Problems of Switching Gas Additives Fueling Concerns
Energy: Firms await word on whether move from MTBE to ethanol will be stalled. Meanwhile, possibility of supply shortages spark price worries.
By JAMES F. PELTZ,
LA TIMES STAFF WRITER
August 10, 2001
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It's a colorless liquid with an agreeable odor. But it's posing a danger that could put California's 21 million drivers in a very disagreeable mood in the coming months.
The liquid is ethanol and, as plans stand, it must be blended into California's gasoline by the end of next year as part of a clean-air effort. But just as the state's deeply flawed shift to deregulated electricity spawned the power fiasco, so are some people fretting that the shift to ethanol could trigger gasoline shortages and sharply higher pump prices, at least temporarily.
That's because ethanol, which is intended to replace the current low-emissions additive MTBE, carries a host of problems. Among other things, there's widespread concern that producers won't be able to manufacture enough of the 580 million gallons of ethanol required to meet California's needs when the switch occurs. Ethanol, derived mostly from corn, can't be shipped through the same pipelines that carry MTBE from its source to the state's refineries because ethanol mixes too easily with water that's often found in the pipelines. It also requires its own storage tanks.
That means ethanol must be sent by ship, rail or truck from its Midwest producers to the refineries' storage terminals, then blended into a newly formulated gasoline. As a result, the oil industry must spend roughly $1 billion to modify its plants and build special tanks for ethanol in California.
All those costs ultimately will be passed on to motorists.
"We've predicted all along that the switch to ethanol will likely cost California motorists 3 to 5 cents a gallon" merely in added transportation and production costs, said Jerry Martin, a spokesman for the California Air Resources Board.
But an even bigger problem looms that could send pump prices much higher than that, a problem that's essentially a guessing game involving the oil companies, Gov. Gray Davis, the Bush administration and Congress.
Davis has ordered that MTBE--methyl tertiary butyl ether, which makes fuel burn cleaner but has been found to contaminate ground water--be taken out of gasoline by Dec. 31, 2002. Ethanol is considered the only viable alternative to replace it but, given the problems associated with ethanol, there's speculation that Davis might postpone the switch.
The governor tried to get a waiver from the Bush administration from having to use any special mixture in gasoline on grounds that the state could meet federal clean-air standards without them. But the U.S. Environmental Protection Agency rejected the request in June, dropping the matter back into Davis' lap.
Davis then ordered California's EPA to come up with recommendations by mid-September on how to proceed. Options include Davis sticking with the current plan, pushing back the MTBE phaseout, suing the U.S. government over its refusal to grant California the waiver, or seeking new legislation from Congress.
But as the state weighs these options, most oil companies have yet to start spending big money to overhaul their refineries.
"If I was a refinery, I wouldn't do anything unless I was absolutely sure the governor isn't going to back down on the MTBE rule," said Philip Verleger Jr., an independent oil economist in Newport Beach.
Yet the oil firms, and by extension California's drivers, also are running out of time. If the refiners don't start modifying their plants within the next three months--and Davis' timetable stays the same and there's no new law from Capitol Hill--the oil companies won't have their ethanol infrastructure ready by the 2002 deadline.
That could cause an acute gasoline shortage in California and soaring pump prices similar to what happened this spring. "We are approaching that critical deadline for when the infrastructure needs to begin," said Pat Perez, fuels manager for the California Energy Commission.
"Something will need to be built before the end of the year" if the switch to ethanol goes forward as planned, said Patrick Fitzgibbon, who's overseeing the MTBE phaseout for British oil giant BP at its 650-acre Carson refinery, which produces 6 million gallons of gasoline a day for its Arco service stations. Arco is the top-selling gasoline in Southern California, with nearly 30% of the market.
And the potential for trouble doesn't stop there. Even if the modifications are made in time, California's refineries--already running at a near flat-out pace--won't be able to produce the same volume of fuel with ethanol as they can with MTBE because of physical differences between the two additives, some experts said.
The switch to ethanol "may cause a 6% to 10% shortfall in gasoline supply by the end of next year," the Union of Concerned Scientists, an advocacy group, said in a report last month.
"There isn't going to be as much gasoline" and that's a problem because demand for fuel from California consumers keeps climbing, Verleger said. That could cause shortages at the pump and, together with the other added costs related to ethanol, "it's going to be a very significant hit" for motorists, he said. "Probably 30 to 40 cents a gallon."
Pump prices could surge even higher--up to 50 cents a gallon more--should an ethanol shortage occur at a time of tight gasoline supplies, according to the CEC.
State officials and the oil companies are looking at gasoline imports as a potential solution. But that puts California--the nation's biggest fuel consumer, with a need for 1 million barrels of gasoline every day--at the mercy of possible import disruptions.
California also is looking to import ethanol, especially from giant ethanol producer Brazil, to make sure it has enough of the additive. But that presents the danger of a gas shortage in California from transportation disruptions at sea and on the ground.
Fitzgibbon estimates that 70% of the ethanol coming to California will have to arrive by rail. Yet as the gridlock crisis at Union Pacific Corp. proved four years ago, such shipments aren't guaranteed.
And one of the main modifications that the oil companies must quickly decide whether to build are facilities to unload the ethanol brought by train. "There are today, for all practical purposes, no rail-receiving facilities in California for ethanol," Fitzgibbon said.
It's all so complicated that even oil executives are vexed.
"There is so much confusion," said William Greehey, chairman of Valero Energy Corp., a San Antonio-based oil company that's in the process of building up its California presence by acquiring Ultramar Diamond Shamrock Corp.
"I don't think anybody knows who's doing what, but the infrastructure isn't in place," Greehey said.
Nonetheless, Valero and the other gasoline producers in the state vow that they'll adapt to whatever new rules go into effect. "We're going to be ready, no question," said Chevron Corp. spokesman Fred Gorell.
Fitzgibbon said his company also is "not going to let ourselves get caught short" if the switch to ethanol proceeds on its current schedule. But in looking at all of ethanol's liabilities, he added: "We'll have introduced a brand new mechanism for supply disruption in California."