Structure of The US Gasoline Induustry and Price of Gasoline

Introduction

Petroleum is a major energy source for domestic and industrial activities. Fuel gases, liquefied petroleum gas, gasoline, aviation turbine kerosene, dual-purpose kerosene, diesel fuel, fuel oil, lubricants, and bitumen are important fractions from petroleum whose applications cut across land and air transportation, cooking, heating, lubrication, and road construction, among others. A major challenge in the use of petroleum fractions is the high cost of petroleum refining and the maintenance of the refineries.

Discussion and Analysis

Gasoline for vehicle use is a major source of Volatile Organic Compounds. In the refining of oil to gasoline, production of VOCs occurs. Then in the combustion of that gasoline in driving, further VOC production occurs. Such production is a major source of man-facilitated VOC production (Helm, 1990, Pp. 146-163).

Petroleum refining for production of hydrocarbon fuels involves a number of unit operations that are designed to achieve four main objectives:

Separation of crude oil into fractions with different boiling ranges that are suitable for specific uses

Purification of the petroleum products

Conversion of those products with a relatively low market demand to the products with higher market demand

Improvement of the quality of the refined products

The standard neoclassical theory of the optimal pricing of exhaustible resources was established by Harold Hotelling (1931, Pp. 137-175) during a period when oligopolistic arrangements over the exploration, production, transportation, refinery, and distribution of oil were being struck both in the US and in the Middle East to prevent the price of oil from falling below its cost of production (Bromley, 1991, Pp. 95-98; Yergin, 1991, Pp. 244-252).

When you buy gasoline for your car, you do not pay for your contribution to greenhouse gas emissions and global warming. In standard economics, externalities are recognized as existent, but are largely neglected, or downplayed as insignificant. As mentioned above, when a motorist buys a gallon of gasoline for a certain amount of money, mainstream economics considers this a proper market transaction in which the buyer presumably pays for the full value of expenses plus profits of the seller (extraction, refinement, transportation, storage, and so on). The burning of gasoline in turn leads to smog, which in turn leads to sickness, which in turn leads to various remedial expenses, is not an intrinsic part of the original transaction. Whether it is of concern to society or not, it is not valued by the original transaction for it has not been given a price (Shogren, Nick & White, 2007, Pp. 121-128).

Quantifying the External Costs of Gasoline Consumption

The external costs related to gasoline consumption are substantial, which implies that in the absence of government intervention, the gasoline market fails to operate efficiently. Ian Parry, Margaret Walls, and Winston Harrington (2007, pp. 374-400) divide these costs into two categories: per gallon externalities and per mile externalities.

Per gallon externalities involve costs imposed on others when gasoline is burned, regardless of how many miles were driven when it was burned. Parry et al. (2007, pp. 374-400) suggest that a reasonable estimate for the ...