Seems like The Wall Street Journal agrees with me........
The Gasoline Follies
March 28, 2006; Page A20
Gasoline prices are rising again, and this time Iraq or hurricanes aren't to blame. Congress's energy policy mistakes are finally catching up with it, and American drivers are paying for the bungles.
The average U.S. retail pump price for gasoline has been hovering around $2.50 a gallon the past few weeks; prices are now at their highest since last October -- or back when the country was dealing with Katrina. The federal Energy Information Administration (EIA) has warned this may only be the beginning, and parts of the country could see pump prices well over $3 a gallon going into summer. Happy Memorial Day.
Drivers can send their thank-you notes to Capitol Hill, which created the conditions for this mess last summer with its latest energy bill. That legislation contained a sop to Midwest corn farmers in the form of a huge new ethanol mandate that began this year and requires drivers to consume 7.5 billion gallons a year by 2012. At the same time, Congress refused to include liability protection for producers of MTBE, a rival oxygen fuel-additive that has become a tort lawyer target. So MTBE makers are pulling out, ethanol makers can't make up the difference quickly enough, and gas supplies are getting squeezed.
It didn't take an economics degree to see this coming. The MTBE industry's defense in the many lawsuits claiming its product has contaminated water supplies is that since 1990 the government has required use of oxygenates like MTBE. But with that requirement expiring in May, producers and refiners will face far greater liability, which has set off a race to exit the market. Valero, one of the largest manufacturers, has already announced plans to phase out production. Even the pipeline operators that carry MTBE to high-use areas in the Northeast are backing away.
This abrupt cut-off of a product that makes up some 1.4% of the nation's fuel supply -- and far greater percentages in some places -- is certain to wreak price havoc. According to a February EIA report, ethanol production is already running near its capacity of 283,000 barrels a day. Yet "about 130,000 barrels per day of additional ethanol may be needed to replace the MTBE currently used" in gas.
Even Bob Dinneen, head of the Renewable Fuels Association and promoter-in-chief of all things ethanol, is admitting his industry can't make up the shortfall. "We're adding as much [production capacity] as we can, as fast as we can. But I don't think anybody anticipated refiners would be hemorrhaging MTBE as quickly as they are," he said recently. We're not sure what corn farm Mr. Dinneen has been living on, but MTBE producers have been warning Congress for years that this is precisely what would happen if it failed to offer the industry legal protection.
The bigger question is whether all this newly mandated ethanol -- the subsidized profits of which are funneled to Midwest farmers and agribusiness giants like ADM -- will even make it to its destinations. Unlike MTBE, ethanol can't be shipped ready-made through pipes. Instead it must be trucked or carried by rail from the Midwest to terminals near its ultimate selling point, where it then must be blended with a special unfinished fuel that is shipped separately through pipelines.
This is creating a logistical nightmare, forcing refiners to add blending facilities at their terminals, convert tanks to hold ethanol, and switch over retail outlets. To give a sense of this experiment, consider that only about one-third of all reformulated gas used on the East Coast is currently blended at terminals; the rest is produced or delivered as finished product. That now must change, in a matter of months, and at a time when refiners face a blizzard of separate new regulations. An ultra-low sulfur diesel program begins June 1, another gift horse from Congress.
Imports could help, though the domestic ethanol industry has made sure those also come at a dear price. Ethanol imports are subject to a 2.5% tariff and a second duty of 54 cents a gallon. This is particularly unfortunate for Texas or East Coast residents, who'd benefit greatly if they could get their ethanol (duty free) from local ports rather than pay to have it trucked across the country.
But such economic sense would defeat the purpose of a law designed not to reduce gas prices but instead to underwrite a politically powerful ethanol industry that can't survive without giant government handouts, protectionism and the brute force of mandates. The only bright spot is that perhaps the current travails will put to rest calls that America emulate Brazil -- which sunk billions of state money into a giant ethanol infrastructure so that it could become "energy independent."
As it is, the U.S. already produces more ethanol than Brazil, and even today's four-million-gallon requirement is clearly straining the industry. Increasing ethanol use much beyond the 2012 mandate is going to require that entire states be planted with corn and sugar, or a scientific breakthrough involving biomass and grass. Meantime, prepare to pay more for gas.
This ethanol-MTBE fiasco is just the latest example of what happens when Congress holds energy markets hostage to narrow special interests. If Republicans on Capitol Hill wonder why their approval ratings stay low as gasoline prices rise this spring and summer, we suggest they look in the mirror.
It's your turn Linster.....