The US East Coast and Texas regions that use reformulated gasoline may face local supply disruptions and price spikes as oil refineries switch to blending the motor fuel with ethanol, the government s top energy forecasting agency warned Wednesday. The government in May will no longer require refineries to use in gasoline oxygenates like MTBE, banned in many states for polluting drinking water supplies. Some oil companies are being sued for using the additive.

Many refineries, worried they could be held liable, plan to stop using MTBE, or as methyl tertiary butyl ether, before the summer driving seasons begins and switch to clean-burning ethanol that is made mostly from corn. However, the federal Energy Information Administration said US ethanol production is running near capacity and "is not adequate to replace the MTBE lost at this time."

As a result, the EIA said the East Coast, particularly Maryland, Delaware, Washington D.C. and Virginia, and the Texas cities of Houston and Dallas, may face tight gasoline supplies and higher fuel prices for reformulated gasoline (RFG). "Overall, the complexity of the transition away from MTBE-blended RFG may give rise to local imbalances between supply and demand and associated price surges during the change," the EIA said. "As the summer progresses and demand grows, the tight supply situation is not likely to ease significantly, leaving the market exposed to the increased potential for price volatility in the East Coast and Texas RFG regions," the agency said.

The EIA said the current transition to ethanol caught some oil companies who were planning to eliminate MTBE at a later date off guard. "Not only do these companies have to change their refinery operations earlier than anticipated, they must add blending facilities at their terminals, convert some tanks to ethanol, convert their retail outlets and obtain ethanol contracts sooner than expected," the agency said.

Ethanol-blended gasoline is costlier and more difficult to ship because it can not be mixed with other gasolines during the summer months and ethanol must be transported and stored separately. If ethanol prices increase sharply, some gasoline suppliers will find it more profitable to reduce the quantity of ethanol being blended from 10 to 5.7 percent of the volume of gasoline, the EIA said.

The EIA said additional US ethanol production capacity under construction will eventually be able to meet domestic demand. Until then, imports of ethanol from Brazil could rise "significantly" this year and gasoline suppliers will likely remove some ethanol from conventional gasoline in the Midwest and ship it to the East Cost and Texas for blending into reformulated gasoline, the agency said.

Ethanol imports are less attractive than domestic production because imports are subject to an ad valorem tariff of 2.5 percent and a second duty of 54 cents a gallon, the EIA said. MTBE was used by refineries in 1979 to replace lead in gasoline to make car engines run smoother. Then Congress in 1990 required refiners to use oxygenates like MTBE to clean up tailpipe emissions.

US refiners lobbied Congress but failed to persuade lawmakers to include language in a new energy law that would have shielded them from some MTBE product liability lawsuits.
(Planet Ark, 23/02/06)