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Supply squeeze may force pump prices higher

The U.S. East Coast and Texas regions that use reformulated gasoline may face local supply disruptions and price spikes as oil refineries switch to blending the motor fuel with ethanol, the government's top energy forecasting agency warned on Wednesday.
/ Source: staff and news service reports

Confirming industry reports of looming gasoline supply bottlenecks, the government's top energy forecasting agency warned Wednesday that the U.S. East Coast and Texas regions that use reformulated gasoline may face local supply disruptions and price spikes as oil refineries switch to blending the motor fuel with ethanol.

Since 1979, when it was first certified by the U.S. Environmental Protections Agency for use as a fuel additive, MTBE has been used by gasoline refiners to help comply with federal and state regulations for cleaner gasoline. The additive is used in warm weather months to help reduce smog and other pollutants.

Beginning in May, the government will no longer require refineries to use MTBE, or methyl tertiary butyl ether, which has been banned in many states after it was found to pollute drinking water supplies. Makers of MTBE fought a four-year battle to win protection from liability for clean-up costs, but the measure was dropped in the final version of the Bush administration's Energy Policy Act of 2005. Some oil companies are being sued for using the additive.

Many refineries, worried they could be held liable, plan to stop using MTBE before the summer driving seasons begins and switch to clean-burning ethanol that is made mostly from corn. But the Energy Information Administration said U.S. ethanol production is running near capacity and "is not adequate to replace the MTBE lost at this time."

As a result, the East Coast -- particularly Maryland, Delaware, Washington D.C. and Virginia, and the Texas cities of Houston and Dallas -- may face tight gasoline supplies and higher fuel prices for reformulated gasoline, the EIA said. The problem is compounded by a patchwork of local regulations governing summer blends, which means that surplus gasoline blended for one region of the country can't be used in another where supplies are tight.

As reported last week, several forces may combine to force pump prices higher. In addition to being in short supply in some areas, ethanol-blended gasoline is costlier. And gasoline supplies may be stretched in coming months as refiners begin shutting down for long-delayed maintenance after back-to-back hurricanes forced them to operate at maximum capacity through the end of last year.

"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 regions," the agency said.

The EIA said some oil companies who were planning to eliminate MTBE at a later date were caught off guard by the current transition.

"Not only do these companies have to change their refinery operations earlier than anticipated, they must add blending facilities at their terminals, convert some tanks to ethanol, convert their retail outlets and obtain ethanol contracts sooner than expected," the agency said.

If ethanol prices increase sharply, some gasoline suppliers will find it more profitable to reduce the quantity of ethanol being blended from 10 to 5.7 percent of the volume of gasoline, the EIA said.

The EIA said additional U.S. ethanol production capacity under construction will eventually be able to meet domestic demand.

Until then, imports of ethanol from Brazil could rise "significantly" this year and gasoline suppliers will likely remove some ethanol from conventional gasoline in the Midwest and ship it to the East Cost and Texas for blending into reformulated gasoline, the agency said.

Ethanol imports are less attractive than domestic production because imports are subject to an ad valorem tariff of 2.5 percent and a second duty of 54 cents a gallon, the EIA said.