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Analysis: Ethanol stuck in gas price mess

By HIL ANDERSON, UPI Chief Energy Correspondent

LOS ANGELES, April 1 (UPI) -- The oil market's reaction to Energy Secretary Spencer Abraham's simple statement Thursday that the EPA was considering granting a waiver of gasoline oxygenate requirements to three states would make it appear at first glance that it is the oxygenates that have been driving prices at the pump higher.

But the ethanol industry said prior to the stunning announcement by Abraham that its corn-based additive played virtually no role in the ongoing price spike, even though it accounts for 70 percent of the oxygenates used to produce cleaner-burning reformulated gasoline in the United States.

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"Increasing crude oil prices, historically low gasoline inventories and rising demand for gasoline are the primary causes of the rise in prices," Bob Dineen, president and CEO of the Renewable Fuels Association, told reporters on a conference call. "Ethanol and ethanol RFG (reformulated gasoline) are not the problem."

The RFA used the conference call to announce the release of a consultant's study on the economics of ethanol's growing presence in the gasoline market.

The report determined that 35 to 40 percent of the increase in gasoline prices since last December was the result of rising crude prices. At the same time, gasoline demand has increased 23 percent since 1992, while refinery inputs have grown 14 percent in the same time frame.

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"Production of gasoline has simply not been keeping up with demand," concluded Bob Spear, the author of the RFA report. "When that happens, gasoline stocks tend to draw down too fast and at inappropriate times. We can see that the recent price spikes ... have been associated with low inventories."

The oil markets have largely been in agreement that it is indeed crude prices and inventories that have been driving prices, so why did Abraham's far-from-conclusive statements about the EPA Thursday cause futures prices on the New York Mercantile Exchange to come off so hard?

May crude plummeted $1.49 to $34.27 per barrel, while May gasoline shed a hefty 5.91 cents, falling to $1.0759 per gallon.

The answer appeared to be fears that if the EPA did waive its summer oxygenate requirements in Connecticut, New York and California, the ongoing tightness in gasoline supplies would be greatly eased. That notion reportedly prompted many traders to bail out of long gasoline positions before being caught out on a limb by a price collapse.

The EPA waiver was requested by the states in question so that additional supplies of gasoline that don't necessarily contain oxygenates such as ethanol and the additive MTBE (methyl tertiary butyl ether) can be imported to help ease supply squeezes.

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The idea is that getting relief from the stringent requirements for oxygenates in summer-formula RFG would make it easier to meet demand and keep prices at the pump in check.

Without the regulations, states would be allowed to bring in gasoline that isn't necessarily tailored to their markets' RFG specifications. California could bring in fuel from the Gulf Coast or Pacific Northwest, while the East Coast would be able to attract additional gasoline cargoes from Europe.

California Gov. Gray Davis sought such a waiver last year but was rejected by the EPA, which was unwilling to bend the Clean Air Act's minimum requirements that RFG be 2 percent oxygenates by weight.

Abraham told the House Resources Committee Thursday that the EPA was giving serious consideration to the latest requests from New York and Connecticut and from California, which was made by Republican Gov. Arnold Schwarzenegger.

The RFA has strongly objected to such requests on the grounds that ethanol is neither in short supply or a significant production cost. In February, the association issued a report contending that replacing MTBE with ethanol had actually reduced the price of RFG in California by 8 cents per gallon, and had dropped the price of New York RFG by 3.8 percent.

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But the idea of waiving oxygenate requirements altogether is something the ethanol industry and its friends in Washington are not about to accept.

The oil industry has stated in recent months that it can produce gasoline that meets Clean Air Act emissions standards without adding any oxygenates. Giving major states a waiver that might help them prove their point could open the door to the unraveling of the pending Energy Bill's provisions that mandate increasing the amount of ethanol used nationwide to around 5 billion gallons annually.

The RFA's stance is that ethanol is good for the environment, not to mention farmers, and there is no economic reason to curtail its use.

"Looking at it broadly, the supply rate of ethanol looks OK," Spear told reporters. "Ethanol inventories aren't short and the economics seem to work out."

Down the road, the ultimate answer might be a requirement that all gasoline in the United States be of one uniform formula, which would presumably end the supply bottlenecks caused by "boutique" gasoline markets. Until that time, however, the supply situation will remain volatile, and simple remarks such as Abraham's will continue to cause anxiety among oil traders and the ethanol lobby.

(Please send comments to nationaldesk@upi.com.)

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