Brandon: An unexpected culprit in gas price escalation
Apr 3, 2006 5:23 PM, By Hembree Brandon
Talk about timing: While major oil company executives were being grilled by the Senate Judiciary Committee about record profits and the impact of consolidations on prices, gasoline pump prices were seeing one of the biggest short-term run-ups since Hurricane Katrina.
BRANDON
Within the space of three weeks, starting late February, prices hereabouts rose more than 40 cents per gallon. In one two-day period, the price of regular unleaded went up 10 cents per gallon each day, hitting $2.499 before dropping back ever so slightly to the current $2.459. In California, the per gallon price of unleaded topped $2.60.
The reasons, we’re told, are (1) the unexpected shutdown of a refinery in St. Croix, (2) scheduled maintenance at U.S. refineries and their switchover to summer-grade fuels, and (3) the higher price of ethanol now being mandated for gasoline blends in several states to cut air pollution and to reduce demand for oil.
It’s indicative of the jitteriness of energy markets that the two-week hiatus at the St. Croix refinery, which only processes about 150,000 barrels of crude per day, sent New York Mercantile Exchange gasoline futures soaring nearly 13 cents per gallon — this despite the fact that U.S. crude oil supplies are reported at a seven-year high and gasoline supplies are at year-ago levels, well above any Katrina-induced reductions.
The irony in this skyrocketing price scenario is that a major share of the blame is being directed at ethanol, which is being used in many pollution-sensitive areas of the United States to replace methyl tertiary butyl ether (MTBE), a cancer-causing agent, as an additive in gasoline. Shortages and higher prices for ethanol are, according to press reports, a factor in the gas price run-up.
Wholesale prices for ethanol, in late March, were about $2.75 per gallon, some 50 cents above normal, and higher than gasoline. While ethanol plants are popping up all over the map and the added capacity should eventually help moderate prices, it still is an expensive product.
That’s a near-term boon for farmers who’ve invested in ethanol plants and for major industry players such as Archer Daniels Midland and Cargill. Sustained high prices might, however, be a problem long-term, given the substantial government subsidies and tax breaks for ethanol.
And in one of the quirks of U.S. trade agreements, Cargill has been catching some heat from American corn producers and ethanol interests for its plans to build a plant in El Salvador that would convert Brazilian ethanol into fuel grade ethanol, which could then be imported into this country free of tariffs. This is allowable under provisions of the Central America Free Trade Agreement (CAFTA), and since Brazilian ethanol costs less than half that produced in the United States, even with processing and transportation costs, it would mean a tidy profit on the imports.
Brazil, which manufactures ethanol from sugarcane, is far and away the world’s low-cost producer of ethanol. It has plenty to sell and the potential to crank out substantially more. It will be the 800-pound gorilla in competition to meet the increased worldwide demand for ethanol.
e-mail: hbrandon@prismb2b.com.com
