Energy Bill May Spur Gasoline-Price Rise

[adios]

I don't know if this link will work but I did get to this story through Yahoo.

Basically the article states that:

1) The recently passed energy bill will weaken the legal defense of those refiners who are sued for using MTBE and the resultant contamination that it might produce. If my recollection is correct, the Democrates in Congress pushed hard for this weakening.

2) MTBE is an anti smog additive.

3) Refiners such as Valero are abandoning the use of MTBE due to the increased legal risks of using it. Therefore it's use will be phased out and gasoline production will fall in the interim thus reducing the supply available thus increasing the price at the pump.

Energy Bill May Spur Gasoline-Price Rise

A provision in the massive energy bill that cleared Congress last week is likely to shrink the nation's gasoline supplies next spring and could boost prices eight cents a gallon or more.

The provision removes the congressional mandate, in place since 1977, that supports using the gasoline additive methyl tertiary butyl ether.

Yesterday, officials of two oil-industry trade associations and a spokesman for Valero Energy Corp., a major San Antonio refiner, said the change raises the legal risks for companies that use the additive. President Bush is expected to sign the 1,700-page bill this month, and the change goes into effect about 270 days after that.

MTBE reduces smog caused by automobile emissions, but has tainted well water in thousands of areas of the country, usually by seeping into ground water from leaks in underground tanks at gas stations. Although banned in some states, it is still heavily used in Texas and along the northeast coast of the U.S.

"This is going to be the biggest step the industry has taken since we phased out lead in the 1970s," says Gene Edwards, senior vice president of Valero. The company, he says, decided to stop using MTBE because the change in the energy bill weakens its defenses against lawsuits over pollution caused by the additive.

"We have put our planners on a crash course over what we're going to do," Mr. Edwards says. The company estimates it will lose about 60,000 barrels a day of gasoline production next spring because it will take as long as two years to reconfigure its refineries to use another additive. If other U.S. refineries follow suit, Valero figures, U.S. gasoline production would fall short of usual levels by about 258,000 barrels a day -- the equivalent of losing output from four major refineries. The price of gasoline "will definitely go up," Mr. Edwards says, estimating a potential rise of eight cents a gallon.


An official from another oil company said the impact of the change may not be as great on other refiners, some of which have already phased out MTBE use. But he said the federal move, which leaves a patchwork of state laws governing the use of MTBE, would impair the ability of companies to alleviate supply shortages by exchanges of gasoline and, thus, "lead to the balkanization of the nation's fuel distribution system."

Supplies would shrink around May, just as demand for gasoline rises for vacation driving. "I don't think anybody really intended this," says Ed Murphy, director of refining and marketing for the American Petroleum Institute, which represents the oil industry. He says there is "no question" but that the 270-day deadline "will add to the cost" of a gallon of gasoline because it will force refiners to compete for already scarce MTBE-free gasoline-blending components.

Initially, both the House and Senate versions of the energy bill called for phasing out MTBE over a number of years, but those clauses disappeared from the final version of the bill after an attempt to find a compromise that provided limited legal liability protection for MTBE producers collapsed. A different section of the bill, however, removed a 1977 mandate by Congress requiring that "oxygenates," or additives that reduced smog-causing components of gasoline, account for 2% of gasoline, by weight.

Oil companies and other MTBE producers have since argued in court that because Congress mandated its use, they shouldn't be held liable for MTBE damages in cases where they weren't proved to be negligent. At the time, there were only two oxygenates in use: MTBE, which is made from natural gas and refinery byproducts, and ethanol, which usually is made from corn.

Larry Neal, spokesman for House Energy and Commerce Chairman Joe Barton (R., Texas), who led the failed effort to resolve the MTBE dispute, says Mr. Barton had no immediate comment on legal issues caused by changes in the bill. Alex Flint, chief of staff for Sen. Pete V. Domenici, (R., N.M.), chairman of the Senate Energy Committee, said the oil refiners' problem was news to him: "They never came in to raise this with us." He said it wasn't likely Congress would revisit the MTBE issue anytime soon, because "it is simply too contentious."

"I suspect a lot of refiners are looking at the same question that Valero is," says Robert Slaughter, president of the National Petrochemical and Refiners Association, which represents oil refiners and independent makers of MTBE. "There is a question of where substitutes for this supply can be found." The Department of Energy noted in a 1999 study that it would take at least four years for refiners to substitute other additives for MTBE, which constitutes 10% of a gallon of gasoline in areas where it is used.

"We've not only tightened the domestic supply for gasoline, we've also just tightened supplies of imported gasoline," says Larry Goldstein, president of the Petroleum Industry Research Foundation, an independent industry research group in New York. He notes that in the past the U.S. has imported gasoline from Europe to prevent shortages but might not be able to in the future since European refiners use MTBE.

Mr. Goldstein says MTBE has been the cheapest and most popular additive for refiners partly because it has a high octane rating and allows refiners to use lower-octane gasoline components for blending. "Now we're going to have to shop the world for higher quality blend stocks, which will end up costing more money," he says. "Everything [Congress] did was to raise the cost to consumers."

Ethanol, which takes up less volume than MTBE, produces the same smog-curbing quality. Unlike MTBE, ethanol breaks down quickly into relatively harmless components that don't give well water the turpentine-like taste and smell that MTBE does.

Ethanol, however, is difficult to ship in pipelines or over long distances in tank trucks when blended in gasoline. That is because it is attracted to water and can come out of solution, throwing gasoline specifications off when it arrives at the gas station. Gasoline marketers, who blend ethanol into gasoline at local terminals, say it will take years to develop a nationwide ethanol distribution system.

The nation's water utilities, which successfully fought oil companies' efforts to get a partial liability waiver, say they aren't particularly happy with the outcome. They wanted a multibillion-dollar fund to help clean up tainted well water, but instead are left with the option of suing MTBE producers. Tom Curtis, deputy executive director of the American Water Works Association, says smaller water utilities have been hit with much of the MTBE damage.

Trial lawyers who waive fees for MTBE cases and instead take up to 40% of any court award may not want to handle claims for small water utilities, he says. "They may not have the kind of cases that would be attractive to contingency claims, so [the small utilities] may get left out of this," he says.

Write to John J. Fialka at john.fialka@wsj.com


Corrections & Amplifications:

Congress authorized the use of oxygenates in 1977 and mandated their use in gasoline smog-prone areas in 1990. This article incorrectly said their use was mandated by Congress in 1977.