Previous sections of this Issue in Depth have highlighted the central role of properly functioning markets to every nation’s energy securityA complex concept meaning many things, energy security is most often used in a narrow sense to indicate the stability of a country’s supply of energy. (see “The Evolving Concept of Energy SecurityA complex concept meaning many things, energy security is most often used in a narrow sense to indicate the stability of a country’s supply of energy.”). But not all markets function properly. In fact, some have inherent flaws that distort the way they operate. This section will examine one such imperfection that fragments demand in the American market for oil: “ boutique” gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. regulations.

The constitutional power of states and localities in the United States to regulate commerce within their borders has created a complex patchwork of different fuel standards that vary from region to region. Fuel suppliers must tailor gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. to the exact specifications of each area in which they want to sell their product. Thus instead of one unified national supply chain for oil there are many individual distribution arrangements for 18 boutique gasolines.¹

The danger is that the proliferation of boutique gasolines makes it difficult to allocate oil stocks during a supply disruption because available gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. might not meet local specifications. Shortages created by such artificial fragmentation of the market can lead to price jumps that hurt all consumers, as was the case in the aftermath of Hurricanes Rita and Katrina in 2005.²

Many argue that the various fuel regulations of different states should be harmonized into a single national standard. But harmonization would be a complicated and costly process. Local standards were developed largely as a result of the differing needs of localities in the U.S. with respect to air quality. Some areas have worse air quality than others and require the use of more refined, expensive gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. to avoid further damaging the environment. Since any national standard would probably fall on the more rigorous end of the spectrum, harmonizing local standards would raise energy costs for consumers who live in regions with clean air but who would nonetheless be forced to pay premiums for more refined fuel.³

Although boutique standards do indeed complicate the oil market, harmonization is not necessarily the best solution. This dilemma is another example of the complexity involved in many energy policy debates.

1 Yacobucci, “Boutique Fuels,” 1

2 ibid., 1

3 ibid., 2

Next: Appendix C. Hubbert’s Peak Theory