President Bush has joined the chorus of lawmakers suggesting that recent price spikes and supply shortages are the work of market “manipulation.” However, the action he took today indicates that he understands the extent to which environmental regulation is responsible.
Late yesterday afternoon, Wall Street Journal reporter Henry J. Pulizza wrote (subscription may be required) that Bush directed U.S. EPA Administrator Stephen Johnson “to use all his available authority to grant waivers that would relieve critical fuel supply shortages… If Johnson finds that he needs more authority to relieve the problem, we’re going to work with Congress to obtain the authority he needs.”
One of the short-term measures Mr. Bush advocated Tuesday to help get gasoline into filling stations is allowing the Environmental Protection Agency to temporarily waive local fuel requirements to ease concerns over a switch in fuel blends, particularly a transition from MTBE to ethanol as the main ingredient in reformulated gas.
Bush included these remarks in an address delivered to a meeting of the Renewable Fuels Association, “the national trade association for the U.S. ethanol industry.” The RFA denies that gasoline supply disruptions are the result of a shortage of ethanol per se, but they acknowledge that the conversion from MTBE to ethanol as the oxygenate is indeed responsible:
Media reports of a handful of retail gas stations temporarily running out of gasoline is not due to a lack of ethanol supply in those markets. More than adequate ethanol supplies exist in all markets where MTBE is being taken out of gasoline to supply the necessary demand.
As a result of gasoline refiners’ decision to eliminate MTBE and switch to ethanol, gasoline terminals are converting storage facilities to handle ethanol blendstocks, known as RBOB (reformulated blendstock for oxygenate blending). To do this, they must drain the facilities completely. Coupled with the seasonal refinery turnaround to produce summer gasoline, these factors are what contributed to a few isolated gas stations temporarily running out of gasoline. This phenomenon will be isolated and temporary.
The RFA fact sheet says that the price of ethanol as a gasoline additive is set by fixed-price contracts. Presumably, this statement is intended to counter any suggestion that ethanol producers or distributors have engaged in “price gouging.” (The letter to President Bush from Speaker Hastert and Majority Leader Frist, which asked the Administration to investigate “collusion, price-fixing or gouging,” specifically referred to the ethanol market.)
RFA also points out that refiners are not required by law to use ethanol and says they are removing MTBE “voluntarily and unilaterally.” RFA does not explain why refiners need to add oxygenates in the first place–that is, first to restore octane lost when lead was phased out, and then to comply with U.S. EPA’s reformulated gasoline requirements. A primer on gasoline oxygenates published by the Energy Information Administration is here.
RFA also says it’s a “myth” that ethanol cannot be shipped by pipeline, then suggests what elements of the myth are in fact true:
Ethanol can be shipped via pipeline, as it is all over Brazil, but the U.S. pipeline infrastructure is not set up for shipment from ethanol production centers to markets across the country.
In other words, pipeline transport is technically feasible; it just can’t be done in the U.S. today. Yet pipeline transport apparently is undesirable. According to RFA, “the ethanol industry has developed a ‘virtual pipeline’ consisting of rail, truck and barge options to deliver ethanol to market more effectively than shipping by pipeline” (our emphasis), but it isn’t clear that “more effectively” is synonymous with “more efficiently,” which is necessary for it to also be lower cost. A fair inference from all this is that the conversion from MTBE to ethanol will raise the price of gasoline, at least in the short run–which, of course, is where we stand today.
A final note about ethanol: RFA’s fact sheet makes a virtue of the price-increasing constraint identified by the Energy Information Administration, which we highlighted in a previous post. EIA noted that converting from MTBE to ethanol would reduce gasoline output for technical reasons. RFA says that eliminating MTBE “removes 11% of the volume of a gallon of gasoline moving through the pipeline system,” giving “refiners additional volume in the pipeline to deliver more gasoline to market, thus reducing consumer prices.” This statement appears to be false on both counts. First, the blendstock in the pipeline lacks both MTBE and ethanol and thus is not actually marketable gasoline. Second, refraining from adding MTBE may permit the transport by pipeline of more blendstock but not more gasoline, the supply of which remains constrained by the availability of ethanol at the receiving end and the ability to blend it. For consumer prices to fall under this arrangement, as RFA claims, requires the cost savings from transporting more blendstock via pipeline to exceed the higher cost of obtaining ethanol at the end of the pipeline and using it to make retail gasoline. RFA provides no evidence supporting this assertion.
In Bush’s speech to RFA, he said that he had asked the Federal Trade Commission to investigate whether gasoline prices have been manipulated, and asked the Department of Justice to offer “technical assistance” to state attorneys general investigating illegal conduct. If previous investigations are prophetic, these investigations will not lead anywhere, and regardless of what they find they will have no effect on retail gasoline prices.
He also proposed that Congress eliminate $2 billion in tax expenditures provided to oil companies in the 2005 energy bill covering “write-offs of certain geological and geophysical expenditures, or the use of taxpayers’ money to subsidize energy companies’ research into deep water drilling.” The merits of these tax expenditures aside, eliminating them also will not reduce the retail price of gasoline.
Bush ordered the Department of Energy to defer purchases of crude oil for the Strategic Petroleum Reserve until fall 2006. On April 25, 2006, the SPR contained 687.6 million barrels. Administration policy, set in 2001, is to reach 700 million barrels. SPR has a capacity of 727 million barrels. Eleven million barrels were drawn in response to Hurricane Katrina, some of which has been replaced. Monthly additions appear to be small relative to U.S. consumption, so it is unlikely that this action will have any discernible effect on retail gasoline prices.
Finally, Bush responded to concerns that environmental regulations were responsible for the sudden price spike and localized supply shortages:
And some have contacted us to determine whether or not they can ask the EPA to waive local fuel requirements on a temporary basis. And I think it makes sense that they should be allowed to. So I’m directing EPA Administrator Johnson to use all his available authority to grant waivers that would relieve critical fuel supply shortages. And I do that for the sake of our consumers. If Johnson finds that he needs more authority to relieve the problem, we’re going to work with Congress to obtain the authority he needs.
Secondly, we also need to confront the larger problem of too many localized fuel blends, which are called boutique fuels. The number of boutique fuels has expanded rapidly over the years, and America now has an uncoordinated and overly complex set of fuel rules. And when you have a uncoordinated, overly complex set of fuel rules, it tends to cause the price to go up.
And so I’m asking Director — directing Administrator Johnson to bring the governors together to form a task force on boutique fuels. And the mission of this task force will be to find ways to reduce the number of boutique fuels and to increase cooperation between states on gasoline supply decisions. I want to simplify the process for the sake of our consumers. And then I’m asking them to get these recommendations to my desk, and I look forward to working with the United States Congress to simplify the process.
Of all the actions taken thus far, this is the only one with significant potential to reduce the retail price of gasoline in the short-run and overcome localized supply shortages.