What's Pushing Up The Price Of Gas?

A Producer's Notebook By Michael Rosenbaum

By 60 Minutes producer Michael Rosenbaum.

As gas prices rise past $3 a gallon oil companies say ethanol's to blame, because oil companies now have to add 10 percent ethanol to all gas instead of a different additive called MTBE. Others, like the American Coalition for Ethanol, say the oil industry's claim is "incredibly disingenuous."

Those who study oil production – in the petroleum industry, government, at universities and elsewhere, agree that there are many reasons why gasoline prices are at record levels:

Supply And Demand: The fact that oil costs more than $70 a barrel has nothing to do with ethanol. Oil prices are rising because the supply of oil isn't increasing nearly as fast as the demand for it.

Nigeria's oil production has been hurt by civil unrest; Iraq's oil production has never returned to pre-war levels; Saudi Arabia already is producing oil at nearly its maximum capacity; Iran's oil supply is threatened as a result of tensions over its nuclear ambitions; and Venezuela's government is increasingly anti-American.

Meanwhile, demand for oil is climbing rapidly. China, India and other Asian countries with booming economies are getting thirstier for oil every day. Demand here in the U.S. – the world's largest petroleum consumer – remains high. Most experts 60 Minutes talked with cite supply and demand as the primary, but not only, reason why gas at U.S. pumps costs more than $3 a gallon.

Refining Capacity: Even if more, or cheaper, oil was available on world markets, most oil refineries in the U.S. couldn't handle it. The American Petroleum Institute says U.S. refineries are operating "flat out," at or near maximum capacity. Oil companies couldn't make more gasoline, even if they could buy oil at a cheaper price.

It Happens Every Spring: Oil companies change the blend of the gasoline they refine from oil every spring, to deal with higher summer temperatures. This yearly shift to a "summer mix" forces refineries to shut down for a few days or weeks to adjust to the "summer mix" gas blend. Every year, there's a temporary price spike when this changeover occurs. This has nothing to do with ethanol.

Replacing MTBE: What is different this year is that oil companies are shifting from one octane-boosting, oxygenating additive called MTBE to ethanol. What has been confusing are reports about why they are making that shift now.

First, MTBE has been known as a toxic pollutant for years (Steve Kroft reported that story on 60 Minutes in 2000). A number of towns and municipalities are suing oil companies because, they claim, MTBE has polluted their groundwater. Some of those suits also allege that oil companies knew about, but concealed, the pollution problems of MTBE for years.

The 2005 Energy Act did not mandate oil companies stop using MTBE; it only said they would be liable in lawsuits if they continued using it. The 2005 Energy Act did mandate increasing use of renewable fuels, like ethanol, in gasoline. Both MTBE and ethanol boost octane in gasoline.

Oil industry critics point out that the oil industry knew last August that it would have to switch from MTBE, and could have made a more gradual and coordinated switch-over which might have minimized the impact of the sudden change.

Ethanol: There has been a temporary ethanol "shortage," due to the sudden increase in demand by oil companies, but largely because the ethanol transportation system is limited. Ethanol now is transported from manufacturing plants by tanker truck or tanker rail cars. In the last few weeks alone, shippers and distributors have begun acquiring trucks, train cars, terminals and other facilities to increase the ethanol supply.

You can't transport ethanol in oil pipelines, because oil-pipelines aren't water-tight. That's no problem if some water gets into the gas pipeline, because oil and water don't mix. The water can be easily separated out at the end of the pipeline. But, ethanol and water do mix, and that's bad for the ethanol and vehicles that would use water-contaminated ethanol fuel.

Ethanol makers could, and probably will, build ethanol pipelines, right next to those existing oil and natural gas pipelines. But until recently, there was not enough demand for ethanol to make new ethanol pipelines viable. Now there may be.

The experts in government, ethanol manufacturers, scientists and economists say there is plenty of ethanol for today's demand. And, as our story reported, production is increasing rapidly to meet rising demand in the future.

Import Ethanol? The U.S. could import sugarcane-based ethanol from Brazil, which is already exporting a lot of ethanol to Japan and, by the way, is building a big pipeline to transport ethanol from the interior to the coast less expensively. But the U.S. imposes a huge tariff (54-cents per gallon) on ethanol imported from Brazil. That tariff makes it economically impractical to import Brazilian ethanol. The tariff was imposed to "protect" domestic ethanol production, which some argue no longer needs such protection. Some in Congress have proposed reducing or eliminating that tariff, which may make importing Brazilian ethanol more economically viable.
Produced By Michael Rosenbaum