US drivers could face a shortage of fuel and significantly higher prices.
Financial Times - Carola Hoyos and Kevin Morrison in London - March 15, 2006
US drivers could face a shortage of petrol and significantly higher prices at the pumps because of problems phasing in environmentally friendlier petrol this spring.
The US Department of Energy issued the warning as industry executives and analysts are forecasting that prices at petrol pumps could rise as much as 30 per cent to $3 (€2.5, £1.7) a gallon – close to the records achieved after Hurricane Katrina devastated the Gulf coast last summer.
The US gasoline futures contract that corresponds to the new fuel – a mix of reformulated petrol with corn-based ethanol – is also rising, further underlining concerns.
“Average retail prices in the US could move up into the $2.80-$3.05 area. Our analysis overtly assumes (perhaps heroically) that there are no major refinery outages/interruptions,” Mike Rothman, analyst at International Strategy and Investment, said in a recent report.
Wholesale US gasoline prices have risen by a third in the past month to about $1.80 a gallon, in part on concerns about a potential squeeze on gasoline supplies due to the changes. The shift from methyl tertiary butyl ether (MTBE) to the ethanol mix next month will also coincide with a seasonal pick-up in demand for petrol as the summer driving season starts.
“We are introducing these new rules when demand is high and it looks like supply is going to be low, therefore putting a squeeze on supplies and prices,” said Philip Verleger, an energy economist and senior fellow with the Institute for International Economics.
Several US states have now banned the use of MTBE and the 2005 energy bill specifies that companies are liable for ground contamination caused by the additive. Refiners had little choice but to drop MTBE, but the ethanol mix is posing serious logistical challenges.
A potential bottleneck is the transport and storage of ethanol-blended petrol. Because of contamination concerns, terminals will have to handle the petrol and ethanol separately, which they will not be able to do without further investments, warned the Energy Information Administration, the statistical arm of the Department of Energy.
With the east coast needing to increase by 2.5 times the amount of ethanol it receives, rail waggons and barges may not be available, the agency said. Texas is likely to face similar problems.
The EIA has also raised concerns about the availability of ethanol. “Ethanol capacity in the United States is running at near-capacity and therefore is not adequate to replace the MTBE lost at this time,” it said recently.
Michael Burdette, senior analyst at the EIA, said the new rules would create 129,000 barrels a day of additional demand for ethanol, surpassing existing US capacity of 282,000 b/d – which meets current demand levels. However, the EIA expected the additional demand to be met by the installed new capacity by the end of the year.
The vast US petrol inventories are of only limited use because 90 per cent of the stockpile is conventional petrol, which cannot be blended with ethanol and is therefore useless in making up any shortage.
Mr Burdette said the difficulties of the switch to the ethanol mix were exacerbated by the fact that the US refining sector was still recovering from Hurricanes Katrina and Rita. The devastating hurricane season had left about 800,000 b/d of refining capacity out of action.
In the aftermath, the sector put off much of its scheduled maintenance programmes last autumn to catch up with demand and was planning to start the work during the spring.
Mr Burdette said the rise in prices in part reflected the concern about the potential supply demand imbalances in some areas when the new rules were introduced.
“We have seen this in the past,” he said. “When new specifications are introduced, the market factors in the worst-case scenario, but as the new rules come into the place the market finds its own balance and prices adjust accordingly.”