It’s no secret that Hoosier gasoline prices have been high this summer. During the last week of May, Indiana had the third-highest gas prices in the nation, surpassed only by Midwestern neighbors Michigan and Illinois. For weeks, Indiana’s pump prices even surged past traditionally high-gas-price states out West, such as California.
The effects of the price jolt have been felt throughout the state. Police officers in Bloomington were ordered to cut back on the number of patrol routes.1 Trucking companies based in and around Indianapolis have been forced to pass high fuel costs on to delivery clients.2 And Hoosier drivers statewide are spending less on other goods to make up for the larger portion of their incomes spent on gas, according to anecdotal reports from newspapers in various Indiana cities.
Clearly, high gas prices and their effects are familiar to Hoosiers. Less known are the factors that lie behind this summer’s price spike and the key insights that spike reveals about Indiana’s gasoline situation.
Indiana’s gas prices traditionally hover close to the national average due to the state’s location in the heart of the Midwest, a modest distance from the oil-rich Gulf Coast. Recently, however, Indiana has strayed above that average due to refinery problems that underscore significant vulnerabilities in the state’s gasoline network. Several other factors affect Indiana’s gas prices as well – from taxes to carpooling to environmental regulations – and shed light on potential solutions to Indiana’s gas problems.
Supply and Demand
Fluctuations in the quantity and price of gasoline are best analyzed by separating the market into its supply side (producers) and demand side (drivers).
Generally speaking, Indiana’s gasoline demand does not vary much with the rest of the nation. Like the other 50 states, Hoosier gas demand is relatively inelastic, responding to increases in price with only slight, if any, decrease in demand. Although many Hoosier drivers are making deliberate efforts to conserve fuel in light of rising fuel costs, the dominance of automotive travel as the primary means of transportation and the scarcity of suitable gasoline alternatives, coupled with the onset of the summer driving season, have led to slight increases in demand nationwide.
In 2004, the most recent year for which reliable data are available, Indiana consumed 12.4 barrels of gas per person (20th in the nation) and 77.2 million barrels overall (13th in the nation), putting it above the national average in both categories, according to figures released by the Energy Information Administration.3
Two contributing factors to the state’s gas consumption figures are infrequent use of public transportation and a lack of carpooling. In 2005, only 1 percent of Hoosiers used public transportation.4 Recently, however, public transportation services throughout the state have reported increased interest.5 Bloomington Transit, for example, is anticipating a record-high ridership in 2007 because of high gas prices.6 But while Indiana ranks 31st in the United States in the number of commuters who use public transportation, the state cracks the top five in the number of drivers who don’t carpool. In 2005, 83 percent of Hoosier commuters drove to work solo.7
Though higher-than-average gas demand indicators may contribute to high gas prices, the supply side of the Hoosier gasoline market reveals much more about long-term price trends. Indiana’s gas supply is marked by low crude oil production and high refinery output.
In 2006, Indiana had 5,044 crude oil producing wells that yielded approximately 1.77 million barrels of oil.8 To put that number in perspective, in that same year, total U.S. crude oil production was 5.14 million barrels – per day.9 Oil drilling has moved from eastern Indiana to the southwestern portion of the state, though production has steadily declined since the early 1960s after production peaked at around 12 million barrels annually.10
Refinery output, however, is a different story. Indiana is home to two refineries: a BP refinery in the northwest portion of the state and a Countrymark Cooperative refinery near the southern border in Mount Vernon. The BP plant, based in Whiting, Ind., is the largest refinery outside of the Gulf Coast region and Indiana’s primary supplier, producing 410,000 barrels per day. Countrymark produces approximately 23,000 bpd.11
Indiana’s gasoline market is also influenced by government-mandated taxes and environmental regulations. Indiana is one of only a few states to apply a sales tax to its gasoline, making the total tax on gas among the highest in the nation. Hoosiers pay 18 cents per gallon, plus a 6 percent sales tax. Adding 18.4 cents for the federal gas tax means Indiana drivers, on average, pay about 55 cents in taxes for every gallon of gas they pump.12 Environmental regulations buoy gas prices even higher in certain parts of the state. In the northwest corner near Chicago, for instance, gas stations must sell gasoline that is reformulated with ethanol, while near Louisville, Indiana drivers are required to use a special blend designed to reduce emissions.13
Regional Considerations and Refinery Woes
The state-specific factors described above – gas consumption, refinery output and crude oil production – provide the basis for examining this summer’s notably high gas prices, but other variables must also be taken into consideration. Regional factors, refinery shortages and a strained national supply system, along with steady gas demand, all combined to push Indiana gas prices past $3.50 per gallon in some cities and forced Hoosiers to take a serious look at their gas- guzzling habits.14
Crude oil is the single biggest factor affecting the retail price of gasoline, accounting for more than half of the average price of gas in the United States.15 Much of the crude oil refined in the United States comes from the Gulf Coast. The farther a refinery is from this oil-rich area, the more expensive the crude oil is, due to transportation costs, either via pipeline or by truck. This is one of the main reasons why average gas prices in the New England and Central Atlantic regions of the United States tend to be higher than in the Midwest or Lower Atlantic.
Proximity to refineries is also an important factor in determining the price of gasoline, for much the same reason proximity to crude oil is: The closer a station is to a refinery, the lower the transportation costs. This is one reason why refinery-rich New Jersey, despite its distance from the Gulf Coast and high population density, boasts some of the lowest gas prices in the nation.16 The importance of refinery proximity is also another reason why gas prices generally tend to be higher farther from the Gulf Coast: Due to its abundance of crude oil, the Gulf Coast is home to 56 of the country’s 149 refineries, including the four most productive, and is responsible for supplying gasoline to other parts of the country.17
While Indiana benefits from being home to the nation’s fifth largest refinery, the state is hindered by its distance from the Gulf Coast and its heavy reliance on the BP refinery. These weaknesses were exposed in March when a fire there paralyzed production and sent Indiana’s gasoline supply plummeting.18
The fire cut production at the refinery in half. To replace the lost output, gas stations had to purchase refined oil from more distant sources, incurring transportation costs every step of the way. However, these sources were already strained for output themselves for at least two reasons: First, the start of the summer driving season meant gas demand was already higher than normal. Second, many refineries were switching over to the more expensive, environmentally friendly “summer blend,” which requires them to reconfigure and cut output temporarily. Additionally, certain blends of gasoline required in Indiana near Chicago and Louisville may have been harder to replace since other refiners may not have been producing those particular “flavors.”
Although the BP Whiting refinery’s output (when it is producing at full capacity) would be enough to quench Indiana’s fuel thirst, the refinery must also provide gasoline to other parts of the Midwest. On the whole, the Upper Midwest’s refining capacity is not sufficient to satisfy consumer demand. This means the area is hit particularly hard by refining shocks because it must import gasoline from surrounding areas.
Two case studies illustrate this point: In August 2001, a fire at a Citgo refinery near Chicago reduced output for more than six months and caused retail gasoline prices to surge. An explosion at a refinery in Ponca City, Okla., in 2003, on the other hand, had a significantly smaller impact on gas prices. This is because the Oklahoma refinery produces more gasoline than the Oklahoma area needs, so in response to the disruption, it simply exported less to surrounding areas.19 Unfortunately, Hoosiers do not have this luxury. Indiana and its neighbors saw the now all-too-familiar first scenario play out this summer as gasoline prices in Illinois, Michigan and Indiana became the highest in the nation.20
No End in Sight
For the past decade, U.S. refineries have been operating at near full capacity during peak summer months, leaving drivers in the Upper Midwest, who must rely on gasoline from surrounding areas when shortages occur, vulnerable.21 This uncertain supply climate, combined with steady demand unfazed by higher gas prices, means Hoosiers shouldn’t expect relief from high gas prices any time soon.
The supply side of the gasoline market, for the most part, is unlikely to change in the near future. Due to environmental restrictions and high building costs, a new refinery hasn’t been built in the United States in more than 30 years,22 even as refineries are producing at near 100 percent capacity. Although it could yield billions of barrels of oil, the prospect of drilling in Alaska or other states is unlikely, at least for now.a The United States remains at the mercy of politically unstable suppliers in Venezuela, Nigeria and Iraq, for example, that could decrease production at a moment’s notice. Crude oil from Mexico – the United States’ second largest source of imported crude oil23 – is running low, putting further strain on U.S. gasoline supply.b And global demand will only increase as India, China and Brazil industrialize, requiring more and more gasoline to fuel their growing economies.
However, there is at least one reason for hope. While many refineries in the United States will continue to import crude oil from politically unstable regions in Africa, Latin America and the Middle East, the BP Whiting refinery has plans to import the majority of its crude oil from Canada by 2011. The $3 billion project will also increase gasoline output by 15 percent, according to the refinery.24
Ultimately, however, the “solution” to high gas prices lies in the hands of drivers. Individuals may not be able to reduce the price of oil, but they can certainly control how much they spend on gasoline.
Anecdotal evidence from across the state suggests Hoosiers are beginning to adjust their consumption habits in response to rising fuel costs:
These examples suggest Hoosiers throughout the state are becoming increasingly aware of how much they spend on gasoline. With any luck, those conservation habits will die hard and the trends will continue as prices continue their upward march.
Cohen authored this Sagamore Policy Perspective while serving as a Research Assistant at Sagamore Institute.
a Recent research suggests the United States has as much as 1.3 trillion barrels of oil resting in shale deposits below parts of Wyoming, Utah and Colorado.28, 29 An additional estimated 800,000 barrels of oil a day may also be extracted through underwater drilling in the Gulf of Mexico.30 Drilling in these areas would significantly decrease U.S. dependence on imports from unreliable sources in Africa, Latin America and the Middle East. Extraction costs have prevented exploration until now, but high gas prices are making the prospect of shale-oil and off-shore drilling economically feasible. However, environmental considerations still hamper exploration efforts, and politicians, reflecting the attitudes of the majority of Americans, do not appear likely to change their stance any time soon.
b At current production and reserve levels, Mexico will run out of crude oil in a little over a decade, according to estimates based on figures from the Energy Information Administration. In 2006, Mexican crude oil production was 3.256 million barrels per day (or 1.188 billion per year). At the end of that same year, it had 12.352 billion barrels in reserves.
1 Creps, Marcela. “Driven to conserve.” Bloomington Herald-Times. May 20, 2007.
2 O’Shaughnessy, Brendan. “High prices trickle down.” Indianapolis Star. June 3, 2007.
3 “State Energy Profiles: Indiana.” Energy Information Administration. June 21, 2007.
4 “Indiana Population and Housing Narrative Profile: 2005.” U.S. Census.
5 O’Shaughnessy, Brendan. “High gas prices trickle down.” Indianapolis Star. June 3, 2007.
6 Creps, Marcela. “Driven to conserve.” Bloomington Herald-Times. May 20, 2007.
7 “Indiana Population and Housing Narrative Profile: 2005.” U.S. Census.
8 “State Energy Profiles: Indiana.” Energy Information Administration. June 21, 2007.
9 “Short-Term Energy Outlook.” Energy Information Administration. June 12, 2007.
10 Rupp, John. “Oil and gas in Indiana.” Indiana Geological Survey.
11 “U.S. Refineries Operable Atmospheric Crude Oil Distillation Capacity.” Energy Information Administration. Jan. 1, 2006.
12 “Federal and State Motor Fuel Taxes.” Energy Information Administration. June 2007.
13 “U.S. Gasoline Requirements.” Exxon Mobil. April 2007.
14 “IN Metro Averages.” AAA Fuel Gauge Report. Updated daily.
15 “A Primer on Gasoline Prices.” Energy Information Administration.
16 Hargreaves, Steve. “Cheapest gas in the nation – New Jersey’s full service.” CNN Money. May 22, 2007.
17 “Table 1: Number and Capacity of Operable Petroleum Refineries by PAD District and State as of January 1, 2006.” Energy Information Administration. Jan. 1, 2006.
18 Laasby, Gitte. “Fire at Whiting’s BP plant fuels gas hikes.” The Post-Tribune. May 8, 2007.
19 “Gasoline Price Changes: The Dynamics of Supply, Demand, and Competition.” Federal Trade Commission. July 5, 2005.
20 Morath, Eric. “Michigan gas prices highest in nation.” The Detroit News. May 25, 2007.
21 “Refinery Outages: Description and Potential Impact on Petroleum Prices.” Energy Information Administration. March 2007.
22 Schoen, John. “U.S. refiners stretch to meet demand.” MSNBC. Nov. 22, 2004.
23 “Crude Oil and Total Petroleum Imports Top 15 Countries.” Energy Information Administration. June 22, 2007.
24 “BP plans $3 billion project to refine more Canadian heavy crude oil in the U.S. Midwest.” BP. Sept. 20, 2006.
25 O’Shaughnessy, Brendan. “High prices trickle down.” Indianapolis Star. June 3, 2007.
26 “High gas prices spur hybrid sales.” The South Bend Tribune/WSBT-TV. June 5, 2007.
27 Routledge, Ric. “As gas prices rise, so do moped, bicycle sales.” June 6, 2007.
28 Fine, Daniel. “Oil Shale: Toward a Strategic Unconventional Fuels Supply.” The Heritage Foundation. March 8, 2007.
29 Talhelm, Jennifer. “Study reveals huge U.S. shale-oil field.” The Associated Press. Sept. 1, 2005.
30 Mufson, Steven. “U.S. oil reserves get a big boost.” The Washington Post. Sept. 6, 2006.
2902 N. Meridian Street, Indianapolis, IN 46208 | 317.472.2050 | | 501 (c)(3)