Experts differ over cost of ethanol switch

Sacramento Bee

Californians could pay $2 a gallon — or higher — for gasoline early in the new year when the state makes the transition from gas additive MTBE to ethanol, some energy experts say.

Analysts, fuel-market watchers and others see a price spike ahead as the state makes the conversion, mandated because of MTBE’s potential to leak from underground tanks and pollute groundwater.

But the oil companies that refine and produce gasoline bristle at what they characterize as the doomsday predictions, pointing out that they are way ahead of meeting the state’s deadline for conversion and that they are forging ahead to wrap it up as soon as possible.

The latest bombshell in the state’s long-contentious gas-additive debate dropped just before Thanksgiving, when Stillwater Associates, an energy consulting firm that has done research for the California Energy Commission, said the odds favor an infrastructure disruption — a refinery fire, breakdown or fuel/additive-transport disruption, for example — in the MTBE-to-ethanol change, which would then prompt a sharp rise in gas prices at the pump.

“Our major concern is if there’s a serious refinery hiccup, they won’t be able to keep up,” said Stillwater energy analyst David Hackett.

Paying $2 or more for a gallon of self-serve, regular, unleaded gas would be a jolt to Northern Californians who have experienced comparatively stable prices for eight months — paying, on average, between $1.59 and $1.67 a gallon, according to AAA of Northern California. Sacramentans have paid a few pennies less per gallon in that time, AAA said.

The new concerns were not news, however, to many longtime followers of California’s historically twitchy gasoline market.

“I just got back from a (meeting) in Texas, and most of the major oil analysts there were predicting increases of 50 to 75 cents a gallon in California next March or April,” said Atle Erlingsson, a spokesman for AAA of Northern California.

“Switching to ethanol is a compound issue, but it mostly comes down to supply and demand. There is some pessimism among analysts about meeting California’s demand. And if there’s not enough ethanol, gas prices are going to go up.”

Conversion typically involves constructing special rail, port and fuel-blending facilities. MTBE and ethanol must be handled differently, with a primary concern being ethanol’s tendency to corrode pipelines. Oil companies add it at distribution points — where gas goes from pipelines to trucks or ships — while MTBE has typically been mixed at refineries and moved through pipelines to distributors.

Those predicting price hikes cite what they consider an iron-clad precedent: When the Chicago and Milwaukee areas went through the MTBE-to-ethanol conversion in late June 2000, gas prices sailed above $2 per gallon. At the time, motorists in other large U.S. metropolitan areas — where stations still pumped fuel with MTBE — were paying between $1.54 and $1.87.

Some analysts believe that the $2.14 price seen in Chicago and $2.08 in Milwaukee might be a picnic compared to what could happen in California. California’s appetite for gasoline is greater (a national-high 15 billion gallons a year, about a third more than No. 2 Texas), and the likelihood of an infrastructure problem — anything from on-site failures of blending equipment to construction delays in conversion — is high with 13 major refineries in the state.

Oil companies don’t buy that scenario, citing their own iron-clad precedent.

ConocoPhillips, which operates refineries in Rodeo and Los Angeles, completed the conversion in July and provides MTBE-free gasoline to its 1,500 “76” service stations throughout California. No monster price hike occurred.

“We did a lot of planning in this process, and there were a lot of logistics involved, but we made the commitment that we would not make our customers pay high prices at the pump,” said ConocoPhillips spokesman Jeff Callender, who noted that the company paid for conversion costs out of its budget, including the addition of an ethanol-only pipeline in California.

The MTBE-to-ethanol conversion in California has evolved over nearly a decade.

In the mid-1990s, most California refineries more than tripled the volume of MTBE (methyl tertiary butyl ether) in gasoline to meet a federal mandate that at least 2 percent of the fuel sold in smoggy regions contain oxygen-boosting compounds to cut vehicle exhaust. Either MTBE or ethanol could be used. But MTBE was subsequently labeled a menace to water supplies because it migrated from leaking underground fuel storage tanks to groundwater faster and farther than gasoline’s other ingredients.

The state turned its attention to ethanol — alcohol produced from corn and other grains — grown primarily in the Midwest but also imported from Brazil. In March 1999, Gov. Gray Davis ordered removal of MTBE from the state’s gasoline by Dec. 31, 2002, calling the fuel additive “a significant risk to California’s environment.”

But in March of this year, Davis — citing the difficult logistics of conversion and the accompanying possibility of skyrocketing fuel prices — set the deadline back to Jan. 1, 2004.

ConocoPhillips, Exxon-Mobil, Shell, BP and other oil companies representing more than half of the California market supply, announced that they planned to meet the original deadline.

While some lauded the companies’ dedication, others insisted those efforts would simply hasten an unavoidable rise in gas prices.

Jamie Court, executive director of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, said he fears the MTBE-to-ethanol conversion will provide “refiners an opportunity once again to manipulate supply and jack up prices. … Refiners know that if they keep inventories low enough, they can use that to make more profits.”

In August, a foundation report recommended replacing the three-octane gasoline format (regular, midgrade, premium) with a single-grade gasoline requirement, with an octane level of 87 or 88. Citing a detailed study, the group said a single-grade plan would stabilize supplies, which in turn would stabilize prices.

Oil companies sharply dispute accusations that they worked to meet the original deadline simply to cash in on price hikes as soon as possible. They insist that they were already well along in the conversion process and that slowing down or putting it off might have cost producers and consumers more.

The prospect of paying more than $2 a gallon has been a shock to motorists.

“If it gets to $2 a gallon, I’m in trouble,” said Will Lambert of Roseville. “I’m already strapped just driving into Sacramento and back. We usually drive down to San Diego to see my wife’s parents during Easter break, but if gasoline is that expensive, we won’t make it.”

“Two dollars would be horrible,” said Mary Barber of Sacramento. “We make our family budget to the penny and try to stick to it. But $2 would break us. We would have to give up other things.”

One Sacramento-area service station operator said he feared a customer backlash if prices top $2. The Chevron station operator, who asked not to be identified, said, “I really dread it, no matter how much the price goes up. I’ve had customers scream at me when it happened before. They swear they’ll never come back, and many of them haven’t.

“The funny thing is, I really don’t have control about what happens with the price.”

The people who do have some control insist that all the anxiety and hand-wringing is premature, and perhaps completely unnecessary.

“Basically, after the first of the year, the conversion should be complete at the (Shell) refineries,” said Cameron Smyth, a spokesman for Shell Oil Products, which operates refineries in Martinez, Bakersfield and Los Angeles. “Shell did not take the commitment to convert to ethanol lightly. We took the time to review where we were in the process and the potential impacts to the customer.

“For the customer, we’re still confident that they’re not going to see much of a (price) change at all in all our grades of gasoline.”

Others in the oil industry said predicting the price of gasoline in California during conversion is impossible.

Jeff Wilson, a spokesman for the Western States Petroleum Association, which represents major oil refiners such as ExxonMobil, BP and Texaco, noted that different refiners are at different stages of conversion.

“Some companies are still working toward it, and others seem to be there already,” Wilson said. “It’s really a proprietary company decision …

“I don’t have a crystal ball and can’t predict the supply-and-demand outcome. But truthfully, in talking to the individual (refiners), there’s a good indication that they are well under way in the conversion process.”

William L. Rukeyser, a spokesman for the California Environmental Protection Agency, said the MTBE-to-ethanol switch is “not an exotic transition. It’s not brain surgery.” He estimated that modifications in the production process would boil down to an increase of 2 cents to 3 cents a gallon.

However, Rukeyser stressed, those few pennies do not account for the price consumers pay at the pump. That can be affected by numerous factors, including disruptions in the ethanol-importation process, the cost of producing more gasoline (because the amount of ethanol additive needed is less than MTBE), global supply and demand, international oil-production levels, refinery accidents or breakdowns, the U.S. and international economies, world markets, threats of war, and weather.

“If there’s one localized shock, like a fire at a refinery or an OPEC or Arab oil disruption, that affects (prices),” Rukeyser said.