Hike in gas prices likely in spring
Published: Thursday, January 31, 2008 at 6:01 a.m.
Last Modified: Wednesday, January 30, 2008 at 8:29 p.m.
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 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 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.
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.
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.
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.''
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