gasoline prices in two ways—by increasing the cost of refining and by segmenting the market and increasing the market power of firms," according to Chakravorty and Nauges in the study's conclusion.

Beyond boutique fuels, the U.S. gasoline supply problem is exacerbated by lack of new refineries. "There hasn't been a refinery built in this country in 25 years," says Chakravorty. "U.S. refineries are producing at 90 to 95 percent capacity. That means if a refinery shuts down due to mechanical problems or maintenance issues, it creates a huge problem."

Nor is he optimistic about President Bush's proposal to build new refineries on sites of closed military bases. "In most cases, local people will be up in arms over refinery construction, because they generate a lot of pollution," he says. So while refinery construction is "an open market technically, those approvals are not easily given."

While increasing gas production will continue to be problematic, Chakravorty sees promise in containing demand for gas in the transportation industry with the growing popularity of fuel-efficient vehicles. "There are long lines for hybrid cars, meaning oil consumption may not increase as fast in future. Unlike other energy sectors (such as electrical power consumption), in transportation we can use the same resources but much more efficiently."

Fuel efficiency, once it captures the mainstream of the American automobile market, "could definitely affect oil prices," Chakravorty says. After all, he says, long gas lines in the 1970s resulted in an embrace of smaller cars, and "by 1985, oil prices were $11 a barrel; we could still see a downward trend [in gas prices] today once people shift."

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