The oil and gas industry should brace for public outrage likely to erupt next April or May, if not earlier, on the US East Coast. At that time, in that touchy part of the country, with political campaigns under way, gasoline prices probably will leap. And it will happen as oil and gas companies report strong profits for 2003. A public-relations nightmare looms.
Price volatility will grow as refiners supplying two key states replace methyl tertiary butyl ether with ethanol in reformulated gasoline. The re-placement will occur whether or not Congress passes an energy bill mandating ethanol and eliminating the oxygen requirement in reformulated fuel. At yearend, Connecticut and New York will ban MTBE, leaving ethanol the only source of the oxygen for gasoline.
Prices might jump then for logistical reasons. But the greater pressure will come when refiners, to meet summertime specifications for reformulated fuel, start rejecting volatile components from unfinished gasoline destined for blending with ethanol. And as another set of fuel specifications further fragments the gasoline market, surrounding states also will feel new price volatility.
The blame
Who will get the blame? Not the federal politicians who misguidedly mandated oxygen in fuel designed to suppress formation of ozone. Not the state politicians who required reformulated gasoline in parts of Connecticut and New York untroubled by ozone smog. And not the politicians who refused to distinguish between water supplies truly rendered undrinkable by leaked MTBE and the far more numerous ones bearing only harmless traces of the mobile ether.
Oil companies will get the blame. They'll get the blame because they made money in a year of supply stress. And they'll get the blame because most gasoline consumers don't understand the manifold mistakes politicians make on their behalf. Most politicians, in fact, don't understand the chemical intricacies of their decisions involving vehicle fuel. Too many of them simply do what grain distillers and environmental groups urge them to do: expand markets for ethanol and overregulate refiners.
As temperatures rise next spring in Connecticut and New York, therefore, so will gasoline prices. And the oil companies who know what's coming will be loath to alert customers lest they be accused of manipulation.
They can, however, point to warnings from government sources. A strong one appeared last month from the US Energy Information Administration. At the request of Rep. Doug Ose (R-Calif.), EIA reviewed preparations for gasoline free of MTBE in the two eastern states.
EIA notes that California and the Chicago-Milwaukee area experienced price jumps of 30-40¢/gal during their transitions to gasoline containing ethanol. Much of that reflected start-up of special distribution systems necessitated by ethanol, which must be handled separately from gasoline because of its affinity for water. Refiners and distributors preparing for such logistical changes can't anticipate everything. Costly surprises occurred in the earlier transitions. Connecticut and New York will have their share.
They also face unique supply limits. Rules governing airborne toxics will limit production of summertime gasohol blendstock by East Coast refiners to an extent they did not for refiners supplying either of the fuel markets that earlier replaced MTBE with ethanol. Also, the eastern states rely more heavily on imports, which account for 60% of their reformulated gasoline. About half the imported volume comes from occasional—EIA calls them "opportunistic"—suppliers unlikely to produce low-volatility blendstock until the economics become enticing.
Markets adjust, of course. Gulf Coast refiners can increase production of summertime gasohol blendstock for the East Coast. Foreign suppliers eventually will invest to meet the new requirements. Those options, however, will raises costs while the number of East Coast refiners making gasohol blendstock might well be in decline.
Supply uncertainty
The result of all this is supply uncertainty and the need for physical and logistical adjustment. At least two periods of elevated price volatility—and probably elevated price—thus lie ahead for the East Coast. And diminished supply flexibility might make the condition chronic.
Connecticut and New York will have the gasoline their politicians insist they need. But this exercise of political volition with gasoline chemistry will raise costs and probably prices, at least during the transition from MTBE to ethanol and possibly beyond. Consumers need to know what's coming—and why.
