WHY IS THE PRICE of gasoline going up so fast?
It now averages about $1.20 a gallon -- a rise of 7 cents in the last month alone. One obvious reason -- and the one underlying all the others -- is the latest round of increases in the cost of foreign oil. In addition, for most refiners and most retail dealers, profits have widened over the past year. But that explains only part of the rise. There are other important forces at work as well.
Decontrol of U.S. crude oil is being to have a real impact. Slightly over half of this country's oil supply comes from American wells. Nearly all of it was under price controls last April when President Carter made the hard but necessary decision to lift them gradually. Today, just under 30 percent of all U.S. oil production is decontrolled -- enough to have an effect on the price of gasoline at the pump. That proportion will rise steadily over the next 20 months until the controls finally expire completely in October 1981. Currently, a third of the way through the process, physically identical barrels of U.S. crude oil are sold at prices anywhere from $6.86 to $38, depending solely on their legal status under the very complex price-control rules.
Decontrolled U.S. oil sells for higher prices than most OPEC imports. That isn't surprising. Oil from Canada, and from the British North Sea, has been consistently more expensive over the past year than most OPEC production. Why? It is closer to industrial buyers, and it is sold under contracts that, unlike those in the Third World, are enforceable in court. The 13 OPEC governments' official contract prices -- excluding spot sales -- now average about $29 a barrell. The going prices for decontrolled U.S. oil run at least several dollars higher.
Another and quite separate influence is what you might call the cost of conservation. For example, electric utilities are using more coal and less of the heavy, tar-like industrial fuel oil of which they are the principal buyers. That has created a tremendous oversupply of heavy fuel oil, and its price is rapidly dropping. A typical refinery produces a wide spectrum of products, from gasoline and jet fuel at the light end to the industrial fuels at the other. If a refinery is losing money on one product, it tries to compensate by raising prices of others -- like gasoline -- for which demand remains strong. There are elaborate refining processes that can turn even the gunky bottom-of-the-barrel into gasoline. But they are expensive. You can expect that cost, too, to turn up shortly in the price of gasoline.
Every indication warns of steadily rising gasoline prices for a long time to come. It's unpleasant and it's disruptive, but it's more effective in reducing oil imports than all of the past six years' conservation legislation put together. It would be preferable to raise gasoline prices with a tax, but Congress won't pass a tax and it is imperative to reduce imports rapidly. The present kind of price escalation is second-best policy -- but it is an acceptable second-best, and necessary.