Gas Trade Turns the Tables

Third, crude oil and gasoline futures markets are feeling the aftershocks of a government-mandated change in the chemical makeup of gasoline that occurred in 2004 and 2006. During the changeover, a long-used additive of gasoline called MTBE (methyl tert-butyl ether) was switched out for the cleaner-burning additive ethanol. The change has been both expensive and complicated for refineries.

When refineries used MTBE, they mixed it with gasoline at the plant before sending the finished product to the transport terminals that distribute fuel to retail stations. They can't do that with ethanol because ethanol attracts water, which degrades the quality of gasoline. Thus, refiners have had to undertake the expense of retrofitting their terminals so they can add ethanol to basic reformulated gasoline just before it's sold at retail.

The ethanol production and distribution infrastructure in the U.S. isn't yet at adequate capacity, according to Max Pyziur, an energy analyst at CPM Group in New York. When MTBE was banned, refineries foresaw delays in the ethanol-mixing process that could have caused gasoline shortages.

They reacted by building their stores of gasoline in case something went wrong. This drove up the price of gasoline beyond its historical levels during spring months when refiners normally increase inventories in preparation for the demands of summer travelers.

As a result, margins between gasoline and crude oil, sometimes referred to as crack spreads, climbed as high as 60 cents in the spring of 2006, even while refinery utilitization was normal. To calculate the spread, the price of oil is divided by 42 gallons per barrel and then subtracted from the price of gasoline.