California ethanol switch to boost gas prices, refiner profits
Date: 26-Nov-02
Country: USA
Author: Erwin Seba
"It has the potential to be a mess," said Bryan Caviness, of Fitch Ratings.
"This is going to have the same effect on supply as removing an entire refinery from California," said one gasoline dealer. "That will have the effect of boosting prices and creating excellent refining profit margins."
California decided to switch to ethanol from another gasoline additive, MTBE, due to evidence MTBE is contaminating ground water, largely by leaking from underground fuel tanks.
Both MTBE and ethanol are oxygenates designed to reduce tailpipe emissions by making gasoline burn hotter. The federal government mandates the inclusion of an oxygenate in gasoline - creating "reformulated" grades - at roughly a third of the nation's pumps to combat urban smog.
The switch to ethanol in California, mandated by 2004, is already underway, with refiners planning to add it to their gasoline a year early to reduce pollution.
In order to reach the federal oxygenate standard, gasoline producers will use a blend of roughly 5.8 percent ethanol, compared with the 11 percent blend of MTBE currently used. The shift will remove more than 5 percent from the California gasoline pool.
"The MTBE phase-out could mean the gasoline supply is short 5 to 10 percent," Stillwater Associates President David Hackett told Reuters. "There could be significant shortfalls."
The switch could lead to gasoline prices of $2 to $3 a gallon, Stillwater said in a report. In unusual situations, that price could spike to $4 a gallon.
Gasoline supplies on the West Coast are already running 3.3 million barrels, or 10 percent, below last year's levels, according to federal figures. Analysts expect the shortfall to become more acute next spring in the run-up to peak summer vacation needs.
PRICES ALREADY UP
California drivers currently pay $1.63 for a gallon of regular unleaded fuel, about 25 cents, or 18 percent, higher than the same time last year.
Higher prices for crude oil are partly to blame for the increase in pump prices, as possible war in Iraq threatens supplies from the oil-rich Middle East.
California motorists have long paid more than drivers in other states, since the state is isolated from the rest of the U.S. supply system and tough state environmental regulations make California's gasoline hard to process.
"It's going to be an interesting brand of gasoline that no one else makes anywhere in the world," Hackett said of the ethanol-blended grade.
California refiners, who produce about 1 million barrels of gasoline per day, are expected to enjoy improved profit margins in the event of a supply shortfall, much like oil firms in the Midwest did during the summer supply crunch of 2000.
Originally, the switch to ethanol was to be completed by Dec. 31 of this year. But in March, California Gov. Gray Davis ordered the switch moved back to Dec. 31, 2003, due to concerns about the effect of the transition on the market.
Even so, ConocoPhillips is already producing and selling the ethanol-blend gasoline in California. Oil majors Royal Dutch/Shell, BP Plc , and Exxon Mobil Corp. will make the switch at the start of next year.
Refiners' profit margins in California have doubled in the last month to more than $8 for every barrel of oil processed. Valero Energy Corp. and Tesoro Petroleum Corp. will continue with MTBE through 2003.
Even though the ethanol-blend gasoline required in California will not be made anywhere else, the gasoline blendstock - known as CARBOB, for California Air Resources Board Oxygenated Blendstock - can be imported and blended with ethanol in the state.
The ethanol, for the most part, will be shipped in from the Midwest corn belt or big refining centers in Texas and Louisiana, Fitch's Caviness said.
By contrast, most MTBE used in California is produced within the state.
