Friday April 7, 2006

Doin' some diggin about fuel costs. It was discovered a few years ago that MTBE, an additive to gasoline, was contaminating groundwater. Some places, like California, banned MTBE, and so gasoline sold in CA has no MTBE but instead has ethanol added. As of this summer (2006) nearly all remaining oil producers still using MTBE will be switching to ethanol because of more bans going into effect.

This will have severe impact on our gas prices:
1. Ethanol costs more than MTBE even with the federal ethanol subsidy,
2. It costs LOTS of money to convert to ethanol because while MTBE was mixed with gasoline at the producers, ethanol cannot be mixed with gasoline until it is being loaded on the truck for delivery to the gas station. This is because of ethanol's affinity for water.
3. The U.S. does not produce enough ethanol currently to replace all of the MTBE. Right now the U.S. has the capacity to produce about 283 thousand barrels/day of ethanol. We are currently using 275 thousand barrels/day. We need another 130 thousand barrels/day of ethanol producing capacity
4. A refinery requires more production capacity to use ethanol blended fuels than MTBE. Most of our refineries have been at or near capacity for quite a while now, and it costs money to add capacity.
5. Ethanol must be shipped separately from the gasoline. Gasoline+Ethanol uses more volume to ship than Gasoline+MTBE. There is not currently enough rail or barge capacity to move the additional ethanol around the country.
6. Some ethanol could be imported, but ethanol is subject to 2 tariffs, one of 2.5% on the value and one of 54 cents/gallon. Since the federal subsidy for blending ethanol into gasoline is only 51 cents/gallon, that appears to be an expensive proposition.
7. An option is to reduce the amount of ethanol from 11% to 5.7%. The octane of gasoline is a function of the oxygen content. Ethanol contains oxygen. To reduce the Ethanol content requires that the oxygen content of the gasoline increase. This would be similar to replacing regular gas with premium gas, but a bit more complex. Because the gasoline may be transported via pipeline (as it is here), is may take over a month for the reformulated gasoline to make it to the pump.
8. Some of our gasoline (especially on the East Coast) comes from overseas. Many of these suppliers CANNOT ship MTBE free product.

So it looks like prices will continue to go up and that gasoline may occasionally be in short supply this summer. Better not plan on much travel. This is just the beginning.

You can check this info by visiting the D.O.E. website, most of this came from a publication available at http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2006/mtbe2006/mtbe2006.pdf.