Now, A Gas Tax Seems Like A Drop In The Bucket

If Bill Clinton had to pick a year to pass a gasoline tax, this is shaping up as a fine one. Lawmakers are likely to settle on a 6 -a-gallon tax hike starting this fall, on top of a rise in producer costs caused by tougher environmental regulations. But brimful inventories and lackluster worldwide demand are pushing prices downward--and should muffle any tax-induced gasoline-price spike.

Pump prices are already unusually low. And they may drop a few pennies per gallon more this summer, rather than rising by a nickel or so as they usually do. "I haven't seen the typical school-is-out runup this year," says Barry Miller, owner of Miller's Exxon in Irving, Tex. Indeed, the national average for regular unleaded self-serve as of June 11 was $1.12 per gallon, compared with $1.16 a year ago. "It's a trend that could be reversed, but it appears to be gaining momentum," says Trilby Lundberg, publisher of The Lundberg Letter, which polls 10,000 service stations.

OVERSUPPLY. The downward pressure on prices grew following OPEC's divisive June meeting. After Kuwait raised fears of a production free-for-all by refusing to honor its third-quarter quotas, futures traders shaved more than $1 off crude prices, to less than $18.60 per barrel. Prices have since stabilized, as OPEC-watchers expect Saudi Arabia to intervene if Kuwait and quota busters such as Iran and Nigeria dump enough crude to tank prices. "If West Texas crude goes below $18 a barrel, the Saudis will cut production," says Standard & Poor's oil analyst Edward Graves.

Refiners also face tough fundamentals. Margins, already the lowest since 1988, continue to slip. And stocks of gasoline stand at 225 million bbl., vs. 220 million in a bloated 1992. "The last time inventories were this high relative to demand was 1987," says Ken Miller, an analyst at Purvin & Gertz in Houston.

The longer-term trend is for plentiful supplies, too. OPEC wants to boost its capacity from 26.6 million bbl. of crude a day to 33 million bbl. by 1995--a plan Kidder, Peabody & Co. analyst Bernard J. Picchi calls "outlandish," given worldwide recession and increased production by non-OPEC nations. To raise hard cash, the Russians lifted exports some 30% over last year. Meanwhile, the Iraqis are trying to persuade the U.N. to ease the embargo against its oil exports.

Refining overcapacity is another industry headache. Chevron, Shell Oil, Amoco, and others have shut refineries, taking some 500,000 bbl. a day out of commission since 1991. But upgrading remaining facilities has added a net of 350,000 bbl. a day of capacity, says Purvin & Gertz's Miller. At current sluggish demand levels, "that's about five years' worth of growth," he says. While the Energy Dept. expects U.S. consumption to pick up later this year, gasoline and motor-oil sales dropped 6.1% between the fourth quarter of 1989 and the first quarter of 1993. And recession in Europe and Japan will keep the world market soft.

GREEN FEES. With all these competitive pressures, why haven't gasoline prices fallen even more? The answer in large part: environmental regulation. The Clean Air Act of 1990 forced oil companies to invest in a variety of programs--from gasoline additives called oxygenates that cut carbon monoxide emissions in winter to reformulated gasoline blends that reduce evaporation in the summer months.

Because the regulations depend on local pollution levels and regional weather patterns, there's a jumble of price increases as companies try to pass the costs on to customers. Jerrold L. Levine, Amoco's director of corporate studies, says the company bumped up prices by 2 a gallon over the past three years to pay for programs to increase the vapor pressure of fuels. Last year, consumers forked over an extra 3 to 5 a gallon to pay for the introduction of oxygenates.

That's not the end of the hikes. In 1995, Amoco plans to lift local prices 6 to 8 per gallon for reformulated gasolines required to cut emissions in areas with severe ozone problems. In 1996, Levine says, Californians should begin paying 15 to 20 more a gallon at Amoco stations for special fuels required for the federally mandated Low Emission Vehicle program. Still, Big Oil may not be able to pass on all these environmental costs to consumers. "I'm afraid these companies are going to have to eat a substantial portion of the costs," says economist Philip K. Verleger Jr. of Charles River Associates Inc.

Tax hikes are another matter. Taxes accounted for 28% of gasoline's retail price last year, up from 22% in 1990, says Lundberg. But with prices as soft as they are, American motorists may hardly notice when Washington comes back for more.

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