Ethanol on the On-ramp: The Bumpy Start to the Gasoline Season
One of the main reasons for today's jump in gasoline prices is a substantial change in the way that a significant volume of gasoline is manufactured in the United States. The elimination from US gasoline of methyl tertiary butyl ether (MTBE) is opening the door to a rapid uptake of ethanol to replace the lost volumes. The switch is occurring during the normal seasonal change to summer-grade gasoline, when winter-grade inventories are drawn down. This year market anxiety and uncertainty have been heightened by an especially steep drawdown of gasoline inventories, caused by the need to empty MTBE-laden gasoline completely from bulk storage. Furthermore, the switch to ethanol will pose several key challenges:
* Ethanol's supply chain is separate from gasoline. This creates an added level of logistical complexity and cost in delivering ethanol-blended gasoline to the end-consumer, which was not present with MTBE. CERA expects that over the next several weeks, many logistical bottlenecks in delivery and blending will be overcome through innovative methods.
* Ethanol supplies are tight. The ethanol industry is in the midst of a very rapid expansion, but production capacity at the beginning of the gasoline season is likely to be tightly balanced against demand. This tightness should ease during the year as 70,000 barrels per day of capacity now under construction comes online by end-December.
* The transition is occurring with a very short lead time. The volume of MTBE being phased out is greater than the amount removed in 2004 in California, New York, and Connecticut, and it is transpiring in a fraction of the time.
