The MTBE Component (and others) to the Gasoline Issue

Lynne Kiesling (your go to gal for everything dealing with energy) points to an article in the Wall Street Journal (subscription required) that points to one reason why gasoline prices are high.

There’s been unconscionable behavior all right, most of it on Capitol Hill. A decent portion of the latest run-up in gas prices — and the entire cause of recent spot shortages — is the direct result of the energy bill Congress passed last summer. That self-serving legislation handed Congress’s friends in the ethanol lobby a mandate that forces drivers to use 7.5 billion gallons annually of that oxygenate by 2012.

At the same time, Congress refused to provide liability protection to the makers of MTBE, a rival oxygenate getting hit with lawsuits. So MTBE makers are leaving the market in a rush, while overstretched ethanol producers (despite their promises) are in no way equipped to compensate for the loss of MTBE in the fuel supply. Ethanol is also difficult to ship and store outside of the Midwest, which is causing supply headaches and spot gas shortages along the East Coast and Texas.

These columns warned Republicans this would happen. As recently as last year, ethanol was selling for $1.45 a gallon. By December it had reached $2 and is now going for $2.77. So refiners are now having to buy both oil and ethanol at sky-high prices. In short, the only market manipulation has been by politicians.

For the record, the FTC has an entire crew that pores over weekly average gas prices in hundreds of cities, looking for evidence of gouging — to no avail. Perhaps this is because no oil company controls enough of the market to exercise enough power to raise prices. The Hastert-Frist call for an investigation is nothing but short-attention-span political theater.

Now that isn’t all of it. With oil prices going up, gasoline prices are also going to go up. On top of this we don’t have a national market for gasoline. The boutique blends make it harder for suppliers for one region to offset shortages in another region. This too, we can lay at the feet of politicians. Add in the fact that only new refinery capacity is at existing refineries and you have less competition on top of it.

Another factor appears to be the contango in the oil futures market. A contango, in short, is when the futures price is higher than the spot price. This acts as a signal for higher prices in the future and it induces many in the relevant industry to buy the non-perishable good and sit on it in anticipation of those higher prices. Ideally, this would push up the spot market price so that the two prices move closer together.

Basically it looks like oil prices are going to stay high for awhile.

Update: Also check out James Hamilton’s post on Contango, Speculating, and the Price of Oil.

FILED UNDER: Economics and Business, , , , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Herb says:

    Steve:

    This article appears to prove what I have been trying to say to you in other comments I have made today on the price of gasoline.

    People know who has the power in Congress and the Presidency, The Republicans. If the Republicans with the power will not do something right now to bring down the price of gasoline, then they will pay a heavy price at the polls. The average working stiff with a family knows only the following right now,

    He is paying an outrageous price for a gallon of gasoline.

    This high price is taking a deep cut into the average household budget.

    The high price will sooner rather than later have a toll on the entire countries economy.

    People will purchase less in order to pay for the high gas prices

    The high gas prices are in effect the same as a wage cut when they have to pay out 20 to 30 dollars just get to and from work.

    Prices of other products will soon rise to reflect the higher cost of transportation.

    The average working know that he paid 99.9 cents per gallon when Bush and the Republicans took power and they now see a 200% rise in gas prices.

    The average working don’t give a damn about economic theory’s, supply and demand or excuses made to justify higher prices for gasoline.

    The voter will take their anger and frustration out on the Republicans because they have the power to correct the situation and will not do it.

  2. anjin-san says:

    When Bush was running in 2000, he said he had an energy plan. In this instance, he was telling the truth.

    The plan was to give energy companies a free hand to do pretty much whatever they please.

    Now the average guy is getting bent over the hood of his car and having a gas pump inserted in a painful manner.

    Meanwhile the oil companies, with record revenues and a multi-billion dollar tax break, are getting very, very, fat.

    Another day in Bush’s America…

  3. floyd says:

    gasoline is blended post production, at the wholesale level in tank farms.moving blend stock from place to place is not difficult. “boutique blends” are necessary, since weather and altitude affect the vapor point.eliminating these regional blends would actually cause shortages. for instance; propane and butane are added in cold climates, which lowers the vapor point and stretches lower quality blend stocks. this won’t work at high altitudes or hot climates.so it is more complex than the conspiracy types imply, besides,the oil companies don’t really need to “play games” to have their way.

  4. Christopher says:

    hey jap man anjin-san: why don’t you go back to Japan if you don’t like it here so much? Hmmmmmmmmm?
    If it is so bad here, go back to whence you came. Apparently you don’t like the democratic system of election here where GW was duly elected prez TWICE. And even with all of the probs of his presidency, republicans will STILL kick liberal ass this fall! LOL!!!

  5. akdfjo says:

    Bush’s whole ethanol canard is the latest chapter in his pattern of incompetence. The Republican Congress’ deplorable “energy bill”–signed by Bush–requires this worthless additiive–which is essentially government welfare to Iowa agribusinesses.

    It actually takes more fossil fuel energy to make & process ethanol than it offers in return.

  6. mark says:

    Ah, MTBE. Isn’t that the stuff that leaked into several municipal water supplies around the country? I seem to remember quite a big outcry about it in Santa Monica.

  7. Steve Verdon says:

    floyd,

    That is fine, the probelm is that various localities have their own requirements for environmental/regulatory purposes and have little or nothing to do with things like vapor point. Remove these regulatory requirements would not prevent refiners from blending gasoline for cold weather, etc. So your point, while informative is more or less irrelevant from the stand point of reducing gasoline price volatility.

  8. Steve Verdon says:

    The average working don�t give a damn about economic theory�s, supply and demand or excuses made to justify higher prices for gasoline.

    This undoubtedly true Herb. However, action without analysis will almost surely lead to stupid actions. Heck, even analysis wont stop politicians who cater to your heroic “average Joe” from doing idiotic things like price controls, windfall profits taxes, etc.

    So while you are probably right, the implication doesn’t really help you…unless you like really stupid policy that will do things like keep the price low, but result in shortages.

  9. anjin-san says:

    Christopher,

    Thanks for proving that Bush’s support is now restricted pretty much to morons…

  10. McGehee says:

    Thanks for proving that Bush�s support is now restricted pretty much to morons�

    All he proved is that Democrats don’t have a monopoly on morons.

  11. buddy says:

    i’m neither for or against Bush on this issue. to me, he’s been a non-factor. he hasn’t truly influenced policy action in any way, except by signing last year’s ridiculous energy bill.

    that being said, those in Congress are obviously posturing themselves politically for November. that’s why they’re suddenly calling for hearings and tax records.

    the truth is, much like the Dubai port deal, i don’t think most Americans (myself included) truly understand what causes/effects go into the average price per gallon of gasoline. everybody jumps on Exxon/Mobil and oilman Bush because they’re too lazy to actually think about it or investigate. i’ve learned more about the economics of fuel lately by studying up on it, and to cast it all off on Bush’s oil buddies getting rich on the rest of us seems idiotic. why wait until now to juice gas to $3 a gallon? hell, why wait for Bush to be in the White House if you have that kind of monopoly control? it makes NO COMMON SENSE! but i suppose for someone uneducated on the issue, it’s the easiest excuse.

  12. floyd says:

    not so steve, you can batch blend down to a couple of truckloads at the push of a button. the over regulation arguement, while attractive, is what’s not significantly relevant to price volatility. it’s a sort of redstrawherringman argument?[lol]