Professor Hamilton on the Economics of Oil

There has been a lot of discussion about the economic consequences of the rising price of oil of late. We are fortunate to have Professor James Hamilton of the University of California, San Diego, now blogging at Econbrowser. He's an expert on many things, but his posts on energy really have no equal.

In this post from last week, he makes the case for more uniform fuel standards. The problem, in short, is:

The proliferation of standards raises refining costs and introduces logistical challenges in keeping the different formulations separated at each point of the distribution and storage chain before the product gets to the final consumer. By reducing the available supply that could be legally provided to any given locality, it also makes the price in local markets much more volatile in the event of any unexpected changes in either local supply or demand.

An even bigger concern may be the effect that this market segmentation has in combination with two other developments. The first is the fact that over the last quarter century, half the refineries in America have shut down and no new ones have been built. The second is the number of mergers and acquisitions that we have seen in the petroleum industry over the same period. The result of the three developments together is that there are substantially fewer suppliers of wholesale gasoline available to any particular local market.

Go read the whole article, and look at the map showing the extent of the problem. With more uniform standards (at whichever level), we could spare ourselves some of the cost and more of the volatility in fuel prices that we currently experience.

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