Refiner Ends Use of Fuel Additive, Warns Prices May Rise

Motor,  Sep 2005  by Nash, Tom

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Motorists could face even higher gasoline prices-perhaps up to 9 cents a gallon more-if other refiners follow the lead of Valero Energy in quickly withdrawing a controversial fuel additive.

One of the nation's largest refiners, Valero decided in early August to stop producing and blending the additive MTBE in gasoline. MTBE, a petroleum-based oxygenate designed to reduce air pollution, has been blamed for polluting wells and groundwater.

The company said it took the action because refiners didn't receive liability protection regarding the additive in the energy bill passed recently by Congress. Valero's production of gas for the U.S. market could drop by 2.5 million gallons a day, the company warned. The biggest effect would be felt next spring, after the bill has taken effect. :

If other refiners follow its lead, Valero said, the market could lose a total of about 10.9 million gallons of gas a day. It could take about a year to restore even half of the lost capacity, a Valero spokesperson said.

Seth Kleinman, market analyst for consultant PFC Energy, said that the MBTE issue is "throwing fuel on the fire" of rising gas prices, which "could add a few cents or more to the price of gasoline."

The switch would complicate not only refineries in this country, but those abroad that serve the U.S. market as well, Kleinman said. California, which already has some of the highest gas prices in the nation, wouldn't feel much of an effect. It's one of the states that have phased out MTBE over several years and replaced it with ethanol.

According to Valero, when New York banned the additive last year, the cost difference between conventional gas and the reformulated fuel was only 2 cents. Now it's 11 cents. But Valeros action could prove a shock to the system.

"It's clear costs are going to go up," said Ed Murphy, marketing director for the American Petroleum Institute, a Washington-based trade group. He said it takes about a year for refiners to switch to different gasoline formulations without major disruptions. This hurdle "wasn't anticipated, but we've got nine months to try to fix it," he said.

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