Newsletter Archive

Two recent studies by the U.S. Department of Energy and the California Energy Commission shed new light on the cause of the sharp price increases for California gasoline in the beginning of 2003. Both studies cleared up earlier misconceptions that placed full responsibility for the price increases on the "high cost" of ethanol-blended gasoline and earlier concerns regarding ethanol deliverability.

In May of 1999, Governor Gray Davis of California signed an Executive Order prohibiting MTBE use in gasoline by January 1, 2003. Due to concerns about an adequate supply of ethanol, Governor Davis pushed back this date by a year to January 1, 2004. BP, Shell Oil Products US, Phillips Petroleum Company, and ExxonMobil, started blending ethanol with their gasoline instead of MTBE; their sales accounted for over sixty percent of all gasoline sales in California by the end of 2002. In January of 2003, Chevron U.S.A. Inc announced that it was starting the transition from MTBE to ethanol; this change increased ethanol-blended gasoline's portion of total gasoline sales to eighty percent.

California was originally to have completely switched from MTBE-blended to ethanol-blended motor gasoline by January 2003. This deadline was later moved to January 2004. Yet by January 2003, when over sixty percent of the gasoline sold in California was blended with ethanol, gasoline prices started to drastically increase. From December 9, 2002 to March 17, 2003, the national average retail price for regular gasoline increased 36.8 cents per gallon, while California's average price increased 62.5 cents per gallon, almost double the growth of the national average. In response, the U.S. Department of Energy, Energy Information Administration (EIA) was asked by Congress to examine the causes of the price increase. Governor Davis asked the California Energy Commission (CEC) to do the same.

In May of 2003, EIA released its 2003 Gasoline Price Study: Preliminary Findings. It found that the two major contributors to the steep gasoline price increase were: 1) larger-than-usual refinery maintenance outages and 2) the impact of having two types of gasoline on the market - MTBE-blended and ethanol-blended.

In the first quarter of 2003, four California refineries underwent major maintenance projects; a few others had minor maintenance performed. This resulted in gasoline production rates of 150 thousand barrels per day less than normal. This decrease in production resulted in a tighter gasoline market and higher gasoline prices. While gasoline production was low, independent gasoline marketers had difficulty obtaining gasoline supplies. This supply shortage contributed to first quarter price increases.

Moreover, because MTBE and ethanol-blended gasoline cannot be commingled, marketers must select one or the other type of gasoline to use. The one-year extension of the ethanol phase-in created a problem for suppliers because they couldn't predict the demand by independent marketers. Difficulty in planning created supply and demand imbalances, which further tightened the market and drove prices higher. Even though the segregation of the marketplace created an increase in gasoline prices, the EIA states that "this finding should not be interpreted to mean that the price surge would have been less severe had all suppliers switched to ethanol-blended gasoline together this year or next year. Different problems would arise under these circumstances." But the EIA does say that "other factors associated with the MTBE/ethanol changeover, such as ethanol supply and price, and infrastructure to deliver, store and blend ethanol, did not seem to be significant issues."

An analysis performed by the CEC, Causes for Gasoline & Diesel Price Increases in California, also pointed to the refineries and the segregation of the marketplace as causes of the gasoline price increases. The study also cited low gasoline supplies in Arizona as a contributing factor. In late February and early March, gasoline supplies in Phoenix dropped, causing prices in Arizona to rise even higher than those in California. Arizona's increased demand for gasoline from Southern California contributed to the spike in the latter state's gasoline prices.

Since reaching a high of $2.13 on March 17, 2003, California gasoline prices have been dropping, down almost 30 cents per gallon. The price differential between wholesale gasoline prices in New York City and Los Angeles, as big as 50 cents, is now much lower than the 12-cent average. The wholesale price in Los Angeles was actually lower than that in New York during parts of May. The CEC has confirmed the revival of California's gasoline market: "it appears that the California petroleum industry has recovered from the various problems it experienced during the early part of 2003."

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1. http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2003/cagasoline/cagasoline.pdf
2. http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2003/cagasoline/cagasoline.pdf
3. http://www.energy.ca.gov/2003_price_spikes/2003-04-02_GASOLINE_FINAL.PDF
4. http://www.energy.ca.gov/2003_price_spikes/2003-04-02_GASOLINE_FINAL.PDF
5. http://www.energy.ca.gov/2003_price_spikes/2003-05-01_GASOLINE.PDF

1. Energy Information Administration, "Table 7. Energy Consumption Estimates by Source, Selected Years, 1960-2000, Alabama."
   http://www.eia.doe.gov/emeu/states/sep_use/total/use_tot_al.html
2. Energy Information Administration, "Table 8. Residential Energy Consumption Estimates, 1960-2000, Alabama.
   " http://www.eia.doe.gov/emeu/states/sep_use/res/use_res_al.html; "Table 9. Commercial Energy Consumption Estimates, 1960-2000, Alabama.
   " http://www.eia.doe.gov/emeu/states/sep_use/com/use_com_al.html; "Table 10. Industrial Energy Consumption Estimates, 1960-2000, Alabama.
   " http://www.eia.doe.gov/emeu/states/sep_use/ind/use_ind_al.html
3. U.S. Department of Energy. Alabama Bioenergy Resources. "Alabama Biomass Power Resources: Recent Studies Indicate that Alabama Has an Excellent Biomass Resource Potential."
   http://www.eere.energy.gov/state_energy/tech_biomass.cfm?state=AL
4. U.S. Department of Energy, Office of the Biomass Program.
5. U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy Building Technologies Program. State Energy Program. "Special Projects in Alabama - FY 2002: Biomass Power from Poultry Litter.
   " http://www.eere.energy.gov/buildings/state_energy/projects/cfm/stateprojectdetail.cfm?pid=213
6. U.S. Department of Agriculture, Forest Service.
7. The Database of State Incentives for Renewable Energy (DSIRE). "Alabama Incentives for Renewable Energy: Financial Incentives.
   " http://www.dsireusa.org/library/includes/map.cfm?State=AL&CurrentPageId=1