Motor fuel prices remain very sensitive to changes in the price of crude oil, supply disruptions, and weather-related incidents such as last summer’s hurricanes in the Gulf of Mexico. This year, major fuel-chemistry changes in the US will increase the volatility.
Two major changes will take place in 2006: reduction of the sulfur content of 80% of highway diesel fuel to 15 ppm and removal of methyl tertiary butyl ether (MTBE) from reformulated gasoline. The ultralow-sulfur diesel (ULSD) program is required by the US Environmental Protection Agency under the Clean Air Act. MTBE removal will result from a combination of state bans and refiners’ decisions to quit selling gasoline containing the oxygenate after last year’s rejection by Congress of a limited liability shield in legal cases involving leaks into water supplies.
These changes raise chances for supply problems and will add to volatility of the US products market.
ULSD requirements
Large US refiners must comply with the new sulfur specifications for highway diesel by June, although sales of ULSD do not have to begin until later in the year. Despite damage to Gulf Coast refineries from Hurricanes Katrina and Rita, the industry is believed to have equipment in place and to be ready to meet this deadline.
However, the biggest hurdle will be ULSD delivery. Contamination is likely because of the presence of high-sulfur residues in tanks, trucks, and pipelines. To meet pipeline requirements, refiners plan to produce diesel with sulfur contents of 10 ppm or less. Depending on conditions downstream of pipelines, however, that margin might not be sufficient.
EPA has extended the deadline for ULSD compliance at terminals and retailers to mid-October to allow more time for system tests. During that time, retailers can sell diesel with 22 ppm sulfur. Even if this transition goes smoothly and without supply interruptions, the cost of producing diesel will increase because of the ULSD program, which will tend to push up the retail price.
Moving to ethanol
Refiners deciding to end their use of MTBE and increase their use of ethanol to replace the lost octane and meet new federal volume requirements will experience some loss in summertime production capability due to modifications made necessary by ethanol’s evaporative properties. Transportation and storage issues will also be a challenge for refiners changing to ethanol-blended gasoline because ethanol must be transported separately from gasoline and splash-blended just before sale.
These capacity and transportation issues will add costs, which will push up retail prices if markets remain tight and crude costs high. Another supply question is whether exporters of gasoline to the US can provide fuel free of MTBE.
The degree to which these changes affect supplies and prices of gasoline will be an important topic in 2006. To stay abreast of prices, follow the weekly OGJ gasoline price survey in the statistics section of the magazine.
Anything that happens as disruptive as last summer’s hurricane season will make the numbers appearing there very interesting.✦
