U.S. consumers recovering from record high gasoline costs last summer may now face a nearly 60-cent price surge next year because of stricter environmental regulations, an industry expert said.
The introduction of lower sulfur requirements for gasoline and diesel combined with a shift in gasoline additives could reduce supplies and create problems for refiners trying to produce fuel to meet the new specifications, according to analyst Trilby Lundberg.
"We expect 2006's price surge to be less severe than 2005's, but more severe than any other year on record," Lundberg said in a report. "While we don't expect retail gasoline to revisit the $3 level in 2006, we do expect a 57 cent hike by July."
Motorists in the world's biggest oil consuming nation saw average gasoline pump prices spike to $3.00 a gallon in September after hurricanes Katrina and Rita shut U.S. Gulf Coast refineries. Prices have fallen to around $2.20 a gallon since then as plants restored operations.
But starting Jan. 1, refiners will begin cutting sulfur content in gasoline according to regulations from the U.S. Environmental Protection Agency (EPA). This will be followed by the gradual phasing in of ultra low sulfur diesel requirements beginning in June.
"This ratcheting down of allowable sulfur adds to costs and also strains the refining system," Lundberg said. "In 2006, the EPA could well cost gasoline consumers more than Hurricane Katrina did."
Adding to market pressures will be a government-mandated increase in the production of gasoline-additive ethanol, Lundberg said. Ethanol, which is made from fermented corn or other starchy grains, is mixed with gasoline to stretch available fuel supplies.
While touted as a greener fuel additive, Lundberg said the government requirement translates into an ethanol demand increase of around 5 percent compared with this year, "enough to wreak some havoc in the market."
At the same time, domestic supplies of gasoline additives are expected to fall as companies cut production of MTBE, a suspected carcinogen which has seeped into water supplies in all 50 states and made some water undrinkable.
"This supply loss is permanent, unlike a storm idling refining capacity, even one as horrendous as Katrina. While some of the supply loss will be made up by ethanol, the rest must come from greater gasoline imports," Lundberg said.