By Erwin Seba
SAN ANTONIO, March 24 (Reuters) - California's increasingly volatile gasoline market may be a glimpse of what other U.S. states will face if they switch to ethanol-blended gasoline to cut pollution, refining executives said on Monday.
California is seen as a bellwether as it this year began to transition to the use of gasoline mixed with ethanol, an alcohol made from grain, to help cut smog-forming vehicle emissions.
But in the past month, wholesale prices for California's gasoline-ethanol blend shot up as much as 30 cents a gallon as refiners reported problems in their gasoline production systems, leading traders to fear a shortage.
"The ultimate swing of prices for consumers could be quite drastic," said Dave Pavlich, health, safety and environment manager for Giant Industries during a panel discussion at a refining conference in San Antonio.
Beyond the volatility seen now in U.S. gasoline prices due to swings in crude oil markets worldwide, ethanol prices will also be subject to the whims of the agricultural markets.
"We'd be putting another layer of risk on weather patterns for grain supply," Pavlich said.
Sixteen states in addition to California are making ethanol the pollution-reducing additive to replace the widely-used methyl tertiary butyl ether (MTBE), which is blamed for groundwater contamination.
California refiners began switching to ethanol-gasoline blends this year. About 65 percent of the average 7 million barrels of gasoline made in the state each week is CARBOB, the name for California's ethanol-gasoline blend, according to the U.S. Energy Information Administration.
NATIONAL RULES EXPECTED
First popularized in the 1970s as a home-grown alternative to imported oil, ethanol has taken prominence as a fuel additive for cleaner-burning fuels.
Legislation proposed over the past two years in Congress, with heavy backing from agricultural lobbies, would require all states to use ethanol. It has yet to be adopted, but the executives said they expect it to become law in the next few years.
"The ethanol mandate really creates winners and losers in our industry," said Dan Riley, vice president of government relations for Tesoro Petroleum Corp . "It really is a function of where you are located, whether you have access to ethanol."
One of the primary problems that California is suffering is that most of the grain required for ethanol is grown in the U.S Midwest, adding additional transportation costs and potential for supply disruption for many states.
Federal legislation would require use of 5 billion gallons of ethanol a year, while current production is closer to 2 billion. At current levels, that is just enough satisfy the demand mandated by ethanol laws in 17 states.
The proposed legislation would require the switch to ethanol be completed over 10 years. Even without federal legislation, ethanol will likely become the national gasoline additive as more states require its use, the executives said.
About 2.13 billion gallons of ethanol were produced last year. Backers say ethanol capacity will grow to 3 billion gallons by the end of 2003. The Agriculture Department estimates 1 billion bushels of corn, or 10 percent of the U.S. crop, will go to ethanol plants this year.