Gasoline Prices and Electoral Politics Part Two
Our March 7 analysis of the relationship between gasoline prices and political affiliation elicited considerable feedback and some great questions. So I’ve run some additional numbers and attempt to answer some of the queries we’ve received.
Why do Blue States Pay More for Gas?
In our March 7 note we identified a strong correlation between political affiliation and the price of gasoline at the pump. Blue states pay more, on average, than red states and the bluer the state, the higher the price (Figure 1). Note that we aren’t arguing political affiliation causes gas price differences, or vice versa, just observing that the pain of rising gas prices is not evenly spread.
A number of readers pointed out that gasoline taxes are higher in blue states than in red states, which is of course correct. The American Petroleum Institute (API) has compiled a fairly expansive measure of the level at which gasoline is taxed, going beyond excise taxes to include environmental fees, general sales tax, storage tank taxes and other government-imposed expenses. According to the API, drivers in California and New York pay just under 50 cents a gallon in state-level taxes while drivers in Wyoming pay only 14 cents. So I’ve extracted all state-level taxes from Figure 1 and mapped the results in Figure 2. The correlation drops slightly – from 0.51 to 0.42 – but the relationship is still strong, meaning non-tax factors are mostly to blame.
Proximity to refineries explains much of the remaining difference, as transporting gasoline and diesel across the country costs money. In addition, the Merchant Marine Act of 1920 (known as the Jones Act) limits the shipment of products from one US port to another to US-flagged and US-crewed ships, and there aren’t so many of those left. As a result of these two factors, there has been a persistent 15-30 cent gap between the pre-tax price of gasoline on the West Coast (know in the oil world as the Petroleum Administration for Defense District 5 – or PADD V) and the refinery-rich Gulf of Mexico (PADD III) over the past decade. The Gulf is solid red, save Florida (which is in PADD I), supporting the correlation in Figure 2 above.
That correlation has, however, strengthened over the past year thanks to burgeoning North American unconventional oil supply. Rapid growth in tight oil production in North Dakota and other parts of the US and a steady increase in oil sands output from Canada have left refiners in the mid-continent with more crude than they can handle. And a shortage of pipeline capacity means there are few other buyers, giving mid-continent refiners considerable leverage in crude price negotiations. While producers in the Gulf of Mexico are currently getting $130 a barrel for sweet light crude (see Light Louisiana Sweet- or LLS – in Figure 3 below), similar quality oil coming from the Bakken in North Dakota is going for $90 a barrel. Put another way, the difference in price between these two US crude streams is now higher than the average US crude price throughout the 20th century. Sweet light crude from Canadian oil sands is only doing a little better than oil from the Bakken, but heavier West Canadian oil is selling for less than $80 a barrel.
This divergence in crude oil prices is most visible in what drivers in the Rocky Mountains (PADD IV) now pay at the pump. Traditionally, gasoline prices in PADD IV have been pretty close to the national average, but over the past six months a significant gap has opened up (Figure 4). While North Dakota is in PADD II, much of the oil produced in the Bakken is refined in Wyoming, Colorado and Utah (all PADD IV states). And oil production within PADD IV itself has doubled relative to a decade ago. Finally, all imported oil refined in PADD IV is low-cost crude from Western Canada, further depressing Rocky Mountain refinery acquisition costs.
While unconventional oil production is also growing in PADD II and PADD III, consumers in these states are not getting as much relief. That’s because refineries in the Midwest and along the Gulf still buy a lot of oil priced at international levels (whether imported or from the Gulf of Mexico) and because the refined product market in the South and East of the Mississippi is more integrated than in the West. A Jones Act waiver, which recent news reports suggest some in government may be considering, would likely raise prices along the Gulf Coast, but lower them in New England (PADD I) and potentially parts of the Midwest.
Is Income or Driving Habits to Blame for Red State Pain
We also received a lot of feedback on Figure 5 below (labelled Figure 2 in our March 7 analysts), which shows that while Red States pay less per gallon at the pump, longer commutes and bigger cars mean they face higher gasoline costs (measured as gasoline expenditures as a share of per-capita income).
A number of readers asked how much differences in per capita income, rather than differences in car size and commute length, explain the correlation. This is a great question as incomes are, on average, higher in blue states then in red states (though income level is an important variable in assessing how much rising gasoline prices bite). So I’ve mapped out the relationship between political affiliation and per capita gasoline expenditures below to control for income differences.
The correlation is a bit weaker, down from 0.61 to 0.47. But there is a strong relationship between political affiliation and geography (rural states are more likely to vote Republican than urban states) and rural states have bigger cars and longer commutes. Indeed, if you remove state-level gasoline taxes, as I did in the gasoline price question above, the correlation increases from 0.47 to 0.49.