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Gasoline: Pain Now, Pain Later / Adding Ethanol Could Affect Pricing; Futures Up on Supply Decline

Posted on: Monday, 3 April 2006, 15:00 CDT

Forecasts at a U.S. Senate hearing yesterday that the price of gasoline could rise this summer because of supply problems came as gasoline futures rose on current supply declines.

Government and industry officials told the Senate Environment and Public Works Committee that the imminent transition from the fuel additive MTBE to ethanol "could cause temporary supply dislocations and may cause price volatility."

Refiners plan to stop using MTBE next month because Congress refused to grant them protection from lawsuits. The additive, methyl tertiary butyl ether, has been found to contaminate groundwater.

Guy Caruso, the head of the Energy Department's statistical division, said the agency estimates that 130,000 barrels per day of extra ethanol will be needed beginning May 5, an amount equal to 50 percent of current output.

There are doubts within the department and the oil industry about whether there will be enough of the corn-derived fuel to meet the anticipated surge in demand, and whether the country's distribution system is ready to handle it.

Wholesale prices for ethanol have surged to roughly $2.75 a gallon, or about 50 cents per gallon higher than usual, and analysts say ethanol supply concerns have contributed to a sharp increase in gasoline futures since mid-February.

Yesterday, gasoline futures charged to their highest level in nearly six months. The government released data showing a 5.4 million barrel decline last week in domestic supplies of unleaded gas. Inventories are about even with year-ago levels, but demand is 1.3 percent above year-ago levels.

The decline in commercial gasoline inventories was the fourth in as many weeks, and comes as refiners conduct maintenance on their facilities ahead of the summer driving season, when fuel demand peaks.

The average retail price of gasoline in the U.S. is $2.50 a gallon, up 34.5 cents from a year ago.

Gasoline futures rose 6.97 cents to settle at $1.9542 a gallon on the New York Mercantile Exchange, just 6 cents shy of the Oct. 4 settlement of $2.0157. Then, the U.S. fuel market was grappling with the loss of significant refining capacity in the aftermath of Hurricane Katrina.

The increase in gasoline futures was nearly mirrored in wholesale prices for gasoline in the Richmond area, which ranged from $2.049 to $2.263 per gallon for regular. Bloomberg said the average wholesale increase was 5.6 cents per gallon. Wholesale prices do not include Virginia and federal taxes of 35.9 cents per gallon or the cost of transporting fuel from pipeline terminals to filling stations.

Ben Brockwell, a pricing director for the Oil Price Information Service, said he believes most gasoline suppliers will convert to ethanol by May 5, the 270th day from the passage of the Energy Act of 2005, and the timeframe Congress gave for a move to ethanol.

The Colonial Pipeline, which brings gasoline to Virginia from the Gulf Coast, began shipping the gasoline that is mixed with ethanol in mid-March, a spokesman said. The first shipments should reach the state in early April.

One of the key challenges for Midwestern ethanol producers will be getting their fuel to key markets along the East Coast because of rail and trucking bottlenecks.

Bob Dinneen, president of the Renewable Fuels Association, a trade group that represents ethanol producers, said the industry is filling ethanol storage tanks on the East Coast before summer arrives and contracting barges to ship ethanol down the Mississippi River and then up the Atlantic seaboard.

Dinneen said any supply tightness would likely disappear within two to five months - a point Caruso made as well. "The marketplace is responding," he said.

Sen. Barbara Boxer, D-Calif., said the petroleum and ethanol producers have known about the impending fuel-additive transition since Congress passed the energy bill last July and said it was unfair that the lack of preparedness within industry would fall on the shoulders of motorists.

"It's sort of like let's punish the public again for something they had nothing to do with," Boxer said. While Boxer expressed anger that refiners are going ahead with plans to phase out MTBE knowing that supplies are tight, she also said there is no way Congress will grant them the liability protection they seek.

The energy bill Congress passed last year eliminates a 2 percent oxygenate requirement for gasoline. MTBE has been the oxygenate of choice since a mandate was established about 10 years ago as a byproduct of the Clean Air Act.

GAS GAUGE

Now__Last month__Last year

$2.49__ $2.15__ $2.08

Average price for regular, self-serve. To find real-time prices for your neighborhood, click on www.aaamidatlantic.com

Times-Dispatch staff writer Greg Edwards contributed to this report.

ILLUSTRATION: PHOTO

Source: Richmond Times - Dispatch

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