MTBE and gas shortages

Here's an update from CNN.com on the MTBE/gas price spike connection I wrote about earlier this week. 

Some gasoline distribution terminals from Virginia to Massachusetts are seeing shortages as the industry phases out a water-polluting additive [MTBE], the U.S. Energy Department said on Thursday.

[...]

The shortages are not because refiners are not making enough gasoline, or because of a recent rupture on the key Plantation Pipeline that carries supplies from the Gulf Coast to the East Coast, industry officials said.

Rather, the oil industry is rapidly eliminating a gasoline additive called MTBE, banned in several states for polluting ground water, and replacing it with ethanol, a renewable fuel that can't be shipped by pipeline because it absorbs water.

"There's not a shortage of supply," said John Eichberger, a spokesman for the group. "It's a transitional issue."

Because ethanol is a solvent, it will strip corrosion and impurities that build up inside gasoline storage tanks, allowing them to mingle with gasoline supplies.

That means terminal operators must drain giant tanks that hold gasoline stocks and scrub out the impurities before they can be refilled with ethanol-enriched gasoline, he said.

"That's going to compromise supplies for awhile," he said.

The American Petroleum Institute said 40 percent of the gasoline produced in the United States by the first week of April was blended with ethanol, up from 33 percent a year ago.

Does anyone know what blend they are talking aobut?  What is the current gas/ethanol blend?

Holding everything else constant, shortages cause price increases. The question is:  What happens when EVERYTHING--future expectations, supply uncertainty, huge new markets,...--changes at once? 

Comments

[odograph]

The whole MTBE and ethanol thing sounds very plausable, but here's the thing ... go to www.gasbuddy.com, the chart tool on the bottom left of the page, and bring up a 3 year chart of US and Canadian averages.

It looks to me like they run pretty much in parallel, and both are spiking now.

Canadians are not making a MTBE/ethanol switch ...

[odograph]

a more direct link to the charting tool:

http://www.bcgasprices.com/retail_price_chart.aspx

[Dano]

IIRC, the oil companies lobbied for MTBE so's it would be cheaper for them to refine. Now that we have this market failure, they are going down kicking and screaming.

Best,

D

[odograph]

I think what's happening is two main concurrent signals. Global supply and demand are driving higher gasoline prices. At the same time ethanol shortages are driving gasoline shortages on the east coast.

I fearlessly predict that the shortages will be fixed before the prices - that they are less connected than the TV news would have you think.

(Canada used MTBE in less than 2% of their gas by the year 2000, but is on the same price spike we are.)

[BombingHills]

I find that anything on CNN hard to believe, unless its actual news. And I've come to learn that if you want to know the truth, don't let someone tell you it, search for it.

The transition from MTBE to ethanol additives sure must disrupt supplies and create shortages, but shortages of what actually?

They say they must drain giant gas tanks that contained conventional gas ( with MTBE additives ) in order for them to clean out the impurities and that will compromise supplies. Sure that makes sense, but what stops the oil companies from empting out these tanks into tanker trucks and sending them on their way to states that still use conventional gasoline, like Washington state.

Shortages? Right in the beginning of that report it says that refineries are making enough gasoline to meet demand, and thats gasoline with ethanol additives. Not to mention the fact that oil companies have actually benefited from the switch over from MTBE to ethanol additives in two ways. Since the new blended gasoline burns cleaner, it makes them look like they actually care for the enviroment ( it took states to ban MTBE to make oil companies make the change over ), and using ethanol as the new additive allows the oil refineries to produce more gasoline from single gallon of crude oil. Twice as much fuel is produced using ethanol instead of MTBE, doubling the production and profit from a single gallon of oil. Hence the reason why they all made record-high profits last year but thats a totally different topic.

And if the transition from the old blend to the new blend was really responsible for the recent gas price spikes, then states like Washington would not have felt the spike since they have not yet switched over to the new blend, but if you compare the prices, the difference is only mere pennies.

Its corporate markup and profiteering that is ulimately responsible for the recent gas spikes. And yes, that is the truth but again, don't just believe my word for it, look into it yourself or click on my name for more information.

-----

Just on a side note, its kinda funny how I seem to know more on the gas crisis for Americans then most Americans, being how I'm Canadian and all.

I hope this gives you some initiative to do some research into the problem yourself.

[odograph]

I guess I'm enough of a free-marketer myself that I don't believe charging what the market will bear is "profiteering."

It's as old as the world (and simian proto-economics), in.cou don't like the deal, don't take it.

[Dano]

New Gasoline Study Shows Profits, Not Crude Oil Prices Or Ethanol, Are Driving Pump Price Spike

[Tim Haab]

But someone has to be willing to pay it if they are to profit. So all this is saying is that this is deamnd side and not supply side. As long as consumers are willing to pay higher prices do you really blame gas companies for charging them?

[odograph]

I don't blame the gas companies. I notice that they (or more properly the oil exporting countries) make a different argument. They worry about high prices causing a reduction in use (possibly by triggering a recession) and strangling the goose that lays their golden egg.

(I've got a Prius and a few bicycles, I've already made my high oil price countermoves)

[jimbo]

Geez, if ethanol is corroding the pipelines, what is it doing to your gas tank?

Why are enviros upset about high gasoline prices? Is that not what it would take to make people conserve? Sometimes I think the enviros believe only Soviet-style economics, that is low prices and rationing, will solve our problems. Have they forgotten the massive pollution that the Soviets left behind in East Europe and Russia?

[odograph]

BTW, on Dano's article ... the key is to know that the normal rules of economics do not apply in Santa Monica, CA.

[odograph]

Jimbo, I'm an enviro and I've said a few times that I'm not upset. I get 50 mpg!

I thought it was the anti-enviros who bought a new (discounted) SUV last year that were upset ... at least those are the people the LA Times found to interview.

[Dano]

Sometimes I think the enviros believe only Soviet-style economics, that is low prices and rationing, will solve our problems. Have they forgotten the massive pollution that the Soviets left behind in East Europe and Russia?

This would be a false premise.

Best,

D

[joshua corning]

Why are enviros upset about high gasoline prices?

Becouse it makes it politically impossible for them to raise taxes on the product....and if john's and tim's premise holds that higher prices (either through taxes or otherwise) will increase conservation it also makes it enviormentally unnessasary.

No need for kyoto when simple market economics solves the problem on its own.

[Eric H]

IIRC, it was the enviros and then the EPA that mandated fuel oxygenation. The industry resisted until one of them (ExxonMobil? Chevron?) came up with MTBE, and managed to get *that* mandated. That's a problem of rent-seeking by way of government command and control regulation, not a market failure per se.

Ethanol, the new solution to the oxygenation problem, has been pushed by the corn lobby (enviro groups, ADM, any representative from Iowa, etc.), but it has always been criticized in several ways: first, that ethanol requires more energy to make than is produced (more GHG, more pollution, not sure I buy it), second that it reduces the fuel efficacy in the engine and therefore requires more to get the same output (more pollution, plausible), and third that it carries the corrosives left behind in your tank and fuel lines into the engine, causing problems there (reducing the lifetime of cars and thus faster replacement and more industrial energy and pollution). That last is the least of the problems since if you always use ethanol-mixed fuel, the corrosives never build up (I like the idea of flex fuel cars that are being built for the purpose of switching easily between ethanol and gasoline).

Hmmm, seems like the same problem keeps popping up again and again: a genuine problem in need of solution and a partial solution with problems of its own proposed by a lobbying coalition of greens and interested industry members. Implement over protests. Wait. Blame problem solely on industry, ignore gov't and enviro culpability. Repeat.

The key phrase here is "rent seeking".

And of course Canadians are seeing an increase: arbitrage, the same thing that caused increases in Cali when Katrina impacted markets in the southeast.

[odograph]

I don't doubt an arbitrage component, but I think a lot of this "MTBE price" argument is about how to ignore $75 oil as an obvious driver.

[John R]

I think thats a causality issue. If you look at the relative inventories of U.S. Crude (13.2% above the 5 year average)compared to gasoline (.2% above the 5 year average and plumetting)it seems much more reasonable that gasoline prices are partially driving $75/oil.

[odograph]

It is true, if we didn't use gasoline, oil would be much cheaper ;-)

In terms of causality, world wide gasoline consumption is the largest single driver, isn't it?

[Dano]

it seems much more reasonable that gasoline prices are partially driving $75/oil.

Prices or demand?

Best,

D

[odograph]

I'm an engineer, I get to use sloppy economic language ;-). I'm not sure I have accumulated enough of the lingo. I think "quantity demanded" driving gasone and in turn oil prices.

[Baby Peanut]

How odd. A huge thread about a shortage of fuel and not one mention of Peak Oil.