NEW YORK Are you sitting down? Get ready for another surge in gasoline prices.
Experts are predicting pump prices, which jumped by almost a dollar a gallon in each of the last two springs in many parts of the United States, will spike again this year as refiners and gas stations switch from winter- to summer-blended fuels.
The increases, starting as early as February in Southern California, could push the average national price to a record $3.50 a gallon or more by June.
That would be 17 percent higher than today's average of just under $3 a gallon, which already is about 80 cents a gallon higher than year-ago levels, thanks to the surge of crude oil that took futures prices briefly to $100 a barrel. Prices in urban areas on each coast could approach $4 a gallon.
The reason for the spring price shocks? Analysts say it's linked to a shortage of alkylate, a little-known and expensive gasoline additive that some in the industry are calling "liquid gold." It has become a must-have ingredient since refiners stopped using MTBE two years ago, when the potentially cancer-causing additive was found to be seeping into groundwater.
The alkylate shortage has become the most important driver of summer gas prices, said Doug Leggate, an analyst at Citigroup Global Markets: "Supply of (alkylate) will set the price of summer gasoline not inventory levels."
Oil companies deny that they are purposely limiting production of alkylate, which like gasoline, jet fuel and asphalt is a by-product of the oil-refining process. But only recently have some started studying how they can boost output, and alkylate prices today are more than 15 percent higher than spot gasoline prices. That means overall costs will jump when it is added in larger quantities to summer-blend fuel.
Without additives, gasoline doesn't burn completely, increasing tailpipe air pollution. And untreated gas evaporates more quickly in hot weather, potentially causing vapor lock when it changes from a liquid to a gas and blocks fuel lines.
The federal government long ago required refiners to boost the oxygen content of summer-blend gasoline to make it burn more completely, a problem that was solved by adding MTBE and, more recently, ethanol.
But ethanol also has a high evaporation rate, so refiners increasingly have turned to alkylate, which Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J., calls the "magic bullet" in making summer gasoline.
Alkylate and other gasoline additives don't raise the same safety issues as MTBE because they don't bond with water as effectively as MTBE did, analysts say.
Demand for alkylate changes with the seasons, falling in autumn and rising in the spring. On average, alkylate makes up about 10 percent of a gallon of gas, though that rises to as much as 15 percent in summer. But making more of it is not as simple as throwing a switch, because the underlying chemical properties of oil limit how much of any one refined petroleum product can be produced.
On average, about 44 percent of each barrel of oil ends up as gasoline, 22 percent as diesel fuel and heating oil, 9 percent as jet fuel and about 4 percent each as heavy fuel oil and liquefied petroleum gas, according to the Energy Department. The remainder is comprised of smaller products and additives.
Owners of about two-thirds of U.S. refineries have invested the $100 million or more it takes to add an alkylate unit. The rest have to buy alkylate on the spot market if they want to use it as additive in their gasoline supplies.
Refiners aren't gaming the system, purposely limiting alkylate production to boost gas prices, said John Auers, senior vice president at Turner Mason & Co., a Dallas consultancy. "They're not because they can't," he said. "You can't make more alkylate than you have feedstocks."
But there are tradeoffs that every refiner must weigh. For example, olefins and isobutane are in high demand for use in producing other lucrative products like plastics. Refiners can tweak their main gasoline producing unit to make more olefins and isobutane, but that would cut the gasoline output.
Alkylate prices have jumped from 77 cents a gallon in the summer of 2001 when MTBE was still in use to nearly $3 a gallon at points over the past two summers. Wednesday's price on the spot market was $2.72 a gallon, 40 cents more than the spot price of gasoline.