Gasoline Prices Rise As Fall Election Season Nears

By Keith M. Phaneuf

©The Connecticut Mirror

Democratic state legislators appeared to be out of luck this summer in their bid to make relief at the gasoline pump a campaign issue.

Almost immediately after capping a volatile tax that jacks up gasoline prices when wholesale costs escalate, those costs plunged between April and early July — the time they traditionally rise to their annual peak.

But gasoline prices have spent the latter half of Connecticut’s summer climbing once again — this time during a period when they normally stabilize or begin to creep down.

And with experts saying that it is investor speculation, and not supply and demand, that has created this upside-down year for fuel prices, the gasoline debate is alive and well on the campaign trail.

“We’ve all seen prices creeping back up,” Senate President Pro Tem Donald E. Williams, Jr, D-Brooklyn, said August 17. “What’s most disturbing is the price increase seems wholly unrelated to regular market forces.”

According to the Connecticut AAA, the average retail price of regular gasoline has risen about 20 cents per gallon since it reached $3.75 on July 1.

And Eugene Guilford, director of the Independent Connecticut Petroleum Association, said that over this same period, the average wholesale price at New Haven Harbor rose from $2.74 to $3.08 per gallon.

Normally, fuel prices peak sometime between mid-May and early July, with the approach of summer and heavy travel holidays such as Memorial Day and the Fourth of July.

Majority Democrats in the state legislature were wary when wholesale prices had already exceeded $3.30 per gallon by early April. Consumers paid an average of $4.22 per gallon at Connecticut stations at that time, with the traditional peak period just over a month away.

But prices instead dropped steadily just when they normally rise.

“Much of this year has been countercyclical,” Guilford said, adding it is more confusing when the market forces are analyzed.

Domestic demand for gasoline has been flat or in decline for most of the past two years, Guilford said, adding this is the first time it’s happened since World War II.

Though ailing refineries on the West Coast and in the Midwest have raised some concerns, overall supply and reserves are not in a crisis situation, he said.

Banks Are The Cause

The main culprit, Guilford asserts, is the hope of investment banks and other speculators that the US Federal Reserve soon will launch its third effort in four years to artificially stimulate the national economy.

In 2008 and again in 2010, the Fed bought a huge amount of financial assets, bolstering the value of a wide range of investments and injecting big dollars into the economy.

These “quantitative easings” of the economy, which were dubbed QE1 and QE2, demonstrated to those prepared to invest in fuel commodities the ability to reap huge rewards, Guilford said.

And as evidence that speculators are drooling at the thoughts of a QE3, Guilford noted that the commodity cost of gasoline rose 61 cents on the New York Mercantile Exchange from late June through mid-August.

“If you look at the hard core fundamentals, prices should be going down,” he said, adding this could be a recurring problem until Congress decides that investment banks should be kept out of the commodities market.

Democratic state legislators warned in April of the growing danger of commodities speculation.

Connecticut actually imposes two levies that leave the state with some of the nation’s highest gasoline prices: a fixed, 25-cents-per-gallon tax on retail transactions, and a 7 percent tax on gasoline and certain other fuels when they are distributed to local filling stations and other retailers.

But the state allows fuel distributors, who actually collect and pay the wholesale tax, to pass the cost along to station owners, and through them to motorists. This is part of a complicated system that effectively elevates the 7 percent levy to a rate of 7.53 percent, a system that the state Supreme Court affirmed in 1987.

The cap the Democrats enacted calculates the tax based on an artificial ceiling of $3 per gallon whenever the actual wholesale price rises above that mark.

But Republican Senator Len Suzio of Meriden said Democrats may regret raising the topic of gasoline prices with Connecticut voters.

That’s because state fuel taxes are scheduled to get much higher — regardless of the new cap — starting in July 2013.

That’s when the fourth and fifth increases in a package of wholesale gasoline tax hikes approved in 2005 is set to kick in. And the cap statute contains no provision barring an increase in the overall wholesale tax rate.

“The Democrats are already bragging about the cap to their constituents, but we have a huge disparity in taxes and prices compared with neighboring states,” Suzio said.

According to the AAA, Connecticut’s average retail price of gasoline stood Monday at $3.99 per gallon, which topped prices of $3.94 in New York, $3.82 in Massachusetts, and $3.65 in New Jersey.

And while defenders of Connecticut’s tax system note those other states impose tolls, Rhode Island — which has just one toll road, on the bridge leading to Newport — has an average price of $3.82

And it’s been Connecticut’s wholesale tax — which increased in the summers of 2005, 2006, and 2007 — that has driven overall gasoline prices beyond those in neighboring states.

The 2005 hikes were ordered by the Democratic-controlled legislature and by Republican Governor. M. Jodi Rell to complement what was billed at the time as a major transportation initiative. Between 2005 and 2006, state officials would earmark $2.3 billion for rail, highway. and bridge upgrades, and the fuel tax increases were pitched as necessary to cover the bill.

But in the first five years after those tax hikes were ordered, just 40 percent of the nearly $1.5 billion raised by the wholesale fuel levy was dedicated to the Special Transportation Fund.

More Tax Hikes Coming

A fourth consecutive annual increase in the tax was supposed to take effect in July 2008, but Rell and the legislature delayed it amid skyrocketing fuel prices and media reports of tax revenues used for nontransportation programs.

That increase, plus a fifth and final one, are scheduled to arrive together next July 1.

They would raise the statutory rate from 7 percent to 8.1 percent, and the effective rate passed onto motorists from 7.53 percent to 8.81 percent.

“The maddening thing is that we should have put all of this money into the highways,” said Suzio, who tried unsuccessfully this year to win approval of legislation to cancel next July’s increase. “People are definitely becoming more aware that there’s a double gasoline tax and that something’s wrong with it.”

(This story originally appeared at CTMirror.org, the website of The Connecticut Mirror, an independent, nonprofit news organization covering government, politics, and public policy in the state.)