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For immediate release: March 1, 2002
Contact: Claudia Chandler - 916-654-4989

Latest Report Recommends Delaying MTBE Phase-Out in California

Sacramento -- The Energy Commission has received the consultant's final report on the MTBE Phase out in California. The report indicates that eliminating MTBE in gasoline by the end of the year will seriously impact California gasoline supplies. Given the volatility of California's gasoline market, this MTBE phase out also would cause significant price increases. The report was prepared by Stillwater Associates for an Energy Commission workshop held February 19, 2002 on phasing out MTBE in gasoline.

The consultant report called out its primary conclusions in the Executive Summary. Key highlights include:

  • California's refining capacity has not been able to keep up with the growing demand for gasoline. As a result, the State is a net importer for all petroleum products. (Imports of gasoline and gasoline blending components currently account for approximately 15 percent of the State's gasoline demand; two-thirds of this is MTBE.)
  • Phasing out MTBE from gasoline by the end of 2002 will result in a supply shortfall of 55,000 to 100,000 barrels a day. The Los Angeles Basin refineries will experience approximately 80 percent of the short fall problem impacting gasoline supplies in Southern California, Arizona and Nevada.
  • Looking to refineries outside California to supply gasoline presents challenges due to the difficulty in moving product to the State because of its geographic insularity, and the limited number of refineries, both domestic and international, that can provide California's unique clean burning fuel specifications.
  • The shortfall can not be met from refineries on the Gulf Coast for two primary reasons: First, they are unable to make the new CARB Phase 3 gasoline. Second, they may be curtailed in their ability to produce alkylates for export to California. (Alkylates are used as blending stock to replace MTBE.)
  • The combination of restricted refining capacity, inadequate logistics infrastructure, and commercial barriers has made the California gasoline market increasingly unstable, with even small supply and disruptions causing major price swings.
  • Based on recent California market experience and generally accepted price elasticity estimates, gasoline prices will have to double before demand will match the reduced supply. This will have significant impact on California's economy.
  • The gasoline shortfall will have the greatest impact on independent gasoline marketers and their customers, which include institutional buyers such as government agencies and unbranded retail gasoline stations. This shortfall also will disproportionately impact the State's lower income groups.
  • California's request to the federal government to waive oxygenate requirements in gasoline will improve the flexibility for refiners after the MTBE phase out goes into effect and ease potential ethanol logistic problems, but will not significantly alter the overall supply shortfall.
To avoid gasoline supply shortfalls and the resulting price spikes, the consultant's report recommends that the State should defer the MTBE phase out until November 2005 to allow time for actions to be taken that will result in significant additional supplies for the State's gasoline pool. In the interim, the report stresses the need for expansion of the State's gasoline refinery capacity and terminal and tank storage, the establishment of a strategic fuels reserve, and actions taken toward creating a forward liquidity market mechanism.

Over the next several weeks, the Commission will be developing an action plan to address the most vulnerable areas of the State's gasoline refinery and distribution infrastructure to reduce the supply and price impacts related to phasing MTBE out of gasoline. The Commission received written comments from 40 interested parties and stakeholder groups, which are included in the technical appendix and addressed in the consultant report. The report will be available March 15, 2002 on the Energy Commission's web site: www.energy.ca.gov/mtbe

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