Deinonychus antirrhopus

The MTBE Component (and others) to the Gasoline Issue

Lynne Kiesling (your go to gal for everything dealing with energy) points to an article in the Wall Street Journal (subscription required) that points to one reason why gasoline prices are high.

There's been unconscionable behavior all right, most of it on Capitol Hill. A decent portion of the latest run-up in gas prices -- and the entire cause of recent spot shortages -- is the direct result of the energy bill Congress passed last summer. That self-serving legislation handed Congress's friends in the ethanol lobby a mandate that forces drivers to use 7.5 billion gallons annually of that oxygenate by 2012.

At the same time, Congress refused to provide liability protection to the makers of MTBE, a rival oxygenate getting hit with lawsuits. So MTBE makers are leaving the market in a rush, while overstretched ethanol producers (despite their promises) are in no way equipped to compensate for the loss of MTBE in the fuel supply. Ethanol is also difficult to ship and store outside of the Midwest, which is causing supply headaches and spot gas shortages along the East Coast and Texas.

These columns warned Republicans this would happen. As recently as last year, ethanol was selling for $1.45 a gallon. By December it had reached $2 and is now going for $2.77. So refiners are now having to buy both oil and ethanol at sky-high prices. In short, the only market manipulation has been by politicians.

For the record, the FTC has an entire crew that pores over weekly average gas prices in hundreds of cities, looking for evidence of gouging -- to no avail. Perhaps this is because no oil company controls enough of the market to exercise enough power to raise prices. The Hastert-Frist call for an investigation is nothing but short-attention-span political theater.

Now that isn't all of it. With oil prices going up, gasoline prices are also going to go up. On top of this we don't have a national market for gasoline. The boutique blends make it harder for suppliers for one region to offset shortages in another region. This too, we can lay at the feet of politicians. Add in the fact that only new refinery capacity is at existing refineries and you have less competition on top of it.

Another factor appears to be the contango in the oil futures market. A contango, in short, is when the futures price is higher than the spot price. This acts as a signal for higher prices in the future and it induces many in the relevant industry to buy the non-perishable good and sit on it in anticipation of those higher prices. Ideally, this would push up the spot market price so that the two prices move closer together.

Basically it looks like oil prices are going to stay high for awhile.

Update: Also check out James Hamilton's post on Contango, Speculating, and the Price of Oil.