Why Gas Prices Could Keep Climbing
As if prices at the gas pump aren't high enough. Come May, they could climb even higher as many refiners increase their use of ethanol in gasoline to help it burn more cleanly and thus, cut down on pollutants. Ethanol prices have been rising all year. According to Platts, the New York Harbor spot price for ethanol is about $2.60 per gallon, up from about $2.30 at the beginning of the year, while methyl tertiary-butyl ether (MTBE), the gasoline additive that ethanol will replace because of its pollutant qualities, is $1.60, down from $1.91 in January.
Since gasohol -- or the gasoline/ethanol mixture -- is about 10% ethanol, higher prices for the plant-derived fuel will continue to be felt at the pumps. Drivers might also notice that a tankful of gasohol doesn't get them quite as far as MTBE-laced gasoline, since ethanol doesn't quite pack the same amount of energy as MTBE.
With higher demand on the horizon, some energy industry observers are looking south -- specifically, to Brazil. Along with the U.S., Brazil is a world leader in producing ethanol (about 4 billions gallons each in 2005), though Brazilian ethanol is derived from sugar cane, while the American version comes from corn. However, imports wouldn't necessarily grant price relief, because the U.S. imposes a 2.5% tariff on ethanol imported from Brazil in addition to a 54-cents-per-gallon duty.
GREAT DEMAND. Duties won't matter much, though, if Brazil doesn't have any to spare. Latin America's largest country has a phenomenal thirst. In the U.S. ethanol is primarily a gasoline additive, but Brazil has pushed the use of "flex-fuel" cars -- vehicles that can alternate between burning gas and ethanol -- to the point that they now account for the majority of new cars sold. What's more, the normal gas sold in Brazil has a much higher proportion of ethanol than that used in the U.S., though recent constraints on supplies have forced it to reduce the minimum ethanol requirement from 25% to 20%.
Alfred Szwarc, a consultant for UNICA, Brazil's largest association of sugar and ethanol producers, says that the sugar crop harvest is only beginning, and supply will be tight following last year's drought. He doesn't think the Brazilians will even be ready to consider boosting exports until late May, after the MTBE phase-out begins in those areas where it is most widely used: the Dallas and Houston metropolitan areas; and densely populated areas of the coastal Northeast, outside of New York and Connecticut, where it is already banned.
The U.S. ethanol fuel program is far less developed than Brazil's. Most American cars can't run on formulas of more than 10% ethanol. Last year's federal Energy Policy Act requires that the U.S. burn 7.5 billion gallons of renewable fuel annually by 2012, and much of that will likely come from ethanol. The U.S. ethanol industry -- Archer Daniel Midland (ADM) is the largest producer -- is ramping up to meet the growing capacity, but it is not clear whether it will have enough to cool down prices this summer.
PAY THE PRICE. Why the sudden shift to ethanol now? MTBE is downright dirty on the ground. If it seeps into groundwater, it will make it undrinkable, and there are concerns that it may be a carcinogen. Refiners are a step ahead of regulars now and are cutting back on MTBE because of potential legal liabilities. MTBE-related lawsuits are already pending (see BW Online, 3/16/06, "A New Spike at the Pump?").
According to industry observers, any ethanol price spikes will more likely stem from an inability to move it rather than an outright shortage. Unlike MTBE-infused gasoline, ethanol can corrode pipelines and therefore must be added to the gas late in the supply chain. Without pipelines available, the ethanol must travel by barge, train, or truck.
There's going to be "a lot of scrambling that we're going to have to do," says Mark Routt, a senior consultant with the research group Energy Security Analysis. But in the end, he thinks refiners will get whatever ethanol they need. They will just have to pay a higher price. And so will drivers.
BusinessWeek
Since gasohol -- or the gasoline/ethanol mixture -- is about 10% ethanol, higher prices for the plant-derived fuel will continue to be felt at the pumps. Drivers might also notice that a tankful of gasohol doesn't get them quite as far as MTBE-laced gasoline, since ethanol doesn't quite pack the same amount of energy as MTBE.
With higher demand on the horizon, some energy industry observers are looking south -- specifically, to Brazil. Along with the U.S., Brazil is a world leader in producing ethanol (about 4 billions gallons each in 2005), though Brazilian ethanol is derived from sugar cane, while the American version comes from corn. However, imports wouldn't necessarily grant price relief, because the U.S. imposes a 2.5% tariff on ethanol imported from Brazil in addition to a 54-cents-per-gallon duty.
GREAT DEMAND. Duties won't matter much, though, if Brazil doesn't have any to spare. Latin America's largest country has a phenomenal thirst. In the U.S. ethanol is primarily a gasoline additive, but Brazil has pushed the use of "flex-fuel" cars -- vehicles that can alternate between burning gas and ethanol -- to the point that they now account for the majority of new cars sold. What's more, the normal gas sold in Brazil has a much higher proportion of ethanol than that used in the U.S., though recent constraints on supplies have forced it to reduce the minimum ethanol requirement from 25% to 20%.
Alfred Szwarc, a consultant for UNICA, Brazil's largest association of sugar and ethanol producers, says that the sugar crop harvest is only beginning, and supply will be tight following last year's drought. He doesn't think the Brazilians will even be ready to consider boosting exports until late May, after the MTBE phase-out begins in those areas where it is most widely used: the Dallas and Houston metropolitan areas; and densely populated areas of the coastal Northeast, outside of New York and Connecticut, where it is already banned.
The U.S. ethanol fuel program is far less developed than Brazil's. Most American cars can't run on formulas of more than 10% ethanol. Last year's federal Energy Policy Act requires that the U.S. burn 7.5 billion gallons of renewable fuel annually by 2012, and much of that will likely come from ethanol. The U.S. ethanol industry -- Archer Daniel Midland (ADM) is the largest producer -- is ramping up to meet the growing capacity, but it is not clear whether it will have enough to cool down prices this summer.
PAY THE PRICE. Why the sudden shift to ethanol now? MTBE is downright dirty on the ground. If it seeps into groundwater, it will make it undrinkable, and there are concerns that it may be a carcinogen. Refiners are a step ahead of regulars now and are cutting back on MTBE because of potential legal liabilities. MTBE-related lawsuits are already pending (see BW Online, 3/16/06, "A New Spike at the Pump?").
According to industry observers, any ethanol price spikes will more likely stem from an inability to move it rather than an outright shortage. Unlike MTBE-infused gasoline, ethanol can corrode pipelines and therefore must be added to the gas late in the supply chain. Without pipelines available, the ethanol must travel by barge, train, or truck.
There's going to be "a lot of scrambling that we're going to have to do," says Mark Routt, a senior consultant with the research group Energy Security Analysis. But in the end, he thinks refiners will get whatever ethanol they need. They will just have to pay a higher price. And so will drivers.
BusinessWeek
posted by Ottawa Gas Prices | 9:16 PM
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