Will additives push gasoline to a record high?

The price may hit $3.50 a gallon this spring because of problems obtaining alkylates.

By Ron Scherer | Staff writer of The Christian Science Monitor

from the February 12, 2008 edition

New York - Already feeling the effects of a cold snap in the Midwest and Northeast and strains with key oil supplier Venezuela, American energy consumers are about to encounter a new complication: rising prices of a key gasoline additive – nicknamed liquid gold by some.

As a result of this cost increase, some analysts are predicting that the price at the pump could reach as high as $3.50 a gallon this spring, compared with $2.93 a gallon currently.

Behind the predicted price spike are problems with obtaining alkylates – the additive. But even before that had time to kick in, prices surged 23 cents a gallon between Sunday and Monday in seven states, reports GasPriceWatch.com. In Dayton, Ohio, for example, gasoline prices rose overnight from $2.82 a gallon to $3.05 a gallon, says Brad Proctor, CEO of the website.

"The national price is probably going to rise 3 cents a gallon overnight," he says, blaming rising tensions with Venezuelan President Hugo Chávez, who threatened Sunday to cut off oil supplies to the United States. "They represent 12 percent of our oil supply," says Mr. Proctor.

Yet the rising gasoline prices in the Midwest have not been mirrored in the futures markets. This leads some analysts to speculate that there could be a supply issue or transportation issue in the states where prices have soared. Those states are Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio, and Wisconsin.

Higher gas prices will hit the economy at a bad time: The consumer is already trying to retrench in the face of falling home prices and tighter credit standards. Higher gas prices will also make the Federal Reserve nervous if they spiral into additional surcharges for everything from food to airline tickets.

A spike at the pump could also become a hot topic for the presidential candidates.

"We will see higher gasoline prices in the springtime," says Sander Cohan, a US oil-market analyst at Energy Security Analysis Inc. in Wakefield, Mass.

And a major factor is expected to be the price of alkylate, which is in greater demand as more ethanol is used in making fuel. On Jan. 24, the price of alkylate was about 42.50 cents a gallon more than the price of unleaded gasoline, according to Platt's, an industry trade publication.

"It is the sleeping elephant," says Mr. Cohan. "Last spring's price hike is partially due to shortages of this, and we're on the lookout for this to happen again this spring."

But the oil industry says it's difficult to predict shortages because no one really keeps statistics on alkylate production.

"We don't maintain any statistics on it. The Department of Energy does not keep any information, " says John Felmy, chief economist at the American Petroleum Institute in Washington. "So when I read about shortages, it's hard to say if it's in short supply or someone wants a better price."

In fact, some energy experts say the price of gasoline may be affected by other factors as well. "The demand for gasoline is softening," says Phil Flynn, a trader at Alaron Trading, a commodities broker in Chicago. "We're going into an economic slowdown with demand dropping, so I think it's less likely prices are going to rise this spring."

In the past, recessions have caused the price of energy to plunge. In 2001, the price of oil fell almost 50 percent. So far, however, oil prices have remained relatively high. On Monday morning, they were slightly more than $91 a barrel.

"We keep waiting for an area of consumer resistance to the price," says Mike Fitzpatrick of MF Global, a commodities broker in New York. "We think it might be around $4 a gallon."

Energy suppliers were not helped by an icy blast that sent thermometers plunging in the Midwest and Northeast. "This cold snap may cause the refiners to delay making gasoline for the spring by another week or two," says Mr. Flynn.