Bertram31.com General Bulletin Board

WSJ article on gas prices, and ethanol effects

Posted By: Dug
Date: Wednesday, 12 April 2006, at 10:13 a.m.

I thought this was interesting. It is in the WSJ online today...

Gas Prices to Jump This Summer

Government Predicts 25-Cent-Per-Gallon Rise
And Bigger Spikes in Texas, Much of East Coast
By JOHN J. FIALKA
April 12, 2006; Page D1

Gas prices this summer will be at least 25 cents more per gallon than last summer's steep prices, averaging $2.62 a gallon between April 1 and Sept. 30, the Energy Department predicted. Some populous parts of the country, including big cities in Texas and parts of the middle and upper East Coast, could see "unexpected supply disruptions" that will drive prices even higher.

Gasoline prices have already risen in recent weeks. The price for a gallon of regular in the Dallas suburb of Allen, Texas, has shot up almost 50 cents since February. A few days ago, a run on the area's gasoline wholesalers left 60 stations without gas for a day. The national average has crept up to $2.68 in the past week and is expected to reach $2.73 in May.

The spike may be short-lived, though. Unless there is more hurricane damage to oil production in the U.S. Gulf of Mexico, the Energy Department predicted gas prices will begin to edge down before the end of summer.

Last summer's average price of $2.41 a gallon was the highest in recent years. Rising international prices for crude oil caused sharp increases even before Hurricanes Katrina and Rita damaged production and refining facilities, driving prices above $3 a gallon in September.

About 75% of the expected price increase this summer is due to the rising price of the crude oil used to make gasoline, the DOE said. That is because some production facilities are still down after last year's hurricanes, and world demand continues to be high.

But a significant new factor is also driving prices up. Broad energy legislation enacted last summer has helped push oil companies to shift from one gasoline additive -- known as MTBE -- to another -- ethanol. Most oil companies have decided to make the change by May 5.

The Energy Department estimated that a "few pennies" of the predicted 25-cent increase at the pump will come from the rising cost of ethanol. Its use in blended gasoline has shot from 1.8 million barrels a month in 2002 to 7.4 million barrels as producers struggle to meet soaring demands, though the ethanol price is expected to come down soon as the industry expands. But the rapid switch to ethanol is also causing shortages of gasoline, tank trucks, blending equipment and skilled labor.

WALL STREET JOURNAL VIDEO

Energy Secretary Samuel Bodman discusses how gas prices may spike to all-time highs this summer. And AAA's Geoff Sundstrom explains how that may affect motorists.MTBE, like ethanol, is used to reduce smog in urban areas and meet federal air-pollution limits. So the places hardest hit by the switch tend to be cities, particularly ones that are far from the Midwest, where ethanol is produced mainly from corn, and that are dependent on pipelines to get oil. Ethanol-blended gasoline is very difficult to move by pipeline. Some big states -- including California, New York, and Connecticut -- already made the switch, giving dealers as much as two years to prepare.

Last summer, Congress gave up on a compromise that contained a slower phaseout of MTBE. At the same time, it approved a mandate requiring oil companies to use more ethanol, and it ended a requirement that refiners use a category of additives that included MTBE.

The net effect of those moves has been to make most oil companies uncomfortable about taking the legal risks involved in further MTBE use. MTBE that leaks from gasoline tanks quickly taints groundwater. That has caused a spate of costly lawsuits against oil companies and bans on its use in 26 states. Up to now, oil companies have argued that Congress required the use of MTBE, so they weren't liable for damages. Under the energy bill, that requirement expires May 5.

One Texas distributor, Douglass Distributing Co., discovered it had to make the switch in February, when all seven oil companies that sell its gasoline announced they were switching to ethanol.

"This is nothing that hasn't been done before," explains Bill Douglass, the chief executive officer of Douglass, which owns 14 stations and supplies gas to 165 independent dealers in this north Dallas area. "But we're doing this in a fever."

Because there are no rail facilities to receive shipments of ethanol in Dallas, major oil companies have hired fleets of tank trucks to bring it in from Kansas, driving up the price of leasing the trucks and drivers. "Someone has to pay for all this, and the consumer is the one that always gets to pay eventually," explains Madalyne Lange, who sets the gasoline prices for the Douglass-owned stations.

Ethanol has its own problems. Ethanol-blended gasoline is difficult to ship by pipeline, because ethanol is attracted to water, and pipelines often contain some water. Traditionally, gasoline-station tanks also contain some water from condensation and storm runoff. That was no problem with the MTBE blend because the water stays in the bottom of tanks. With ethanol-blended gasoline, however, as little as 40 gallons in a 10,000 gallon tank causes the gasoline to become unblended into layers of low-octane gasoline or watery ethanol, both of which can foul a car engine.

The expensive computerized fuel gauges in many of Mr. Douglass's outlets aren't capable of detecting this problem, so his company has had to retrain operators of some 80 gas stations on how to measure their gasoline tanks with a long wooden stick, tipped with a chemical that turns bright red when it detects water.

Ethanol also removes a sodium deposit that is present, though harmless, on the walls of MTBE-blended gasoline tanks and puts it back into the gas. Oil companies, starting with Exxon Mobil Corp., warned Mr. Douglass that he must have his tanks flushed out with high-pressure hoses, but then, he says, the companies hired all the contractors that know how to do this for their own stations. So he has to buy special filters to put on each pump to keep the gunk from flowing into customers' cars.

Prem Nair, a spokeswoman for Exxon Mobil, said her company was the first to notify distributors of the switch to ethanol. "We gave them adequate time to make preparations."

Some effects of the switch will be beyond the control of either gasoline distributors or the oil companies. To blend in ethanol, refiners have to remove some gasoline components or risk violating air-pollution standards. The net effect of the switch will cause about a 1.7% shrinkage in the nation's gasoline supplies, according to the Energy Department. Meanwhile, demand for the fuel will be up by 1.5%.

In the final days before passage last summer, oil companies pushed for a partial shield from liability that would protect them against defective-product lawsuits. Democrats and some Republicans argued this would shield oil companies against all liability. It was voted down, and the plan for a gradual shift to ethanol went down with it. "I don't know what else we could have done, but we didn't win the case," explains Ed Murphy, a group director of the American Petroleum Institute. "This is going to be a difficult transition, but we've made it through them before," he says, referring to last summer's gas-price spikes.