Gas could jump 50 cents per gal.
NEW YORK (AP) - January 31, 2008 Experts are predicting pump prices, which jumped by almost a
dollar a gallon in each of the last two springs in many parts of
the United States, will spike again this year as refiners and gas
stations switch from winter- to summer-blended fuels.
The increases, starting as early as February in southern
California, could push the average national price to a record $3.50
a gallon or more by June.
That would be 17 percent higher than today's average of just
under $3 a gallon, which already is about 80 cents a gallon higher
than year-ago levels thanks to the surge of crude oil that took
futures prices briefly to $100 a barrel. Prices in urban areas on
each coast could approach $4 a gallon.
And the reason for the spring price shocks? Analysts say it's
linked to a shortage of alkylate, a little-known and expensive
gasoline additive that some in the industry are calling "liquid
gold." It has become a must-have ingredient since refiners stopped
using MTBE two years ago when the potentially cancer-causing
additive was found to be seeping into ground water.
The alkylate shortage has become the most important driver of
summer gas prices, said Doug Leggate, an analyst at Citigroup
Global Markets. "Supply of (alkylate) will set the price of summer
gasoline - not inventory levels," he said.
Oil companies deny they are purposely limiting production of
alkylate, which like gasoline, jet fuel and asphalt is a byproduct
of the oil refining process. But only recently have some started
studying how they can boost output, and alkylate prices today are
more than 15 percent higher than spot gasoline prices. That means
overall costs will jump when it is added in larger quantities to
summer-blend fuel.
Without additives, gasoline doesn't burn completely, increasing
tailpipe air pollution. And untreated gas evaporates more quickly
in hot weather, potentially causing vapor lock when it changes from
a liquid to a gas and blocks fuel lines.
The federal government long ago required refiners to boost the
oxygen content of summer-blend gasoline to make it burn more
completely, a problem that was solved by adding MTBE and, more
recently, ethanol.
But ethanol also has a high evaporation rate, so refiners
increasingly have turned to alkylate, which Tom Kloza, publisher
and chief oil analyst at the Oil Price Information Service in Wall,
N.J., calls the "magic bullet" in making summer gasoline.
Alkylate and other gasoline additives don't raise the same
safety issues as MTBE because they don't bond with water as
effectively as MTBE did, analysts say.
Demand for alkylate changes with the seasons, falling in autumn
and rising in the spring. On average, alkylate makes up about 10
percent of a gallon of gas, though that rises to as much as 15
percent in summer. But making more of it is not as simple as
throwing a switch since the underlying chemical properties of oil
limit how much of any one refined petroleum product can be
produced.
On average, about 44 percent of each barrel of oil ends up as
gasoline, 22 percent as diesel fuel and heating oil, 9 percent as
jet fuel, and about 4 percent each as heavy fuel oil and liquefied
petroleum gas, according to the Energy Department. The remainder is
comprised of smaller products and additives.
The refining process is loud, hot and smelly. Boilers separate,
or "crack," oil into new substances by subjecting it to high
temperatures and pressure. As different products are boiled out,
pipes carry them to other boilers or vessels where they're further
refined, mixed with other substances or cleaned of pollutants and
toxins.
Alkylate is made via a chemical reaction sparked when olefin
fluids and isobutane - two of the smaller byproducts of the main
gasoline producing unit - are mixed with acid.
"As opposed to the (gasoline unit) that cracks big components
into small, this one takes two components and basically combines
them," said Mark Fligner, director of planning and economics at
Valero Energy Corp.'s refinery in Paulsboro, N.J., across the
Delaware river and just south of Philadelphia.
Owners of about two-thirds of U.S. refineries have invested the
$100 million or more it takes to add an alkylate unit. The rest
have to buy alkylate on the spot market if they want to use it as
additive in their gasoline supplies.
Refiners aren't gaming the system, purposely limiting alkylate
production to boost gas prices, said John Auers, senior vice
president at Turner Mason & Co., a Dallas consultancy. "They're
not because they can't," he said. "You can't make more alkylate
than you have feedstocks."
But there are tradeoffs that every refiner must weigh. For
example, olefins and isobutane are in high demand for use in
producing other lucrative products like plastics. Refiners can
tweak their main gasoline producing unit to make more olefins and
isobutane, but that would cut the gasoline output.
Alkylate prices have jumped from 77 cents a gallon in the summer
of 2001 - when MTBE was still in use - to nearly $3 a gallon at
points over the past two summers. Wednesday's price on the spot
market was $2.72 a gallon, 40 cents more than the spot price of
gasoline, according to Platts. Retail prices for gas are higher
because things like state and federal taxes are added. In recent
summers, that spot market differential has jumped as high as 60
cents.
Refiners place the blame for spring gas price increases on crude
costs, environmental regulations that have increased the overall
cost of refining, and their inability to expand or build new
refineries fast enough to keep up with gasoline demand.
John Pickering, vice president and general manager at the
Paulsboro refinery, said Valero makes enough alkylate to meet its
needs, but concedes that there is a national shortage of the
additive in the spring and summer.
Other refiners contacted by The Associated Press said they are
reluctant for competitive reasons to talk about how they blend
gasoline, or whether they face alkylate shortages.
What is known, however, is that refiners are hiring companies
such as UOP LLC of Des Plaines, Ill., to determine whether they can
increase the capacity of their existing alkylation units. "In the
last year or so, there has been a significant uptick (in
business)," said Ashis Banerji, director for refining at UOP,
which licenses alkylation technology to refiners.
And the 36 percent of domestic refineries that don't have
alkylation units are looking at adding them.
"Our impression is that refineries are moving as fast as they
possibly can to add alkylation capacity," said Jim Pawloski,
business director at UOP competitor DuPont Clean Technologies, a
unit of DuPont Co. He said his unit's business has jumped five-fold
over the past five years and will likely double again this year.
The steep jump in summer alkylate prices has also caught the
attention of at least two companies that used to produce MTBE.
Enterprise Products Partners LP and Texas Petrochemicals Inc., both
of Houston, say they're closely studying whether to convert idled
MTBE plants into alkylate factories.
That also highlights the conundrum that is alkylate: If too many
refiners decide to spend big bucks to crank up production, the
premium prices now enjoyed by alkylate makers could disappear.
Refiners have to weigh the cost of such an investment against
the incremental cost of simply buying the extra alkylate they need.
"I'm not sure that it would be economical," said Jeff Hazle,
technical director at the National Petrochemical and Refiners
Association.
But if production doesn't rise, American motorists will be faced
with big jumps in spring gas prices for years to come.
(Copyright 2008 by The Associated Press. All Rights Reserved.)