ALEXANDRIA, VA --
"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. 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." (U.S. Energy Information Administration (EIA), "Eliminating MTBE in Gasoline in 2006")
These are the final two lines in a 10-page report issued this week by EIA analyzing the market implications of several refineries opting to transition away from MTBE this year. Some observers may criticize the decision of these refiners to take such action in a tight supply and demand market. But what these observers, and all members of Congress, must remember is that the petroleum industry was given no choice.
Let's take a look at the situation as it truly exists. Congress mandated an oxygen content in reformulated gasoline (RFG) in the Clean Air Act Amendments of 1990. This could be accomplished by either blending ethanol or MTBE. As this latest EIA report indicates, even in 2006 choosing ethanol for the majority of RFG production would have negative implications. So, the industry used MTBE, which unlike ethanol is extremely compatible with the existing petroleum production and distribution infrastructure. Then, MTBE was found in groundwater, lawsuits were filed, states began banning the additive, the courts found MTBE was a defective product prompting more lawsuits and Congress itself launched efforts to ban the additive.
Retailers meanwhile are being batted around like piñatas. A gasoline retailer has absolutely no control over what constituents comprise the gasoline available for resale in his or her market. Yet, they are being named defendants in MTBE defect product lawsuits. This is ridiculous. If Home Depot learns that one of the 10 ladders it sells is defective, it can discontinue offering that ladder. A retailer's choice concerning the defective product claim regarding gasoline containing MTBE is limited--either continue selling the gasoline available from the retailer's supplier and within the retailer's market which might contain MTBE or stop selling gasoline--period. This is no choice.
Fast-forward to today. Congress enacts the Energy Policy Act of 2005 after several years of failed attempts. This new law eliminates the oxygenate requirement in an effort to provide additional flexibility to the industry to back away from MTBE, establishes a 7.5 billion gallon ethanol mandate and rejects the industry's plea for liability relief associated with the misguided judicial determination that MTBE was a defective product. Now, the petroleum industry is faced with a situation in which their exposure to liability remains as strong as ever, Congress has removed one of their core defenses for including MTBE in gasoline by repealing the oxygenate mandate, Congress has forced the industry to absorb a significantly higher amount of ethanol than ever before, and two major pipelines serving the east coast will refuse product containing MTBE effective in March 2006.
EIA reports, "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." Government analyses regarding potential supply and price problems at the retail level of the petroleum market does not bode well for retailers, who are now getting from both sides. As refiners move away from MTBE, the number of retailers who will be selling MTBE decreases. However, if the implications are market disruptions, retailers will be blamed for higher retail gasoline prices that, once again, are beyond their control. Welcome back piñata!
EIA identifies the following as the key reasons why there may be market problems. Some of these may sound familiar to you, since NACS has been warning about them for years:
- Switching from MTBE-RFG to ethanol-RFG will result in a loss of approximately 5-6 percent (outside of California) of refinery production capacity this summer.
- Some of America's foreign suppliers of refined motor gasoline are unable to produce ethanol-ready product to satisfy U.S. environmental specifications.
- Domestic ethanol production is at capacity and cannot ramp up enough in time to meet demand. Therefore, ethanol used in conventional gasoline will be diverted to RFG markets and the Northeast is likely to increase imports--which are assessed a 54 cent per gallon duty to protect the domestic ethanol industry. Even so, this may be the most cost effective source of ethanol.
- Because ethanol cannot be shipped in the pipelines, it must be transported via rail, barge or truck. Furthermore, ethanol must be blended at the terminal, which requires additional storage capacity for both the ethanol and the gasoline blendstock formulated for blending with ethanol. Further-furthermore, these terminals must also install blending equipment. All of these additions will require construction and expansion permits, the processing of which is not quick and easy.
Most of these factors cited by EIA have been expressed by NACS and its allies within the petroleum industry as potential problems associated with establishing an ethanol mandate. Now, as the industry deals with the reality that is the MTBE litigation nightmare of the United States, the nation must come to terms with the fact that converting to ethanol will not be as seamless a transition as that industry would like us to believe.
For more details about EIA's analysis of future market conditions in 2006, click here (pdf) to read the 10-page report in its entirety.
For more information about other factors that could affect market conditions, be sure to visit the NACS 2006 Gas Price Kit.
Congress returns next week, and I am certain that I will be discussing this issue on the Hill.
Have a great weekend.
John Eichberger
Vice President, Government Relations