Editorial: A fuel price warning

March 6, 2006
The US Energy Information Administration last month issued an important warning not likely to have made for fun reading in Congress.

The US Energy Information Administration last month issued an important warning not likely to have made for fun reading in Congress. In guarded language, EIA put the US on notice about “surges” and “volatility” in the price of gasoline this summer.

As everyone knows, Congress dislikes high gasoline prices. When gasoline prices rise, Congress reflexively seeks someone to blame. It holds hearings. Committee members hurl accusatory questions at oil industry representatives in front of television cameras, oblivious to answers. So can Congress grill itself at one of these inquisitions? The question arises because Congress created the jam about which EIA warned. Come summer, no one should forget that. Come elections in November, the memory should linger.

MTBE removal

The problem is the rapid removal of methyl tertiary butyl ether from US gasoline supply and the need to replace it with ethanol. “The rapid switch from MTBE to ethanol could have several impacts on the market that serve to increase the potential for supply dislocations and subsequent price volatility on a local basis,” EIA said.

The switch, EIA explained, will create a “net loss of gasoline production capacity.” During summer, refiners making reformulated gasoline (RFG) will have to remove volatile components to compensate for ethanol’s evaporative properties and accommodate other blending disadvantages. A volume loss will result.

Also, the ethanol market is tight. A volumetric mandate begins phasing in this year, and distillers are rapidly adding capacity. But refiners needing ethanol to replace MTBE soon probably will have to resort to imports, which with a few exceptions come with a stiff tariff offsetting the federal tax credit for fuel ethanol made domestically from grain.

EIA further pointed out that resource limits and permitting issues make it difficult for gasoline suppliers to build terminal facilities needed for ethanol. Because of its affinity for water, ethanol requires its own transportation and storage systems and can’t be blended with gasoline until near the point of sale. Yet another worry is that some foreign suppliers to the US can’t yet make gasoline free of MTBE or blendstock suitable for mixing with ethanol.

Markets adjust to supply challenges like these in unpredictable ways. But bottlenecks clearly loom. Cities now supplied by RFG with MTBE and far from ethanol sources are most vulnerable to transition difficulties severe enough to lift prices.

While supply challenges were inevitable when MTBE, because of its appearance in water supplies, fell out of favor and began to be phased out of gasoline, refiners are rejecting the material faster than expected. EIA said its “informal discussions with a number of suppliers indicate that most of the industry is trying to move away from MTBE before the 2006 summer driving season.” In response to customer requirements, the Colonial and Plantation product pipelines between the Gulf and East Coasts will quit carrying gasoline containing MTBE this month.

Lawmakers might see an easy solution to the rapidly developing problem: Force refiners to keep processing MTBE into gasoline until ethanol capacity catches up. But they complicated that option when they passed the Energy Policy Act of 2005 without including a protection refiners sought for defective-product lawsuits involving MTBE. Now, making or selling gasoline containing MTBE, even when no negligence or product defects are involved, can expose a company to ruinous legal liability. So, because Congress wanted its energy bill to make the tort bar happy, refiners subject to illogical but plaintiff-friendly lawsuits are exiting the MTBE business as fast as they can.

The blame

“Overall, the complexity of the transition away from MTBE-blended RFG may give rise to local imbalances between supply and demand and associated price surges during the change,” EIA warned. “As the summer progresses and demand grows, the tight supply situation is not likely to ease significantly, leaving the market exposed to the increased potential for price volatility in the East Coast and Texas RFG areas.”

This is the work of Congress. Unless crude prices plummet, US gasoline consumers will feel the consequences later this year. There must be no doubt about why it happened and who deserves the blame.