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Are you a highway user who wants to travel on safe, less congested roads?
Join Andrew Stasiowski, President and CEO of the American Highway Users Alliance, as he speaks with leading experts about the latest policies impacting the transportation community. Each month, Andrew will cover topics of critical importance to the highway user community, from reducing congestion on roads, to reforming highway trust funds, to increasing global competitiveness.
Listen to new episodes of “Driving Forward” wherever you get your podcasts.
The American Highway Users Alliance is a nonprofit organization advocating for public policies that promote roadway safety, increase freedom of movement, and preserve opportunities for all people to live, work, shop, and travel unencumbered.
To learn more about AHUA, you can visit our website.
Andrew Stasiowski.: Welcome to the Driving Forward Podcast. I'm your host, Andrew Stasiowski of the American Highway Users Alliance. First, here is your Washington update.
On the day before Thanksgiving, the Federal Highway Administration released its long-awaited final rule on greenhouse gas performance measurements on the National Highway System. This rule imposes measurement targeting [00:00:30] and reporting requirements on states with the objective of reducing greenhouse gas emissions from the transportation sector, specifically CO2 tailpipe emissions.
In October of 2022, when the rule was first published, the Highway Administration submitted comments in opposition to this rule. We encouraged the Federal Highway Administration to withdraw the rule as they did not have the authority to propose this rule for multiple reasons, primarily because the rule was considered by Congress and rejected [00:01:00] during the negotiations of the Infrastructure Investment and Jobs Act. The final rule made several changes from the original proposal, notably by removing the requirements for a state to set a declining emissions target that would meet the Biden administration's net zero goals. While the elimination of the need to meet the Biden administration's net zero goals will give states some flexibility in meeting the requirements of this rule, the rule as structured will still require states to set targets to achieve a decline in tailpipe emissions. This is especially problematic for [00:01:30] states that are growing in population and increase in economic output. Furthermore, states which do not have a strong electric vehicle market will have difficulty in meeting the reduction goals of this rule.
The highway users were pleased that the Federal Highway Administration chose to change the baseline year for measuring reductions in greenhouse gas emission levels from 2021 to 2022. As we stressed in our comments, 2021 was not a realistic or fair baseline as it was still in the middle of the pandemic and economic activity was down significantly. [00:02:00] 2022, as the baseline, is an improvement over 2021 is a more realistic reflection of the economic output. Despite these changes, the highways remain opposed to the rule as we believe it penalizes and or discourages investments in highways and adding badly needed capacity to our interstate system.
The Federal Highway Administration has published the rule in the Federal Register, and the rule will go into effect early next year. The highway users are already working with members of the House and Senate [00:02:30] on using the Congressional Review Act to overturn this rule from the Federal Highway Administration. While it is possible that this CRA could pass the House and Senate, it is certain that President Biden will veto the CRA and there are not enough votes to override his veto in Congress. The highway users have also heard that State Attorney Generals are considering filing a lawsuit to challenge this rule as it violates the major questions' doctrine language in West Virginia v. EPA Supreme Court decision [00:03:00] last year. Stay tuned for more information from the highway users on the Greenhouse Gas Performance Measurement rule.
Welcome to the Driving Forward Podcast. Today we're going to be talking about a very important subject to everyone who used the roads. Today we're going to talk about gas prices. Joining us is Dustin Meyer. Dustin is the Senior Vice President of Policy economics and Regulatory Affairs for the American Petroleum Institute.
[00:03:30] Dustin, welcome to the Driving Forward Podcast.
Dustin Meyer: Thank you very much, Andrew. Great to be here.
Andrew Stasiowski: Thank you. This is our second podcast, and I think today's subject is very timely. As it's the holiday season, a lot of people are going to be getting in their cars maybe to go see the grandparents for Christmas or just for the vacation break. And as you're driving, you may look at the gas station signs and say, "Gas is a little high," or, "Gas is a little low." So I thought this would be a great time to kind of dive into [00:04:00] that a little bit and understand what goes into the gas prices and why prices fluctuate so much. I think most people, when they think about oil and gas, they think of what goes in their cars, but you guys, the oil and gas products are much broader than just fuel and oil. Can you talk a little bit about all the different products that oil and gas is used for?
Dustin Meyer: Yeah, it's a great question and it's a great reminder of just how useful crude [00:04:30] oil and natural gas really are. You're right that by far the most common use of crude oil and crude oil derived products would be gasoline. You can think of if you're looking at one barrel of crude oil, roughly about 40% of it is turned into gasoline. Another big chunk, maybe around 30% or so is turned into diesel fuel, those both very common on-road uses and applications, but you go beyond [00:05:00] that. You get to jet fuel anywhere from six to 10%. Obviously, very important as we go into the holiday season. In many parts of the country, and this is even more true in other parts of the world, heavy fuel oil that's used often for indoor heating, for residential heating applications, as well as oftentimes maritime fuel, and then you get all the way down into more derivative products like asphalt. And then another big one, of course, that you'd have to add to the list would be petrochemicals, [00:05:30] and that includes a lot of plastics and plastic related products. That can be almost up to about 10% of a crude oil barrel.
So you can see that there are many different uses just for crude oil. And then, of course, the same question can be asked for natural gas, and there's a number of different uses for natural gas as well.
Andrew Stasiowski.: Right, definitely. Obviously the price of gas, we're always hearing about, "Well, I paid $3.50 when I filled up today in Maryland, [00:06:00] but I saw the barrel of gasoline was $75." I don't know if that's what it's right now, but how do those two tie together? Obviously, taxes play a big portion of what goes into the price of a gallon of gasoline for the consumer, but what else goes into that?
Dustin Meyer: Yeah, you're right at highlighting the single most important component in terms of what is the price of a gallon of gasoline. The single most important driver of that is and always has been, well, what's the price of oil? Gasoline [00:06:30] is derived, it's distilled and refined from crude oil. That's the biggest input cost, so what is the price of crude oil? That's going to have the biggest impact on the price of gasoline? And so, most of the time, when you're looking at the publicly posted price on your local neighborhood gas station and you think, "Oh boy, it seems like it's down quite a bit from where it was last month," or, "It's up quite a bit from last month," almost always the explanation is, well, there was a change in crude oil [00:07:00] prices. Crude oil prices, which are set a dollar per barrel, those are globally traded prices, extremely liquid, very heavily traded, very transparent, and those are very responsive to swings and supply, demand, geopolitical events, all of these things are factored into the price of crude oil, which is then a big part of driving the price of gasoline.
Really, the major other component [00:07:30] that sets the price of gasoline, especially retail gasoline, the price that you actually pay at the pump, would be state taxes. And this gets a little confusing because different states tax gasoline and diesel very different ways. Some have de minimis taxes, some have very high taxes, and therefore, that drives a big difference. You can see sometimes more than a dollar per gallon difference in state A versus [00:08:00] state B, and almost always the primary driver of that is the difference in the state taxes.
Andrew Stasiowski.: Okay, that makes a ton of sense. You mentioned a lot of the different things that impact price, but I've heard this a lot in that gasoline is a futures market or oil is a futures market, and so while we may be producing a lot of oil and gas now domestically, a lot is because permits [00:08:30] were approved in the past, which is why we're getting the oil now. So what is the future impact of that have? If we're seeing more permanent reform making harder to get oil and natural gas, what impact does that have on the current price versus the future price?
Dustin Meyer: This is a bit of a complicated topic because you're right that these prices are set on the marketplace. And because these prices are so liquid in terms of how they're developed because they're so transparent, because there's so many derivatives associated [00:09:00] with them, because there are so many traders and buyers and sellers in this place, the market does an extremely good job of setting the price based on its best estimate of supply and demand factors at any given point in time. Because it is such a highly traded market, this is also one of those commodity markets that has a forward curve. So it has futures curves. So if you're interested in participating in this market, you can buy today's levels, the spot price, or [00:09:30] you can make a bet on where the price is going to be next year or the year after or going well into the future.
Once you get really out on that forward curve, or the strip as we call it, that's when you start to understand the market's perception as to what the risk factors are. Is there going to be not enough supply? Is there demand going to fall? That's where you can start to see that play out, whereas the spot prices really [00:10:00] reflect, what are the supply demand dynamics that the market sees right now here today?
Andrew Stasiowski.: Okay. We've been very active with the highway users in permitting reform. And we've been working with... We've submitted comments to CEQ. Obviously, we've worked with Congress and others to make sure that road projects, energy projects are being approved in a timely manner that we're really making sure that we're getting these projects out there. Where are you seeing permitting reform? [00:10:30] Where are you seeing the permitting... I don't want to say permitting regime, but the permitting process under where we are today?
Dustin Meyer: Yeah, I think that the need for permitting reform is better understood now than ever. I think that's becoming better understood by both political parties because so many different parts of our economy, so many different industries are running smack into a lot of the same permitting challenges [00:11:00] that our industry has been confronted with for the better part of the last 15 or 20 years. It is very difficult to build a new interstate natural gas pipeline in the United States these days. Well, everybody knows that, but what's becoming newer is the fact that, well, it's becoming very difficult to build offshore wind in the United States. It's becoming very difficult to build a new bridge in the United States. It's effectively becoming difficult to build any major infrastructure [00:11:30] of any type in the United States these days because the permitting process is so onerous and so difficult.
Now, it's important that no one in this conversation right now over the need for permitting reform is suggesting that, oh, we need to do away with environmental review or we can ignore the environmental impacts entirely. That's not what this conversation is about. This conversation is about, how do we make sure that we have a permitting process that is clear [00:12:00] and transparent and timely and fair so project developers, when it is completed, they know that they can build their project based on the schedule that has been approved? And right now, we just don't have that. There were some modest legislative improvements that were made earlier this summer as part of the fiscal package. Those were minor steps, and I think really just a beginning as to what this country really needs to make [00:12:30] sure that we can build the infrastructure that we need to not only meet existing demand but do so in a way that's more affordable and cleaner, which is exactly what the American consumer I think really expects.
Andrew Stasiowski.: How long does it take to actually get a permit for an energy project, whether it's a oil well or offshore, onshore, whatever it may be?
Dustin Meyer: Yeah, I think, especially when it comes to the sorts of projects that require federal government [00:13:00] approval, those can easily stretch to four to seven years just to get the initial permit. And then, very often, you see, once that permit is finally issued, it's immediately facing a legal challenge, which can be another couple of years. Again, it's just a real problem for developers of all sorts. It's not just our component of the energy value chain that's experiencing this. It's really all aspects of the energy value chain. [00:13:30] And I think a lot of folks are just realizing that can't persist if we're really going to meet the challenges that we have in the future.
Andrew Stasiowski: Now, I think I've heard this, and you can correct me if I'm wrong, but you need a permit to drill, but you also need a permit to actually extract the oil out of the ground. Is that true?
Dustin Meyer: Well, it depends on where you are, but certainly, if you're operating on federal lands or on federal waters, and we get a decent amount, about 25% of our oil and gas production [00:14:00] comes from federal lands and waters, so it's a major part of our overall production portfolio here in the United States, the bedrock, the baseload, if you will, of our energy production here, and when that's the case, yes, you have to get a series of permits at every step of the process to give you the clearance to go ahead.
Andrew Stasiowski.: All that time, all that effort goes into the cost of oil that we as consumers pay at the pump, and I think we can [00:14:30] understand that. But one of the issues that the highway users are really focused on is this idea of economic security. And I know when we work with you guys and in a lot of our outreach to Congress or the administration, we talk about the need to have greater economic security for our infrastructure, for our energy projects. What does that mean for API and American-made energy projects to have economic security?
Dustin Meyer: [00:15:00] Yeah, I mean, I think it's hard to overstate the importance of affordable and reliable energy to the American consumer. Your listeners, of course, will remember just last summer when average gasoline prices in the United States went above $5 per gallon for the first time, and the amount of pain that that caused for the consumer, the role that played in driving up inflation across the board. That was a real concern and it was very acute, and it's a reminder [00:15:30] of just how much we take for granted the reliable and affordable supply of energy that we've more or less experienced for the better part of the last 10 years.
Demand is increasing. It's not decreasing. And so, if that's the case, we have to have a policy framework that allows us to produce the supply that is needed to meet that demand. Furthermore, we need a permitting process that allows us to build the infrastructure [00:16:00] that gets that product from where it's produced to where it is consumed. And right now, on both fronts, there is a lot of open questions as to whether we will really be able to do that effectively in the next five years, in the next 10 years. And that's a very big concern. It's a concern for us at API and it should be a concern for American consumers as well.
Andrew Stasiowski: Oh, absolutely. I think you touched on one of the derivatives of a barrel of oil is asphalt. [00:16:30] How much does that impact the ability to deliver projects if the cost of oil is going up for asphalt? And asphalt's especially used on a lot of local projects like local roads, not necessarily always highways, but how does that impact asphalt and construction projects?
Dustin Meyer: Yeah, it has a major impact, and asphalt, in many ways, is such a great example because it's not one of the obvious products that you associate with the price of a barrel of oil like what gasoline or diesel would [00:17:00] be, but it is impacted as are so many other products, and it's a reminder of just how pernicious rising energy prices can be to just overall economic growth.
We are experiencing this bout of inflation in a serious way really for the first time in a couple of decades. For you and I's generation, we've never really experienced this before, and you can start to feel the role that energy and higher energy prices can play [00:17:30] in furthering this trend because it has its way of just getting into everything. It causes the price of everything to go up. It causes the price of fertilizer to go up, which is primarily derived from natural gas. That means your food prices are going up. It increases prices for delivery, which means all of your other prices are going up.
Again, it's this very pervasive and pernicious component of our economy that, really, we can only maintain by ensuring that there is [00:18:00] this adequate supply and that we're always able to meet the demand, not just today, but the demand going forward because inflation, higher energy prices, it's one of these problems where too often, once you're experiencing it, it's a little late to really do anything about it. You have to have very sound proactive policymaking to ensure that your economy never really finds itself in that position in the first place.
Andrew Stasiowski.: I think [00:18:30] one of the things that we always hear about whenever maybe there's a natural disaster or whatever it may be, that the first thing is, oh, we got to look out for price gouging. Can you explain a little bit about what price gouging is and just why the cost goes up in a natural disaster versus it's not just someone trying to gouge you, but it's really just, like you said, it's a supply and demand issue?
Dustin Meyer: Yeah, that's exactly right. And we get these questions [00:19:00] a lot, especially during times of high prices and the industry and the government itself. The FTC has explored this issue countless times and they've never found any evidence of price gouging, and the explanation for that is really quite simple. You have extremely transparent markets here. You have transparency in terms of retail gasoline prices. It's posted publicly at every retail gasoline station in the country. You also [00:19:30] have very transparent prices for wholesale gasoline at RBOB, and you have very transparent prices for crude oil in terms of West Texas Intermediate. These are hugely transparent, very heavily traded markets.
Whenever you have something like that, price gouging as a principle, is technically impossible. There are so many buyers and sellers, you can think of it if there was somebody, your local gas station, if they tried to elevate the price [00:20:00] and we're going to sell gasoline for a dollar more than what our competitors are, well, consumers would see that immediately and they wouldn't buy gasoline there. So the market is extremely effective when there's this much transparency at regulating that sort of thing. So when we get questions about that, we understand it's painful when folks experience high prices, but there's just no evidence to suggest that any amount of price gouging is happening in these markets.
Andrew Stasiowski: And it's a pretty low margin. I mean, you're not making a lot of money [00:20:30] on a gallon of gasoline, right?
Dustin Meyer: Yeah, which is what you'd expect when you have not only very transparent, highly liquid, but very efficient markets. There just isn't really any room for price gouging of the sort that people often inquire about.
Andrew Stasiowski.: I want to move on to another topic. A lot's being discussed about electric vehicles and the transition through the EPA and the state of California and others on moving towards eliminating their [00:21:00] internal combustion engine or limiting ICE vehicles from entering the market. What kind of impact would that have on you guys as more EVs come on the market?
Dustin Meyer: Yeah, that's a good question. I think most outlooks for gasoline demand and even more so for diesel demand suggests that demand for those products are going to remain quite robust even if you assume pretty high adoption rates for EVs. I think the bigger [00:21:30] concern that we have is just what this does for consumer choice. We have absolutely no problems with EVs. They're wonderful choices for a lot of drivers, and it's a good thing that consumers have more choice when it comes to their automobiles and their energy more broadly. But we think that that choice should be maintained.
And unfortunately, what we see with a lot of these heavy-handed, very Draconian policies, be it coming from the state of California or to a certain extent now from the [00:22:00] federal government with some of their new tailpipe proposals, is they're actually doing the opposite. They're removing choice from the marketplace and they start to look a lot more like mandates. And that's where we get uncomfortable because we think that you're depriving consumers of the choice that they should have when they go to pick out a new car. And we think that that is just fundamentally a misguided approach to reducing emissions in the transportation sector.
Andrew Stasiowski.: I know that people want to look at [00:22:30] just going to EV because they don't have any tailpipe emissions, but aren't there other ways we can reduce the emissions from the transportation sector that are not simply, as you say, moving towards one type of vehicle?
Dustin Meyer: Yeah. To begin with, internal combustion engines have become dramatically more efficient on their own just in the last 10 years, certainly in the last 20 or 30 years. So there's a lot of progress that can still be made there. The liquid fuels themselves, I think the industry has learned [00:23:00] a lot about how to blend them with biofuels, with advanced biofuels. There's a lot of research being developed in there to lower the overall emissions' intensity of those feedstocks and of the resulting fuel stocks. So I think that there is a lot of progress that can be made to supplement the increasing interest in electric vehicles, which again, for a lot of consumers, electric vehicles, both now and in the future, might be a wonderful choice for them, but there's a lot of folks that aren't there yet [00:23:30] for one reason or another. And we think, for those folks, the option should always remain to buy the vehicle of their choice.
Andrew Stasiowski.: Now, if you're making these new blends, I think you're talking about the low carbon fuel standard. Does that come with an additional cost to the consumer?
Dustin Meyer: It depends. It depends on the regulatory framework that's in place. It depends on the nature of the feedstock that is being used, but it is possible to overall lower and reduce the emissions' intensity of [00:24:00] that liquid fuel, which would allow consumers to maintain their internal combustion engine and get the performance that they're looking for out of their automobile.
Andrew Stasiowski.: We like to end our interviews here at the Driving Forward Podcast, if you could just snap your fingers, wave a wand and implement one policy that would be beneficial to the public in lower gas prices and whatever, other goals you may have for the oil and gas industry, what would it be?
Dustin Meyer: [00:24:30] That's a very good question. I do think it would be a clear and consistent and workable permitting process for energy projects of all sorts. I think that the productive capacity of the US industry is absolutely massive. The resources that we have in ground are enormous, and that is not questioned. The only question is whether we [00:25:00] have the policy frameworks in place, that we can bring that production onto market and get it to where it is in demand. And I think that that would do a lot in ensuring that prices are both more stable and across the board just lower and more palatable for the American people. I think that that really is at the crux of so much of the conversations that we're having about the future of energy today.
Andrew Stasiowski.: So we're not at, I guess the term was always peak oil, where [00:25:30] we have much more supply than people think do.
Dustin Meyer: Yeah, we have so much, and it's a useful reminder that the United States is right now, by far, the world's largest producer of crude oil. We are, by far, the world's largest producer of natural gas, and that is a dramatic transformation from where we were just 10 or 12 years ago. And there's so much that has happened over the last couple of years, especially following the invasion of Ukraine last spring. That is a reminder [00:26:00] of the importance of having that productive capability here in the United States. It's so easy to run the counterfactual and think of how painful these last 18 months could've been if instead of producing 13.2 million barrels per day, we were producing five and a half million barrels per day. And instead of supplying oil and natural gas to the rest of our allies around the world, we were out there competing for those same volumes with those allies. It would've been a very different outcome. [00:26:30] It would've been very, very painful. And the only reason why we didn't have that is because of this unconventional shale revolution that we've had here in the United States.
Andrew Stasiowski.: Absolutely. All right. Well, Dustin, I wanted to thank you very much for joining us today. It was a great conversation and hopefully we'll have you back again sometime soon.
Dustin Meyer: Thank you, Andrew. I would love to come back.
Andrew Stasiowski.: All right, well, thank you for listening to the interview with Dustin today. I think it was a great conversation and I hope [00:27:00] you guys learned a lot about all the different factors that go into gas prices. Please listen and follow to the Driving Forward Podcast wherever you get your podcasts. This will be the last episode of the Driving Forward Podcast in 2023. I wish all of you happy holidays and a happy New Year and we will return in 2024 with an exciting lineup of guests and topics to discuss.
Speaker 3: VOXTOPICA.