NEW YORK -- Experts are expecting another surge in gasoline prices. They are predicting pump prices, which jumped by almost a dollar a gallon in each of the last two springs in many parts of the United States, will spike again this year as refiners and gas stations switch from winter-blend to summer-blend fuels, said the Associated Press.
The increases, starting as early as February in southern California, could push the average national price to a record $3.50 a gallon or more by June. That would be 17% higher than today's average of just under $3 a gallon, which already is about 80 cents [image-nocss] a gallon higher than year-ago levels thanks to the surge of crude oil that took futures prices briefly to $100 a barrel. Prices in urban areas on each coast could approach $4 a gallon.
Analysts say the spring price surge is linked to a shortage of alkylate, a little-known and expensive gasoline additive that some in the industry are calling "liquid gold." It has become a must-have ingredient since refiners stopped using methyl tertiary butyl ether (MTBE) two years ago when the potentially cancer-causing additive was found to be seeping into groundwater.
The alkylate shortage has become the most important driver of summer gasoline prices, said Doug Leggate, an analyst at Citigroup Global Markets. "Supply of [alkylate] will set the price of summer gasoline—not inventory levels," he said.
Oil companies deny they are purposely limiting production of alkylate, which like gasoline, jet fuel and asphalt is a byproduct of the oil refining process. But only recently have some started studying how they can boost output, and alkylate prices today are more than 15% higher than spot gasoline prices. That means overall costs will jump when it is added in larger quantities to summer-blend fuel.
Without additives, gasoline does not burn completely, increasing tailpipe air pollution. And untreated gasoline evaporates more quickly in hot weather, potentially causing vapor lock when it changes from a liquid to a gas and blocks fuel lines.
The federal government long ago required refiners to boost the oxygen content of summer-blend gasoline to make it burn more completely, a problem that was solved by adding MTBE and, more recently, ethanol. But ethanol also has a high evaporation rate, so refiners increasingly have turned to alkylate, which Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service, Wall, N.J., called the "magic bullet" in making summer gasoline.
Alkylate and other gasoline additives do not raise the same safety issues as MTBE because they do not bond with water as effectively as MTBE did, analysts say.
Demand for alkylate changes with the seasons, falling in autumn and rising in the spring. On average, alkylate makes up about 10% of a gallon of gasoline, though that rises to as much as 15% in summer. But making more of it is not as simple as throwing a switch, since the underlying chemical properties of oil limit how much of any one refined petroleum product can be produced.
On average, about 44% of each barrel of oil ends up as gasoline, 22% as diesel fuel and heating oil, 9% as jet fuel and about 4% each as heavy fuel oil and liquefied petroleum gas, according to AP, citing the U.S. Department of Energy. The remainder is comprised of smaller products and additives.
Owners of about two-thirds of U.S. refineries have invested the $100 million or more it takes to add an alkylate unit. The rest have to buy alkylate on the spot market if they want to use it as additive in their gasoline supplies. Refiners are not gaming the system, purposely limiting alkylate production to boost gasoline prices, John Auers, senior vice president at Turner Mason & Co., a Dallas consultancy, told AP. "They're not because they can't," he said. "You can't make more alkylate than you have feedstocks."
Alkylate prices have jumped from 77 cents a gallon in the summer of 2001—when MTBE was still in use—to nearly $3 a gallon at points over the past two summers.
Refinery managers concede that there is a national shortage of the additive in the spring and summer. But many are reluctant for competitive reasons to talk about how they blend gasoline or whether they face alkylate shortages, AP said. Some refiners are hiring companies such as UOP LLC, Des Plaines, Ill., to determine whether they can increase the capacity of their existing alkylation units.
And the 36% of domestic refineries that do not have alkylation units are looking at adding them.
If alkylate production does not rise, American motorists will be faced with big jumps in spring gas prices for years to come, AP concluded.
[Editorial Note: For further analysis into the probability of $4 per gallon gasoline on the street, see the cover story of the February issue of CSP magazine.]
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