Business & Technology : Tuesday, March 06, 2001

Gasoline prices may soar again this summer

By Mark Shenk Bloomberg News

NEW YORK - The high cost of natural gas may claim another victim this summer: the American motorist.

Gasoline pump prices soared to records above $2 a gallon last spring because refiners had trouble making new grades of cleaner-burning reformulated gasoline, which the government required for the nation's most densely populated regions.

This year, the refiners are facing a different problem. They can't get their hands on enough MTBE, a reformulated gasoline additive that's derived from natural gas.

A quadrupling of natural-gas prices last year made it more profitable for gas companies to sell the fuel directly to power producers without stripping out MTBE components for refiners.

"Because of the high price of natural gas, you are not extracting the blending compounds used in reformulated gasoline," said Marianne Kah, chief economist at Conoco in Houston, the fourth-largest U.S. oil company. And the fuel's specifications are "more stringent, which makes it tougher to bring in imports."

MTBE, or methyl-tertiary butyl ether, is classed as an oxygenate. About $3 billion of MTBE is consumed in the U.S. each year. It's made from methanol and butane and is used to meet clean-air standards by helping gasoline burn more completely, cutting down on tailpipe pollutants.

About 87 percent of reformulated gasoline in the U.S. contains MTBE.

The other major oxygenate is ethanol, a form of alcohol derived from corn. Ethanol use is limited mostly to the Midwest because it's difficult to transport over long distances.

Last year's supply disruption was centered in the Midwest, where refineries had trouble gearing up their plants to meet new federal regulations covering some of the dozen-plus grades of cleaner-burning gasoline required in various U.S. localities.

This year, motorists on the East and West coasts may be the ones who suffer most.

MTBE goes for $1.295 a gallon on the Gulf Coast, 22.5 cents more than this time a year ago. Since MTBE makes up about 10 percent of a gallon of reformulated gasoline, the increase translates to a rise of about 2.25 cents a gallon in retail prices. An MTBE shortage would make it difficult to make enough reformulated gasoline, sending motor-fuel prices higher.

"You are going to see the same situation we had last year going into summer," said Ed Silliere, a trader at Energy Merchant in New York. "Everything suggests very high prices."

The dearth of MTBE supplies follows a drop in natural-gas inventories last fall of almost 40 percent from a year earlier. The shortfall came as industrial demand grew faster than producers could extract gas from wells in the U.S. and Canada.

The coldest November-December in more than a century sparked fears that there would not be enough gas to last through the winter heating season and prices skyrocketed, reaching a record $10.10 per million British thermal units on the New York Mercantile Exchange at the end of December from around $2.20 at the start of the year.

A crisis in making electricity for California contributed to the rally, as power companies competed for the tight supplies.

With prices so high, producers couldn't justify stripping butane and methanol out of the gas for refiners to use in gasoline production.

Many refiners closed MTBE units during the past two months. In January, MTBE production fell 11 percent to 142,000 barrels a day, the lowest level since March 1995, when the reformulated program was just beginning, according to the Department of Energy. Inventories are down 14 percent from a year ago.

While some plants have reopened, such as Enron's 13,500-barrel-a-day unit in La Porte, Texas, demand still exceeds supply, traders said.

MTBE prices on the U.S. Gulf Coast are up 18 percent from a year ago. Natural-gas futures, while they've fallen back from the record high, still are up 89 percent from this time last year.

Retail gasoline in 2000 surged 32 percent from the start of the year to June 19, as refiners had trouble coping with new government mandates for reformulated fuel.

The average U.S. price of regular gasoline that week reached $1.681 a gallon, according to a DOE survey of 800 service stations, the highest price in the survey's 10-year history. Prices climbed above $2 a gallon in some Midwest cities.

Nationwide pump prices for gasoline this summer are expected to average about the same as last year - $1.50 a gallon - and once again, a shortage of reformulated grades may send prices surging in some localities.

"We are going to have problems every summer for the foreseeable future," said Sarah Emerson, managing director at Energy Security Analysis in Wakefield, Mass. Other changes to gasoline formulas imposed by federal regulators are increasing costs, some refiners say.

Premcor closed an Illinois refinery in January because it would be too expensive to upgrade the plant to make low-sulfur fuels.

For many refiners, though, this summer looks like another winner after years of thin profit margins and costly environmental investments.

"We should go into the driving season with low inventories and then the margins should shoot up," said William Greehey, chief executive of San Antonio-based Valero Energy, the second-biggest independent U.S. refiner.

While economic growth is slowing, demand for gasoline will still be high this summer, Greehey said. "We'll be set up very nicely."

http://archives.seattletimes.nwsource.com/cgi-bin/texis/web/vortex/display?slug=summergas06&date=20010306

-- Martin Thompson (mthom1927@aol.com), March 06, 2001

Answers

MTBE is usually only used in the winter - not the summer!

The EPA has ordered the phasing out and banning of MTBE because of ground-water contamination from leaking gas tanks. Does anyone know what year MTBE is supposed to be banned?

The author of this article seems to have some facts wrong.

MTBE also is known to cause asthma and other respiratory problems in allergic or sensitive individuals.

slza

-- slza (slzattas@erols.com), March 06, 2001.

Slza,

Who's got their facts wrong? Refiners have to lower gasoline vapor pressures in the summer to avoid evaporation. The lowest vapor pressure high octane additive is MTBE. Hence it is used MORE EXTENSIVELY in the summer to hit specs, especially reformulated gasoline specs. The spot market for reformulated gasoline hit 10-11 cents over conventional gasoline on the Gulf Coast yesterday because of less MTBE available. MTBE makes up about 6% of our gasoline pool [u]but its the highest octane component[/u]. What are we going to replace it with when it gets phased out in 2002? Answer: Gasoline shortages! Ethanol, light ends such as butane and other oxygenates have vapor pressures that are much higher. They burn cleaner cause they contain more oxygen but this also causes evaporation complexities.

-- Downstreamer (Downstreamer@aol.com), March 07, 2001.

See http://www.eia.doe.gov/emeu/steo/pub/special/mtbe.html for details of MTBE usage (the US Dept of Energy webpage on "MTBE, Oxygenates, and Motor Gasoline"; it was last updated in March 2000; at the end of the webpage are links to lots of other official sources of information).

My reading of the DOE information is that MTBE is definitely to be banned in California but that a U.S. national ban is not yet finalized--is my reading correct?

Another official government source for information is the U.S. Environmental Protection Agency, at http://www.epa.gov/mtbe/

From the EPA website, note these two sections:

[begin snip]

Movement and Disposition of MTBE in the Environment

What happens when MTBE gets into the environment?

Because MTBE dissolves easily in water and does not "cling" to soil very well, it migrates faster and farther in the ground than other gasoline components, thus making it more likely to contaminate public water systems and private drinking water wells. MTBE does not degrade (breakdown) easily and is difficult and costly to remove from ground water.

How long will MTBE remain in water?

MTBE is generally more resistant to natural biodegradation than other gasoline components. Some monitoring wells have shown little overall reduction in MTBE concentration over several years which suggests that MTBE is relatively persistent in ground water. In contrast, studies of surface water (lakes and reservoirs have shown that MTBE volatilizes (evaporates) relatively quickly.

[. . .also. . .]

What the experts say about MTBE

What did the Blue Ribbon Panel conclude and recommend?

In response to the growing concerns regarding MTBE in water, EPA’s Administrator Browner appointed an independent Blue Ribbon Panel of leading experts from the public health, environmental and scientific communities, fuels industry, water utilities, and local and state governments. They were charged to investigate the air quality benefits and water quality concerns associated with oxygenates in gasoline, and to provide independent advice and recommendations on ways to maintain air quality while protecting water quality. They concluded, among other things, that MTBE detections have primarily caused consumer odor and taste concerns, and that in rare instances MTBE has been found in drinking water supplies at levels well above EPA’s drinking water advisory and some state standards.

The Panel recommended the following:

-- Removing the current congressional CAA requirement for 2 percent oxygen in RFG

-- Improving the nation’s water protection programs, including over 20 specific actions to enhance Underground Storage Tank, Safe Drinking Water, and private well protection programs

-- Reducing the use of MTBE substantially nationwide

-- Maintaining current air quality benefits

-- Accelerating research on MTBE and its substitutes

[End snip from EPA website]

As I understand the issue (speaking as a physician-epidemiologist with some enivironmental medicine background but not now working in this specific area): In the short term, it is obvious that even low levels of MTBE in drinking water are detectable by many people and render potable water supplies very unpleasant or unusable. Some people may have asthma exacerbations and allergic reactions. I seem to recall that the TV show "60 Minutes" had a piece on this problem last year.

The long-term health effects of MTBE at low levels are unclear but based on its chemical structure it is reasonable to suspect MTBE could be a human carcinogen (cancer-causing chemical). This is true of lots of other chemicals. The question is, which ones are least toxic and have the least potential to spread through the environment.

On this latter point MTBE scores poorly indeed: it seeps through the water table rapidly and cannot be easily removed (if at all), nor does it readily break down or evaporate from undergorund water supplies. Unlike some other chemicals, once it gets into underground water supplies those supplies are going to be messed up for a very long time.

Oxygenates (liquid fuel additives intended to reduce harmful emissions) are not inherently bad--the air quality issues are quite important. And as noted by Downstreamer in this thread, removing MTBE will cause an immediate drop in gasoline supply. But there is a tension between putting additives in fuel to improve air quality versus the negative health effects of any such additives—and MTBE falls far onto the wrong side of the question.

The bottom line is that MTBE was an extremely poor choice as an oxygenate. I am not just saying this myself as a clueless bystander: I seem to recall that one of the persons interviewed by "60 Minutes," someone high in the petroleum industry, said [paraphrased] "If we knew then what we know now about MTBE, we would *never* have selected it as a fuel additive." The implication of the interview was that the petroleum industry as well as environmental regulators want badly to get rid of MTBE, but are stymied by legal requirements at the national level and a lack of ready-to-use alternatives (I am not competent to discuss ethanol as such a replacement, and I look forward to anyone else's comments).

Cheers, and may your drinking water be clean,

-- Andre Weltman (aweltman@state.pa.us), March 07, 2001.