In the WSJ this morning..
February 1, 2001
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Gasoline Prices Are Primed
To Rise Again This Summer
By ALEXEI BARRIONUEVO and THADDEUS HERRICK
Staff Reporters of THE WALL STREET JOURNAL
Drivers, beware: Gasoline pump prices are primed for a repeat of last summer's scary ride.
One reason is the recent decision by the Organization of Petroleum Exporting Countries to trim crude-oil production by 1.5 million barrels a day. But an even bigger culprit is the price of natural gas, which is crucial in the production of MTBE, a high-cost gasoline component that reduces tailpipe emissions.
Natural gas is used to make methanol, a primary ingredient in MTBE, whose full name is methyl tertiary butyl ether. But with natural gas having soared above $10 a million British thermal units in late December on the futures market, "it doesn't make economic sense to produce" methanol, says George Beranek, an analyst at Petroleum Finance Co., a consulting firm in Washington, D.C. Indeed, analysts say as much as 50% of North American methanol production capacity is idle. Although natural-gas prices have declined to about $6 per million BTUs currently, that's still far above the level of about $2 per million BTUs a year ago.
As a result, "we don't see starting off the driving season any better than last year," says Dave Costello, an economist with the Department of Energy's Energy Information Administration.
The price of MTBE also has risen, but not enough to offset the sharp increases in natural-gas prices. Indeed, MTBE prices jumped by nearly 37% to a high of $1.41 a gallon in January from a low of $1.03 a gallon a month earlier. Still, some refiners have stopped making the chemical temporarily. For example, Valero Energy Corp. in San Antonio dropped its MTBE production from mid-December to about mid-January by more than half, to 7,000 barrels a day. Overall, the industry has cut back by 80,000 barrels a day, or about 35%, Valero says. As a result of the lower MTBE supplies, both reformulated and total gasoline production fell about 4% during the period.
"We probably would have built more gasoline [inventories] if this hadn't happened," said Gene Edwards, a Valero vice president. "What happened with natural gas has cleaned the system out of any gasoline surpluses and has got us back in a tight situation again."
Although the problem has eased as natural-gas prices have slipped in the last several days, tight supplies of reformulated gasoline, which has additives to reduce auto emissions and is used by about a third of the nation, could push up prices this spring and summer. As of Jan. 22, the average price of gasoline was $1.47 a gallon, up from $1.32 a year ago, but down from last summer's peak of $1.67.
Another problem for refining concerns: High electricity prices in some parts of the country drive up refiners' overhead costs.
MTBE, a component that boosts octane in unleaded gasoline, was adopted to help the environment. But California is phasing out MTBE by the end of 2002 because it is believed to contaminate ground water. The rest of the country is expected to do the same soon after. In the meantime, MTBE is critical to the gasoline supply for the East and West coasts to satisfy government requirements for an additive to reduce emissions.
While gasoline stocks are up slightly from a year ago, the Energy Information Administration expects them to fall more sharply between January and March than usual. Meanwhile, demand is expected to grow this year by as much as 2%, says the EIA's Mr. Costello. That's likely to be the case even if the economy slips into a sustained slowdown, he says.
Last year, a shortage of gasoline led prices to rise to above $2 a gallon in the Midwest at one point in the peak driving season from Memorial Day to Labor Day. A mix of pipeline outages, refinery bottlenecks and difficulties implementing a new reformulated-gasoline program contributed to the spikes.
Matthew Simmons, president of Houston investment bank Simmons & Co., worries that refineries might put off maintenance work next month to take advantage of high profit margins on gasoline, which could make them vulnerable to breakdowns during the summer.
OPEC is yet another worry. If demand is stronger than expected, the group's production cuts could mean higher crude-oil prices this spring.
Write to Alexei Barrionuevo at alexei.barrionuevo@wsj.com and Thaddeus Herrick at thaddeus.herrick@wsj.com. |
