Tucson CitizenTucson Citizen

Gas prices heading higher

NEW YORK – Get ready for another surge in gasoline prices.

Experts are predicting pump prices, which jumped by almost a dollar a gallon in each of the last two springs in many parts of the United States, will spike again this year as refiners and gas stations switch from winter- to summer-blended fuels.

The increases, starting as early as February in southern California, could push the average national price to a record $3.50 a gallon or more by June.

That would be 17 percent higher than today’s average of just under $3 a gallon, which already is about 80 cents a gallon higher than year-ago levels thanks to the surge of crude oil that took futures prices briefly to $100 a barrel. Prices in urban areas on each coast could approach $4 a gallon.

And the reason for the spring price shocks? Analysts say it’s linked to a shortage of alkylate, a little-known and expensive gasoline additive that some in the industry are calling “liquid gold.” It has become a must-have ingredient since refiners stopped using MTBE two years ago when the potentially cancer-causing additive was found to be seeping into ground water.

The alkylate shortage has become the most important driver of summer gas prices, said Doug Leggate, an analyst at Citigroup Global Markets. “Supply of (alkylate) will set the price of summer gasoline — not inventory levels,” he said.

Oil companies deny they are purposely limiting production of alkylate, which like gasoline, jet fuel and asphalt is a byproduct of the oil refining process. But only recently have some started studying how they can boost output, and alkylate prices today are more than 15 percent higher than spot gasoline prices. That means overall costs will jump when it is added in larger quantities to summer-blend fuel.

Without additives, gasoline doesn’t burn completely, increasing tailpipe air pollution. And untreated gas evaporates more quickly in hot weather, potentially causing vapor lock when it changes from a liquid to a gas and blocks fuel lines.

The federal government long ago required refiners to boost the oxygen content of summer-blend gasoline to make it burn more completely, a problem that was solved by adding MTBE and, more recently, ethanol.

But ethanol also has a high evaporation rate, so refiners increasingly have turned to alkylate, which Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J., calls the “magic bullet” in making summer gasoline.

Alkylate and other gasoline additives don’t raise the same safety issues as MTBE because they don’t bond with water as effectively as MTBE did, analysts say.

Demand for alkylate changes with the seasons, falling in autumn and rising in the spring. On average, alkylate makes up about 10 percent of a gallon of gas, though that rises to as much as 15 percent in summer. But making more of it is not as simple as throwing a switch since the underlying chemical properties of oil limit how much of any one refined petroleum product can be produced.

On average, about 44 percent of each barrel of oil ends up as gasoline, 22 percent as diesel fuel and heating oil, 9 percent as jet fuel, and about 4 percent each as heavy fuel oil and liquefied petroleum gas, according to the Energy Department. The remainder is comprised of smaller products and additives.

The refining process is loud, hot and smelly. Boilers separate, or “crack,” oil into new substances by subjecting it to high temperatures and pressure. As different products are boiled out, pipes carry them to other boilers or vessels where they’re further refined, mixed with other substances or cleaned of pollutants and toxins.

Alkylate is made via a chemical reaction sparked when olefin fluids and isobutane — two of the smaller byproducts of the main gasoline producing unit — are mixed with acid.

“As opposed to the (gasoline unit) that cracks big components into small, this one takes two components and basically combines them,” said Mark Fligner, director of planning and economics at Valero Energy Corp.’s refinery in Paulsboro, N.J., across the Delaware river and just south of Philadelphia.

Owners of about two-thirds of U.S. refineries have invested the $100 million or more it takes to add an alkylate unit. The rest have to buy alkylate on the spot market if they want to use it as additive in their gasoline supplies.

Refiners aren’t gaming the system, purposely limiting alkylate production to boost gas prices, said John Auers, senior vice president at Turner Mason & Co., a Dallas consultancy. “They’re not because they can’t,” he said. “You can’t make more alkylate than you have feedstocks.”

But there are tradeoffs that every refiner must weigh. For example, olefins and isobutane are in high demand for use in producing other lucrative products like plastics. Refiners can tweak their main gasoline producing unit to make more olefins and isobutane, but that would cut the gasoline output.

Alkylate prices have jumped from 77 cents a gallon in the summer of 2001 — when MTBE was still in use — to nearly $3 a gallon at points over the past two summers. Wednesday’s price on the spot market was $2.72 a gallon, 40 cents more than the spot price of gasoline, according to Platts. Retail prices for gas are higher because things like state and federal taxes are added. In recent summers, that spot market differential has jumped as high as 60 cents.

Refiners place the blame for spring gas price increases on crude costs, environmental regulations that have increased the overall cost of refining, and their inability to expand or build new refineries fast enough to keep up with gasoline demand.

John Pickering, vice president and general manager at the Paulsboro refinery, said Valero makes enough alkylate to meet its needs, but concedes that there is a national shortage of the additive in the spring and summer.

Other refiners contacted by The Associated Press said they are reluctant for competitive reasons to talk about how they blend gasoline, or whether they face alkylate shortages.

What is known, however, is that refiners are hiring companies such as UOP LLC of Des Plaines, Ill., to determine whether they can increase the capacity of their existing alkylation units. “In the last year or so, there has been a significant uptick (in business),” said Ashis Banerji, director for refining at UOP, which licenses alkylation technology to refiners.

And the 36 percent of domestic refineries that don’t have alkylation units are looking at adding them.

“Our impression is that refineries are moving as fast as they possibly can to add alkylation capacity,” said Jim Pawloski, business director at UOP competitor DuPont Clean Technologies, a unit of DuPont Co. He said his unit’s business has jumped five-fold over the past five years and will likely double again this year.

The steep jump in summer alkylate prices has also caught the attention of at least two companies that used to produce MTBE. Enterprise Products Partners LP and Texas Petrochemicals Inc., both of Houston, say they’re closely studying whether to convert idled MTBE plants into alkylate factories.

That also highlights the conundrum that is alkylate: If too many refiners decide to spend big bucks to crank up production, the premium prices now enjoyed by alkylate makers could disappear.

Refiners have to weigh the cost of such an investment against the incremental cost of simply buying the extra alkylate they need. “I’m not sure that it would be economical,” said Jeff Hazle, technical director at the National Petrochemical and Refiners Association.

But if production doesn’t rise, American motorists will be faced with big jumps in spring gas prices for years to come.

Citizen Online Archive, 2006-2009

This archive contains all the stories that appeared on the Tucson Citizen's website from mid-2006 to June 1, 2009.

In 2010, a power surge fried a server that contained all of videos linked to dozens of stories in this archive. Also, a server that contained all of the databases for dozens of stories was accidentally erased, so all of those links are broken as well. However, all of the text and photos that accompanied some stories have been preserved.

For all of the stories that were archived by the Tucson Citizen newspaper's library in a digital archive between 1993 and 2009, go to Morgue Part 2

Search site | Terms of service