Editor’s note: 

The price of gasoline has been rising over the last several weeks, as traders are betting on major shortages during the peak summer driving season. Although the current buying was based on the phase out of MTBE based gasoline and the related logistics, in this installment of the Peak Oil series, Dr. Duarte looks at the validity of the situation and concludes that $3 gasoline is possible during the summer driving season. Other installments in the series can be found below:

• Peak Oil: The Covert War & The Uneasy Triangle

• Peak Oil: The Gulf Jitters
• Peak Oil: Bush, the Middle East Conflict, & Alternative Sources
• Peak Oil: China & Iran - The Energy Tightrope
• Peak Oil: Big Oil Companies Want Reserve Accounting Change
• Peak Oil: On the Verge of Hitting Prime Time
• Ethanol Hits the Big Time

Gasoline Crisis Possible Although Jury Still Out

Consumers and investors might be facing an extended run of rising gasoline prices by the traditionally tight summer driving season, although some experts are calling the mainstream expectations of such shortages as overblown.

The switchover from MTBE to ethanol and other gasoline additives is the major reason for traders to be bidding up the price of gasoline in the futures markets, and is accelerating the rise in the price of gasoline at the pump.

The key is whether this run up is justified, or otherwise. To be sure, on paper it is an important development, and is just another cog in the machine toward higher energy prices. When this set of events and its potential effect is added to the still unrestored production in the Gulf, the unlikely to be resolved anytime soon lack of refinery capacity, and the geopolitical risk to oil exploration and production, the case for $3 gasoline over the summer is almost a slam dunk.

According to the Chicago Sun Times: "The price of gasoline could rise this summer because of supply problems from the phaseout of a fuel additive found to contaminate groundwater."

Yet, representatives of the ethanol and oil industries told Congress on Wednesday that ethanol shortages, the indirect reason for the rise in gasoline prices, are not going to happen.

MTBE At The Center Of The Controversy

The additive is MTBE, a clean air additive that was put in place in 1990, but may be a cancer causing agent that has seeped into ground water and has led to a litigation frenzy. Congress has not exempted the oil industry from such litigation, so the oil industry is abandoning MTBE in favor of less litigious additives such as ethanol.

And while the ethanol industry is sanguine about its prospects for supplying enough of their fuel, an Energy Department expert suggests that the situation is far from clear.

According to the Chicago Sun Times: "Guy Caruso, the head of the Energy Department's statistical division, is doubtful, and told the Senate Environment and Public Works Committee that the imminent transition from MTBE to ethanol "could cause temporary supply dislocations and may cause price volatility." His agency estimates that 130,000 barrels per day of extra ethanol will be needed beginning May 5, an amount equal to 150 percent of current output."

The Transportation Issue

Assuming that there is enough ethanol to meet demand, there is another issue, that of getting the stuff from one place to another.

Because gasoline containing ethanol tends to attract water, it can't be shipped by pipeline. That means that trucks and railroad cars that specialize exclusively in the transport of the fuel will be needed.

According to UPI: "Bill Douglass, who testified on behalf of the Society of Independent Gasoline Marketers of America and the National Association of Convenience Stores, told the committee that gasoline wholesalers were scrambling to hire more truckers as well as contractors to clean out and prepare tanks for ethanol storage."

According to the Oil & Gas Journal: "The ethanol supply crunch already is being felt now and will continue at least through May 6 when MTBE lawsuits can be moved into the federal court system. The ethanol supply chain faces issues of delivery of this new and necessary component of gasoline into terminals, then blended with RBOB to make finished gasoline, and finally delivered into service stations."

The situation could be worsened by the fact that "many terminals do not have the space for separate tanks" in which to blend and hold the new ethanol blends "and many terminals lack access to the rail system used to deliver bulk ethanol."

Conclusion

The repercussions from seemingly unrelated events continue to drive fuel prices higher.

The combination of a well-meaning act of Congress, the addition of MTBE to gasoline in order to decrease pollution, has gone all wrong.

The substance may cause cancer, and its removal from the environment is certainly called for.

Litigation has led to the escalation of events, at a time when the already tight fuel refinery system in the U.S. is near a crisis due to the lack of capacity to meet demand.

Hurricane damage to refineries and production in the Gulf of Mexico, which remains largely unrepaired, is another factor that is exacerbating an already concerning situation.

In other words, we have another energy crisis building.

© 2006 Joe Duarte, M.D.
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