Released on November 15, 2007
(Next Release on November 21, 2007)

Recipe for Change
Like chefs who periodically change their favorite recipes to improve a dish or make use of ingredients that are most readily available and affordable in the current marketplace, petroleum refiners have been changing the recipe, or the component blendstock, of the motor gasoline pool since early 2006. One of the primary reasons for this change stemmed from petroleum refiners’ decision to replace the gasoline blending component, methyl tertiary butyl ether (MTBE), with ethanol prior to the start of the 2006 summer driving season. The decision was driven by the proliferation of State bans on MTBE as a blendstock because of water contamination concerns, continued liability exposure from adding MTBE to gasoline, and perceived potential for increased liability exposure due to the elimination of the oxygenated content requirement for reformulated gasoline (RFG) included in the Energy Policy Act of 2005.

The transition from MTBE to ethanol as a blending component posed serious concerns within the gasoline distribution system during the early months of 2006. Chief among those concerns was the switch from blending MTBE at the refinery and subsequent transportation and storage as a finished product through the distribution chain versus a system where ethanol had be to transported and stored separately from the gasoline mixture, with blending taking place at the terminal or final destination point of the distribution chain. With a year and a half of experience without MTBE behind us, now is a good time to review these developments.

Our review suggests that the gasoline distribution system exhibited sufficient flexibility to avoid major market dislocations during the transition period. Nevertheless, one of the more striking expected consequences has been the upward shift in the refinery production and storage volume of gasoline blending components, compared with total finished gasoline. As recently as December 2005, gasoline blending components comprised less than a 35 percent share of total gasoline inventories. However, since early 2006, the volume of gasoline blending components, as a percent of total motor gasoline, has gained an ever larger volume, that, as of October 2007, comprised more than a 46 percent share of total gasoline inventories (see chart below).

Most of the impact of the 2006 changeover occurred in the East Coast and Texas, since other areas, such as the Midwest and California, had already switched from MTBE to ethanol prior to this time. Even so, the East Coast had been the largest consumer of MTBE-blended reformulated gasoline prior to the changeover. The post 2006 increased share of blending components can be traced primarily to the way gasoline inventories are reported. With the elimination of the oxygen content requirement for RFG on May 8, 2006, gasoline that previously included MTBE, was being reported mostly as finished gasoline. Because refiners still needed to maintain the same performance and clean-burning properties as the old fuel, a blend of 10 percent ethanol (about 6 percent in California) was added as an economical replacement for an oxygenate blendstock. With suppliers’ inability to ship finished gasoline blended with ethanol, and with ethanol blending occurring predominantly at the final destination point in the distribution chain, gasoline blending components, subsequently gained a larger share of the total gasoline pool as reformulated blending was reported directly as a blending component, rather than indirectly as a blended component within finished gasoline.

Another emerging market change resulting from the switch away from MTBE blending is the conversion of some former merchant MTBE plants to those that produce isooctane or isooctene, potential gasoline blending components. Since most refiners still maintain alkylation units, (used to make isobutylene used in MTBE production), the isobutylene production from these units could be used to make these new high-octane blendstocks. While some refiners still produce MTBE, the volumes are mostly destined for export.

The recipe for making gasoline is likely to continue evolving over time, driven increasingly by economic considerations as well as policy changes. For example, the present spread between wholesale ethanol and gasoline prices, which after consideration of the ethanol tax credit is in the neighborhood of $1 per gallon, provides a strong incentive for terminal operators to invest in blending equipment to increase the market penetration of fuel blended with 10 percent ethanol in conventional gasoline markets beyond areas where this formulation has already been popular for some time.

Residential Heating Fuel Prices Continue To Climb
Residential heating oil prices reached record highs for the sixth consecutive week during the period ending November 12, 2007. The average residential heating oil price rose by 9.7 cents last week to reach 320.7 cents per gallon, an increase of 83.7 cents from this time last year. Wholesale heating oil prices increased by 4.3 cents, reaching 267.8 cents per gallon, which was increase of 94.1 cents compared to the same period last year.

The average residential propane price, which has attained historic levels for the sixth consecutive week during this heating season, increased 7.3 cents to reach 240.6 cents per gallon. The trend of record high prices for propane continued and heightened from the streak attained over the final five weeks of the 2006/07 heating season, from February 12 through March 12, 2007. This was an increase of 46.6 cents compared to the 194.0 cents per gallon average for this same time last year. Wholesale propane prices gained 1.4 cents per gallon, from 164.1 to 165.5 cents per gallon. This was an increase of 66.5 cents from the November 6, 2006 price of 99.0 cents per gallon.

Retail Gasoline and Diesel Prices Soar
Continuing a counter-seasonal climb, the U.S. average retail price for regular gasoline surged 9.8 cents to 311.1 cents per gallon as of November 12, 2007. The highest ever for this time of year, the price was 87.9 cents over last year. Gains were recorded in all regions as the East Coast jumped 10.3 cents to 307.7 cents per gallon, 87.9 cents above a year ago. The Midwest price rose 9 cents to 312.7 cents per gallon while the Gulf Coast increased 8.8 cents to 298.1 cents per gallon, the only region under the $3 mark. The Rocky Mountain region shot up 9.2 cents to settle at 306.4 cents per gallon. The West Coast maintained the top regional price, rising to 327.9 cents per gallon, a boost of 11.4 cents. The average price for regular grade in California was 336.6 cents per gallon, up 13.5 cents from last week and 90.2 cents per gallon over the previous year.

The retail diesel fuel price experienced a new record high for the second consecutive week, gaining 12.2 cents to reach 342.5 cents per gallon. Prices were up across the country whilst setting regional record highs again this week. Both the East Coast and the Midwest increased 12.5 cents reaching 341.5 and 340.3 cents per gallon, respectively. The Gulf Coast rose 12.8 cents per gallon to 334.7 cents per gallon. The Rocky Mountain price increased to 353.2 cents per gallon, a jump of 12.1 cents. The West Coast registered the highest regional price, soaring to 360.8 cents per gallon after strengthening by a dime. California prices added 13.9 cents to reach 366.3 cents per gallon, another record price for the State.

Propane Inventories Inch Higher
Propane inventories inched higher last week with a modest 0.1 million barrel gain that positioned inventories at an estimated 61.6 million barrels as of November 9, 2007. Nonetheless, propane inventories remain 9.7 million barrels below the same period last year, with total propane inventories tracking slightly below the average range for this time of year. The only gain reported last week was in the Midwest with an addition of 0.1 million barrels. Inventories in the East Coast, Gulf Coast, and the combined Rocky Mountain/West Coast regions all remained relatively unchanged last week. Propylene non-fuel use inventories also remained relatively unchanged last week but accounted for a slightly higher 3.3 percent of total propane/propylene inventories, compared with the prior week’s 3.2 percent share.

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