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Gasoline could top $2 per gallon ENERGY: Experts even warn of a $3 price, citing low supplies, power crisis.

February 1, 2001

By ANNE C. MULKERN The Orange County Register

After falling for five months, gasoline prices appear poised to jump to new highs.

Low fuel reserves, scheduled refinery maintenance and the state's electricity shortage could combine to drive prices past $2 per gallon, or even to the unthinkable $3 mark. Industry experts say increases could hit as soon as next month.

Significant price surges likely would be temporary. But if they persisted, increases would wallop consumers by pushing up air fares and prices for all products transported or made with fuel.

"I'm telling you, it's going to be a major, major problem,'' said Tim Hamilton, an industry consultant who was on the state attorney general's task force that studied California fuel prices last year.

Gasoline prices have drifted down since September, when the state average hit a record $1.85 per gallon for regular. The average price Monday was $1.59.

Fuel prices typically fall in winter, however. And this winter's low is higher than those of recent years. At the end of January 2000, the state's average price was $1.38 per gallon. A year before that, it was $1.11.

An energy consultant who has tracked 20 years of fuel costs said crude-oil prices already are headed up from their winter low. Gas prices usually follow, said Walter Zimmerman, vice president of United Energy, a New York City brokerage and consulting firm.

Zimmerman said data he has analyzed show gasoline spot prices - the wholesale market where extra supplies are sold - could hit $1.50 per gallon this summer. That's the price before 45 cents to 50 cents in taxes and the dealer's profit are added.

"You're looking at a potential new all-time high for gasoline prices,'' Zimmerman said.

Barring an economic downturn that depresses demand, price increases could start in March, when refineries start shutting down to perform lengthy annual maintenance.

Oil refiners for the past 18 months haven't built up reserves because they anticipated lower crude prices. That leaves little cushion when production levels drop.

Nationwide, inventories are about the same level as last winter, which was a 10-year low, said Tancred Lidderdale, a federal Energy Information Administration economist.

In California, winter and spring refinery shutdowns often trigger price increases. Plants often have problems restoring operations because the state's cleaner-burning fuel requires a precise balance of components. In March last year, for example, the state's average price hit $1.79 per gallon.

"We call it the spring flu,'' said Jay McKeeman, executive vice president of the California Independent Oil Marketers Association.

This year, a new factor enters the scene as the state's power shortage threatens fuel production. Refineries are not exempt from scheduled blackouts.

Some of the state's largest refineries - such as BP-Arco and Chevron - make their own power and probably wouldn't be hurt by outages.

But others, such as the Exxon-Mobil refinery in Torrance and the Valero refinery in Benicia, north of San Francisco, depend on utilities' power. Exxon-Mobil is the fourth-biggest refinery in the state. The Valero refinery, the sixth-biggest, produces 10 percent of the state's fuel supply.

Valero officials want to add generators but say it's unclear whether they would be approved and available by the time summer arrives. Exxon-Mobil has no immediate plans to add generators.

"If we have a couple of electricity problems or we have a refinery outage, we'll be at $3'' for a gallon of gasoline, said Philip K. Verleger, an energy economist based in Corona Del Mar. In December 1999, Verleger correctly predicted that pump prices were heading toward $2 per gallon.

If power is knocked out at a refinery, it usually takes at least three days to get the refinery operating again.

"We are very concerned about the summer,'' said Valero spokeswoman Joanne Weidman. "If electricity is out for 10 seconds, or 10 hours, it has a pretty devastating effect on a refinery. We lose quite a bit of production.''

If refinery maintenance or power outages cut production, fuel supplies would tighten. Refineries then would start to watch how much fuel is sold per day and ratchet up prices until the demand drops to meet the reduced production level, said Hamilton, the industry consultant.

To reduce demand by 10 percent in California, he said, pump prices would probably need to hit $3 per gallon.

Even if refineries somehow escape those operational problems, the current volatility of crude prices makes gasoline more vulnerable to price swings, analyst Lidderdale said.

The Organization of Petroleum Exporting Countries, or OPEC, is trying to increase crude prices by cutting production by 1.5 million barrels per day.

Refiners who are concerned about price changes will only make as much gasoline as they need to meet immediate demand. That supply tightness often leads to higher prices.

"It's the uncertainty that's the source of many of the problems,'' Lidderdale said.

-- Martin Thompson (, February 01, 2001


Martin, I was just speaking to some family members today on my gut feeling that we were going to start paying more at the pumps...... Wa- la *Maybe* But sure hope not!

-- lurker (, February 02, 2001.

Gasoline Prices Are Primed to Rise Again This Summer Thursday, February 1, 2001 01:04 AM ET

Gasoline prices are likely to rise at the pump this summer, in part because of the price of natural gas, which is crucial in the production of MTBE, a high-cost gasoline component that reduces tailpipe emissions, Thursday's Wall Street Journal reported.

Another reason is the recent decision by the Organization of Petroleum Exporting Countries to trim crude-oil production by 1.5 million barrels a day.

Natural gas is used to make methanol, a primary ingredient in MTBE, whose full name is methyl tertiary butyl ether. But with natural gas having soared above $10 a million British thermal units in late December on the futures market, "it doesn't make economic sense to produce" methanol, says George Beranek, an analyst at Petroleum Finance Co., a consulting firm in Washington, D.C. Indeed, analysts say as much as 50% of North American methanol production capacity is idle. Although natural-gas prices have declined to about $6 per million BTUs currently, that's still far above the level of about $2 per million BTUs a year ago.

As a result, "we don't see starting off the driving season any better than last year," says Dave Costello, an economist with the Department of Energy's Energy Information Administration.

The price of MTBE also has risen, but not enough to offset the sharp increases in natural-gas prices. Indeed, MTBE prices jumped by nearly 37% to a high of $1.41 a gallon in January from a low of $1.03 a gallon a month earlier. Still, some refiners have stopped making the chemical temporarily. For example, Valero Energy Corp. in San Antonio dropped its MTBE production from mid-December to about mid-January by more than half, to 7,000 barrels a day. Overall, the industry has cut back by 80,000 barrels a day, or about 35%, Valero says. As a result of the lower MTBE supplies, both reformulated and total gasoline production fell about 4% during the period. story=/news/stories/dj/20010201/on20010201000013.htm&department=0

-- Martin Thompson (, February 02, 2001.

MTBE as an additive should be banned. It has already contaminated a number of water supplies. The gubbermint may have to relax standards to allow adaquate production.

-- John Littmann (, February 04, 2001.

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