California got a harsh lesson in the economics of energy commodities a year ago when the state found itself in the unenviable position of being a consistent buyer in a hot sellers' market when electricity prices surged. The political question became whether or not the state was going to be buried in massive debt or forced to go through disruptive rolling blackouts.
Consumers were largely shielded from the economic impact of the electricity pinch by state laws that prevented the full cost increases from being passed on by the utility companies, but there are no such protections in the gasoline market.
Davis signed an executive order in 1999 requiring the elimination of MTBE as an oxygenate in California gasoline because of fears the petrochemical was contaminating groundwater. In order to comply with the federal Clean Air Act, however, corn-based ethanol must be introduced as a replacement oxygenate.
Like MTBE, ethanol is not produced in significant amounts in California and would have to be hauled in from the Midwest by train and requires its own unique storage tanks and other infrastructure.
"If I could snap my fingers and make MTBE go away tomorrow, I would," Davis said last Friday when he issued an order extending the deadline for the MTBE phase-out by 12 months to the end of 2003. "But we have seen this movie before, and I am not going to let Californians be held hostage by another out-of-state energy cartel."
The energy cartel the governor speaks of is the ethanol industry that has been on an expansion drive to boost its nationwide production capacity by 1 billion gallons a year. The industry says it is ready, willing and able to step in by the original MTBE deadline at the end of this year, and they chastised Davis for supposedly playing election-year politics.
"Gov. Davis' about-face on the MTBE phase-out schedule is completely unjustified and places political expediency ahead of safe drinking water," said Bob Dinneen, president of the Renewable Fuels Association. "This decision represents a callous breach of faith with California consumers that want MTBE out of their drinking water now."
Dinneen has a definite point about Californians wanting to put an end to the contamination of groundwater supplies by MTBE. The foul-smelling petrochemical is, according to medical literature, suspected of being a carcinogen and its seepage into water supplies from leaking gasoline storage tanks has been difficult to curb.
But Davis has to consider the estimated need for about 900 million gallons of ethanol a year to blend in with gasoline in order to satisfy the 1990 Clean Air Act's requirement that reformulated gasoline contain 2 percent oxygenates. Oxygenates are additives that help gasoline burn cleaner, and the choice of oxygenates available is largely limited to either MTBE or ethanol.
California has unsuccessfully sought a waiver from the federal oxygenate requirement on the grounds the state's fuel burns clean enough without the need for any oxygenates, but the request was refused by the Environmental Protection Agency on the grounds an exemption likely wouldn't produce any improvement in the state's air quality.
A consultant's study produced last week for the California Energy Commission concluded there was a likelihood that there would not be enough ethanol available to allow the state to meet the 2002 deadline without the risk of those dreaded price spikes.
California's unique formula for gasoline makes it difficult to find additional supplies that can be brought in by tanker from the Gulf Coast at a premium price.
"Based on recent California market experience and generally accepted price elasticity estimates, gasoline prices will have to double before demand will match the reduced supply," the Energy Commission said in a statement. "This will have significant impact on California's economy."
That was all the once-bitten Davis needed to hear. Although the oil industry says it had expected to be ready at the refinery level to make the switch to ethanol by the original deadline at the end of this year, Davis was stung by the electricity crisis and the last thing he needs is gasoline prices topping $2 a gallon in an election year.
"I think they (the oil industry) are acting in good faith, but I believe they are in error," Davis opined. "My job is to protect the interests of the entire state and I'm not going to let California be put through the wringer again."
Removing the potential for a gasoline price spike may keep Davis' political career from being put through the wringer as well if the voters recognize that the delay in the phase-out of MTBE is more than a cynical election-year ploy.