MTBE Production Economics
April 1, 2001
Summary
Last year the price of MTBE (methyl tertiary butyl ether) increased dramatically on two occasions
- Between April and June 2000, the price (U.S. Gulf Coast waterborne market) of MTBE rose from $1.00 per gallon to over $1.60 per gallon. This represented an increase in the price premium for MTBE over the wholesale price of conventional gasoline from its normal (1995 though 2000 average) $0.26 per gallon to $0.60 per gallon. The MTBE price fell back to an average $1.12 per gallon by August and the price premium to conventional gasoline to $0.27 per gallon.
- The MTBE price hit a low point in November 2000 (under $1.00 per gallon and $0.14 per gallon over conventional gasoline) but quickly rebounded to $1.35 per gallon at the end of March 2001 ($0.52 per gallon over conventional gasoline).
The purpose of this analysis is to evaluate the causes of these MTBE price increases. Our focus is on the supply side, in particular the cost of producing MTBE.(1) For example, during the fourth quarter of 2000, the price of natural gas almost doubled. This natural gas price run-up raised the price of normal butane and methanol, which are feedstocks in the production of MTBE. In fact, the price of normal butane rose above the price of conventional gasoline for the first time in at least 15 years. The summer prise rise, on the other hand, cannot be explained by the costs of MTBE production.
The price of MTBE has an impact on gasoline markets because of its use as an oxygenate blendstock in reformulated gasoline. Reformulated gasoline (RFG), which makes up about 1/3 of total domestic gasoline demand, requires the blending of an oxygenate such as ethanol or MTBE. MTBE generally represents the marginal source of oxygenate for RFG blending, particularly during the summer months. The price premium for RFG over conventional gasoline, which does not require oxygenates, is directly related to the price premium for MTBE over conventional gasoline. For example, since RFG contains about 11.5 volume percent MTBE, each 10-cent per gallon increase in the price of MTBE relative to the price of conventional gasoline should raise the price of RFG by about 1.2 cents per gallon.
The availability of MTBE can also influence gasoline prices if MTBE shortages were to create a gasoline supply constraint. During the first MTBE price spike in the second quarter of 2000, production of MTBE remained at high levels. But during the second price surge in the fourth quarter 2000, MTBE production declined from 210,000 barrels per day in October 2000, to 142,000 barrels per day in January 2001, the lowest level of output since March 1995.
An analysis of the relationships between the prices of the different products reveals the following:
- The Spring 2000 MTBE price increase cannot be explained by increases in the cost of producing MTBE. The winter 2000/2001 MTBE price increase can, however, be fully explained by increases in the cost of production, brought on by the rise in the price of natural gas.
- The cost of producing MTBE rose faster than the spot market price in the winter 2000/2001, which led to significant cutbacks in production, primarily by the large merchant producers.
- The price of RFG relative to conventional gasoline has maintained a relatively steady relationship to the price premium for MTBE over conventional gasoline. During the Spring 2000, however, there was a surge in the price premium for RFG, most likely caused by the additional cost of complying with the new Phase 2 RFG requirements.