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Taxes, clean air and OPEC — the politics and price of gasoline

Gasoline and other motor fuels are the lifeblood of Illinois' economy. Consumers depend upon and expect their availability, increasingly on an around-the-clock basis, at more than 5,400 retail stations throughout Illinois. Gasoline prices are a topic of happy (when
ic01040400021.jpg David A. Sykuta
they're low) to not-so-happy (when they're higher) daily discussion from the "office water cooler" to the family dinner table. Increased price volatility confuses consumers and they want to know how all this clean-fuel jargon like RFG, and "ozone non-attainment" areas affects their lives. I'll use the balance of this essay to address these issues and suggest some ways to improve the situation.

Illinois consumers purchase more than 6.5 billion gallons of motor fuel per year. Illinois is the fourth-largest gasoline refining state (six refineries producing more than 42 million gallons per day) and is also a significant crude oil producer. The industry employs more than 50,000 Illinois taxpayers. However, most Illinois citizens only notice petroleum dealers at their local gas pump and they all wonder how prices are set and why they seem to go up and down so quickly. Each retailer sets gasoline prices, but all gasoline prices have four basic components:
• The cost of crude oil — gasoline's main building block;
• The level of taxation - federal, state and local governments all levy taxes;
• The cost of making the gasoline, transporting it, maintaining the retail outlet, and making enough profit to keep the business running and paying for the numerous environmental programs that improve our lives;
• Constant cutthroat competition.

Crude oil prices are like Illinois' weather— if you don't like them, wait 10 minutes and they'll probably change. Since 1998, crude oil prices have ranged from $19 per barrel down to $8.50/barrel and up to $37/ barrel. This factor most explains gasoline price volatility. Oil at $8.50/barrel in late 1998 and early 1999 allowed retail prices to sink into the 80 cents per gallon range, while last summer's $37/barrel oil caused retail prices in Chicago to exceed $2/gallon.

This volatility will likely persist since our country relies on imports to meet more than 56 percent of our needs. Dependence on OPEC and other foreign sources is a largely self-inflicted wound. In my view, our political leaders for the last eight years and more have miscalculated our national interest by greatly restricting domestic oil and natural gas production. They have ignored new technology and the industry's proven ability to extract oil and natural gas in an environmentally sensitive manner.

Taxes are the second component of gasoline prices. Aside from the IRS, the oil industry is the nation's largest tax collector. Taxes often comprise 40 percent or more of the price of a gallon of gasoline. This is especially true in Illinois since it is one of only a handful of state that allow a sales tax on gasoline and the only state to allow local taxes on gasoline. These taxes are in addition to state and federal gas taxes. The total tax ranges from around 45 cents per gallon to more than 65 cents per gallon at today's prices. Plus, gasoline is one of the few retail commodities priced with taxes included. So, the next time you grimace at a gasoline price sign saying $1.40 per gallon, please remember the sign actually means 93 cents per gallon, plus tax.

The third component of gasoline prices is the cost to refine the gasoline, transport it, comply with all environmental regulations, and make enough money to keep the system operating. Clean fuel regulations have resulted in much cleaner air, but also in more expensive gasoline and an overwhelmed distribution system. For example, in the 300 miles from Chicago to St. Louis, the USEPA requires four distinct fuels, three grades in each, for a total of 12 different gasolines; plus, they can't be co-mingled or substituted for each other. Ethanol use in gasoline is politically popular in Illinois, but adds to supply complexities.

In fact, many experts agree this hopelessly complex regulatory scheme led to a distribution "meltdown" that was a major cause of last summer's high prices.

Competition is the final component of gasoline prices. Gasoline retailing is, without doubt, the most competitive retail environment in existence. Moreover, "new era" gasoline marketers from WalMart to Taco Bell are adding to the competition. Competition is great for the consumer, and in fact, gasoline adjusted for inflation and tax increases has significantly decreased in price over the past 20 years.

In conclusion, what can be done to ensure reasonable priced clean gasoline in the future? Here are my top three suggestions:

• Develop a national energy policy that promotes domestic oil and natural gas production and security;
• Force the Illinois General Assembly to repeal the sales tax on gasoline and the legal authority for local taxes — the money raised by these taxes almost never goes to road improvement and really are just thinly disguised income taxes on motorists. Most other states don't allow them - neither should Illinois.
• Continue towards our clean fuel goals, but give my industry enough lead-time to comply with new standards. Moreover, ensure that clean fuel standards are based on sound science - not politics.

David Sykuta became executive director of the Illinois Petroleum Council in January, 1986. He is past chairman of the Business and Industry Federation and presently serves on the Illinois Environmental Review Commission. He joined the American Petroleum Institute (API) as associate director of the Illinois Petroleum Council in M.ay, 1976.

The opinions and views of guest commentators are their own and may not represent those of the Association of Illinois Electric Cooperatives or the electric co-ops of Illinois.


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