Gas Prices Could Skyrocket When MTBE Is Removed

By J.R. Pegg

WASHINGTON, DC, March 29, 2006 (ENS) – The oil industry's decision to abruptly abandon the controversial fuel additive MTBE could tighten gasoline supplies and cause further price spikes, the head of the U.S. Energy Information Administration (EIA) told a Senate panel Wednesday.

Fear of litigation has prompted refiners to replace MTBE, which has contaminated groundwater across the nation, with ethanol, but concerns remain about the logistics of the switch and supply of the plant-based fuel.

An estimated 130,000 barrels of ethanol per day are needed to fill the void left by MTBE, or methyl tertiary-butyl ether, a figure that is nearly half the current domestic production.

"Nearly all companies have been planning to blend ethanol," said EIA Administrator Guy Caruso, "and it involves major changes in operation and supply sources to the east coast and Texas."

An ethanol blend is available at many gas pumps. (Photo courtesy Pioneer)

"A shift of this magnitude in this short of time could cause temporary local supply dislocations and price volatility," Caruso told the Senate Environment and Public Works Committee. The hearing came amid growing concern about rising gasoline prices, which have jumped by 25 cents in the past month.

Americans are now spending on average about $2.50 for a gallon of regular gasoline and prices could top $3 this summer. Democrats warned that they would be watching future price fluctuations closely.

"We need to put oil companies on notice that they cannot use MTBE as another excuse to boost up oil prices," said Senator Frank Lautenberg, a New Jersey Democrat.

Caruso did not say how much of the recent increase might be linked to speculation about ethanol supplies.

"This is a short-term issue," Caruso said. "Ethanol producers are ramping up to meet the increased demand. It is a summer driving season problem that we face."

MTBE was first used in the late 1970s as an octane enhancer for premium grade fuel. MTBE enhances gasoline combustion and reduces tailpipe emissions.

Since the passage of the federal Clean Air Act in 1990, the U.S. Environmental Protection Agency has ordered the use of oxygenates, such as MTBE, in gasoline in areas that do not meet state and federal clean-air standards. At present, gasoline contains between 11 to 15 percent MTBE.

Even though the full adverse health effects of MTBE remain to be discovered, the U.S. Environmental Protection Agency has listed MTBE as a hazardous substance and as a potential human carcinogen.

Bob Dinneen, president of the Renewable Fuels Association, said the U.S. ethanol industry anticipated the transition from MTBE and can tackle the "short-term challenges" of the rapid demand increase.

The current domestic ethanol capacity is more than 4.4 billion gallons annually, Dinneen told the committee, and new construction and plant expansions will boost that by another two billion gallons.

"I'm confident the marketplace will respond and have the product where it needs to be," Dinneen said.

MTBE warning sign at a California gas station. (Photo courtesy The Reynolds Group)

The problem is "a direct result" of Congress' failure in last year's energy bill to grant MTBE processors and producers protection from litigation, said Douglass, who represents the National Association of Convenience Stores and the Society of Independent Gasoline Marketers of America.

Committee Chair James Inhofe, an Oklahoma Republican, echoed that sentiment and said such a liability waiver is appropriate because the 1990 Clean Air Act Amendments required the use of MTBE.

Those amendments called on areas in violation of federal smog standards to use gasoline with two percent oxygen in order to reduce harmful emissions – ethanol and MTBE widely agreed to be the primary options.

"It is remarkable, that we as government, can mandate things to take place and then not offer the protection to those who are simply following the law," Inhofe said.

The claim that Congress mandated the use of MTBE to meet the federal oxygenate requirement for reformulated gasoline is "patently false," said Senator Barbara Boxer, a California Democrat.

"Let us be clear - there has never been a mandate for MTBE from Congress," Boxer said. "Let's get off this business of these poor oil companies being forced to use MTBE." Any new effort to grant a liability waiver "isn't going to go anywhere on the Senate floor," said Boxer.

Boxer said groundwater contamination from MTBE could cost California some $7 billion and the total bill for the nation could top $29 billion. Low levels of MTBE can make drinking water supplies undrinkable due to its offensive odor and taste and the chemical is relatively persistent in ground water – industry critics contend manufacturers knew of the risks and failed to inform the public.

"It has long been obvious that MTBE was the wrong oxygenate to use in gasoline," Boxer said, adding that oil industry representatives had in the past said phasing out MTBE would be a "walk in the park."

The threat of price spikes from the phase out is "sort of like let's punish the public again for something they had nothing to do with," she told colleagues.

Congress is not mandating that oil companies abandon MTBE, said Senator James Jeffords, a Vermont Independent. "The oil industry has had plenty of time to phase out MTBE and has resisted doing so," Jeffords said. "But suddenly, after years of foot-dragging, it has decided to stop using MTBE in gasoline in early May, in an abrupt and potentially disruptive manner."

The industry is "now faced with a crisis of its own making, and I fear it will use this as an excuse to hike prices at the pump," Jeffords said. "I am sorry that there are no witnesses at this hearing today to represent the oil industry so that we could better understand why they are responding to the new energy law in this way."