- The Washington Times - Wednesday, May 9, 2007

Gasoline, already past $3 a gallon, is poised to rise this summer as robust demand for the fuel once again outpaces the ability of U.S. refineries to produce it.

The reasons for high gas prices are many, ranging from the falling dollar to extraordinarily low supplies at gas stations and refineries, to tight markets around the world. But a new culprit emerged this year: Washington’s push to incorporate more ethanol into transportation fuels.

President Bush has called for a nearly six-fold increase in ethanol production by 2017 to displace 1.5 million barrels of daily oil imports, and many legislators in Congress would like to go even further to push ethanol, which is derived from corn, and other bio-fuels. Their plans have created an investment boom in ethanol refineries.

But because ethanol displaces gasoline, it creates uncertainty about the future market for gas and is giving U.S. oil refiners one more reason to be cautious about expanding their drum-tight capacity to produce the gas that still constitutes more than 90 percent of the fuel cars run on.

“As ethanol capacity grew, petroleum refining capacity failed to keep up with demand,” according to the Energy Policy Research Foundation in a report asserting that the U.S. is creating a “home-grown” fuel shortage by artificially propping up ethanol prices with extensive government subsidies at the expense of gasoline.

The impact has become apparent since ethanol’s widespread introduction as a blending fuel last summer. The report found that despite growth of 1 million barrels per day in U.S. demand for petroleum fuels between 2003 and 2006, U.S. refineries were able to produce only 600,000 barrels more per day. The rest came through imports of gasoline, making the nation more dependent on foreign providers despite the opposite intent of ethanol boosters.

Adding to the inability of refiners to meet the strong growth in demand this spring has been a series of accidents and outages at major refineries on top of the usual downtime for spring maintenance. The result has been a pressure keg for prices, with inventories of gas dropping to minimal levels not seen since Hurricanes Katrina and Rita closed down most gas production on the Gulf Coast in September 2005.

Wholesale gasoline prices continued to rise yesterday in New York trading despite an Energy Department report showing the first increase in inventories in more than three months. The report failed to calm fears in the market of shortages this summer, leaving wholesale prices at levels about $2.30 a gallon that analysts say most likely will lead to record pump prices within weeks.

Pump prices reached $3.05 for regular gas last week, only 2 cents short of the record set after the 2005 hurricanes, the Energy Information Administration reported Monday.

“We can’t rule out further supply-induced energy price shocks” that could send prices skyrocketing, destabilizing the economy and feeding inflationary pressures,” said Eric Chaney, an analyst with Morgan Stanley.

Besides refinery outages, other factors are pushing up oil and gas prices, he said, including strikes at key European refineries in Marseilles, France, and Antwerp, Belgium, that provided imports that helped to alleviate price pressures in U.S. markets last year.

The prices of oil and gas imports are rising because of the weak dollar, which recently fell to a record low against the euro, he noted. Oil is priced in dollars on international exchanges, and when the dollar slumps, exporters raise their prices to maintain their buying power in euros.

A number of easily imaginable developments could send both oil and gas prices to new records, he said, including an outburst of tensions over Iran’s nuclear ambitions, deteriorating political conditions in Nigeria’s oil-producing region, or another major hit on Gulf Coast oil fields and refineries by storms in what is expected to be an above-average hurricane season.

Despite all these hazards, and vows by many U.S. politicians and consumers to use less foreign oil, growth in demand for gasoline has gone unabated, Mr. Chaney said.

“U.S. drivers complain about $3 gasoline, but they are getting increasingly used to high prices,” he said. “Real gasoline consumption is up 3.2 percent from a year ago.”

Aaron Brady, an analyst with Cambridge Energy Research Associates, said the tightness in gas supplies is worldwide and will take time to remedy because of the costs and constraints on building new refineries.

No new refineries have been built in the U.S. in more than three decades, for example, largely because environmental rules governing emissions have rendered the costs prohibitive, and because community and environmental activists fiercely oppose designating new sites for facilities.

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