No Shortage

Ethanol officials say they're not responsible for surging gas prices

By Bill Wilson
Wichita Business Journal
Updated: 8:00 p.m. ET April 9, 2006


Oil refiners say don't blame them for higher gasoline prices this summer. They blame ethanol producers.

Oil refiners are voluntarily removing the additive MTBE from their gasoline. It has been linked to groundwater pollution. They want to replace MTBE with ethanol, and Kansas ethanol producers say there's plenty available for the transition.

But the U.S. Department of Energy told a U.S. Senate committee last week that there isn't enough ethanol to replace the MTBE. That could lead to a smaller supply of gasoline, they say, and higher prices at the pumps.

Kansas producers, state ethanol officials and the president of a national organization all say the DOE forecast of an ethanol shortage is wrong. They call the government's claim "disingenuous" and say their industry will be able to meet peaking demand for the changeover.

Guy Caruso, head of the energy department's statistical division, told a Senate committee ethanol supply won't meet demand, creating gasoline price volatility. Unleaded has surged to $2.49 a gallon in Wichita and some analysts are forecasting that the price will reach Hurricane Katrina levels later this summer -- $3 a gallon or slightly higher.

Ed Cross, vice president of the Kansas Independent Oil and Gas Association, agrees. Cross says that not only will there not be enough ethanol to meet the MTBE changeover, the industry won't meet President Bush's goal of 7.5 billion gallons produced annually by 2012.

"It's going to be almost impossible for them to meet," Cross says. "In order to meet those goals in the future, you're going to see whole states planted in crops. Our industry thinks it's going to be almost impossible for ethanol to be that big of a replacement."

Refiners say that their lack of liability protection for MTBE pollution cleanups make the immediate changeover necessary.

A federal report by Energy Information Administration analyst Joanna Shore -- the basis for Caruso's testimony before the Senate last week -- says ethanol producers can't keep up with demand and can't transport it to refineries for blending, creating a loss in gasoline production. And the report says the U.S. will lose gasoline importers who can deliver MTBE-free product or the high quality oil needed to combine with ethanol. Less available gasoline means higher pump prices.

Wrong, says Bob Dinneen, president of the Renewable Fuels Association in Washington, D.C.

"I absolutely reject that argument," Dinneen says. "There's no question whatsoever that the ethanol supply will be there from increased production, market adjustments and some level of increased imports. We have 33 plants under construction nationwide with 2 billion gallons of capacity coming on line. We'll be at 6.5 billion gallons next year. That gives us five years for another billion. I kinda think we'll make it."

Dinneen and others in the Kansas ethanol industry say the industry is being scapegoated for rising fuel prices.

"It's just not true," says Lee Reeve, president of Reeve Agri-Energy near Garden City, who's been blending ethanol for 25 years. "It's just an excuse to drive the price of gasoline up. Obviously, with or without ethanol the price of gas is pretty doggone high. The price of crude is high. The price of heating oil is high. Just because gas is high it has nothing to do with ethanol."

Jere White, executive director of the Kansas Corn Growers Association, also says ethanol supplies can handle the transition.

"But I believe supplies will be tight for awhile," he says.

With more product moving to traditionally ethanol-free areas like the Northeast and Texas, White agrees with the DOE that temporary transportation and storage challenges will exist.

Dinneen says the transportation problems can be solved.

"The refiners themselves made the decision to eliminate MTBE this spring," he says. "There's nothing in the law requiring them to get out. They claim Congress didn't give them liability protection for cleanups, but they didn't have it before. ... If there's a hiccup in the system, it's on the refiners."

Oil prices shot back towards record levels on Monday amid growing tensions over Iran’s nuclear ambitions after weekend press reports claimed that the US government was studying military options for action.

An article in the New Yorker magazine said US officials were considering the possibility of using nuclear bombs against Iran’s suspected underground nuclear facilities.

Barclays Capital said that although the Bush administration insisted that it was seeking a diplomatic solution to its dispute with Iran, its statement fell short of an outright denial, leaving market fears free to grow.

“Geo-political tensions look capable of bringing about further tests of the $70 a barrel region in the weeks ahead,” said Kevin Norrish, an oil analyst at Barclays Capital. In New York, Nymex West Texas Intermediate rose $1.35 to settle at $68.74 a barrel. IPE Brent for May hit an all-time peak of $68.90, up $1.61, before closing at $68.75, up $1.46.

Crude prices were also supported by aggressive rhetoric from militants in Nigeria who have threatened to kill workers who have returned to oil platforms that were shut by earlier attacks. About 0.5m barrels a day of Nigerian output has been lost because of attacks by militants.

Royal Dutch Shell, operator of about 90 per cent of the lost Nigerian output, said it aimed to restart production in Nigeria soon but the company has declined to return staff to the region until the violence abates.