Gas Prices & the Energy Bill

Proposed oxygenate repeal raises production concerns

WASHINGTON -- A provision in the massive energy bill that cleared Congress last week is likely to shrink the nation's gasoline supplies next spring and could boost prices 8 cents a gallon or more, according to a report in The Wall Street Journal. The provision removes the congressional mandate, in place since 1990, that supports using the gasoline additive methyl tertiary butyl ether (MTBE) in gasoline smog-prone areas.

On Monday, officials of two oil-industry trade associations and a spokesman for refiner Valero Energy Corp. told WSJ the change [image-nocss] raises the legal risks for companies that use the additive. President Bush is expected to sign the 1,700-page bill this month, and the change goes into effect about 270 days after that.

MTBE reduces smog caused by automobile emissions, but has tainted well water in thousands of areas of the country, usually by seeping into ground water from leaks in underground tanks at gas stations. Although banned in some states, it is still heavily used in Texas and along the northeast coast of the U.S.

"This is going to be the biggest step the industry has taken since we phased out lead in the 1970s," said Gene Edwards, senior vice president of Valero, San Antonio. The company, he said, decided to stop using MTBE because the change in the energy bill weakens its defenses against lawsuits over pollution caused by the additive.

"We have put our planners on a crash course over what we're going to do," Edwards said. The company estimates it will lose about 60,000 barrels a day of gasoline production next spring because it will take as long as two years to reconfigure its refineries to use another additive. If other U.S. refineries follow suit, Valero figures, U.S. gasoline production would fall short of usual levels by about 258,000 barrels a day, the equivalent of losing output from four major refineries. The price of gasoline "will definitely go up," Edwards says, estimating a potential rise of 8 cents a gallon.

An official from another oil company said the impact of the change may not be as great on other refiners, some of which have already phased out MTBE use. But he said the federal move, which leaves a patchwork of state laws governing the use of MTBE, would impair the ability of companies to alleviate supply shortages by exchanges of gasoline and, thus, "lead to the balkanization of the nation's fuel distribution system."

Supplies would shrink around May, just as demand for gasoline rises for vacation driving. "I don't think anybody really intended this," Ed Murphy, director of refining and marketing for the American Petroleum Institute, which represents the oil industry, told WSJ. He says there is "no question" but that the 270-day deadline "will add to the cost" of a gallon of gasoline because it will force refiners to compete for already scarce MTBE-free gasoline-blending components.

The leadership of the Petroleum Marketers Association of America, Arlington, Va., however, called the repeal of the oxygenate mandate something to be celebrated. Over the past decade, this mandate has exacerbated the boutique-fuels burden on petroleum marketers, PMAA wrote in its summary report of the energy bill.