Feeling the Pain at the Old Pump
Lee Raymond, Exxon Mobil's recently retired chief executive, used to joke that if he knew which way oil prices were headed, he'd be able to buy an island in the Caribbean. Well, Raymond could buy several islands today with the whopping $98.4 million pension the company revealed last week it had conferred on him, a windfall that he could claim all in one lump sum. As for the direction of oil prices, well, no one in or out of the industry can say any longer it's a secret which way they're heading.
With tensions rising over the nuclear ambitions of Iran, the world's No.4 oil producer, the worldwide price per barrel climbed last week toward $70. Further fueling the price rise was uncertainty about a few other major producers: Iraq, Nigeria, Russia, and Venezuela. As a result, forecasters say $3-a-gallon gas is a virtual certainty once the summer driving season begins. The Energy Department's official word is that gasoline will average only $2.62 per gallon, up 11 percent over last summer's record level. But oil analyst Phil Flynn of Alaron Trading chuckled at the prediction's "daring" in his daily blog, since the average is already $2.68. Gasoline prices have jumped 18.5 cents a gallon in just two weeks and reached their highest level since October.
Sugar and corn. Record crude costs won't be the only factor driving gas prices higher. Refiners have decided to abruptly stop using MTBE, an additive they had chosen for 15 years to meet a clean air requirement. Congress repealed that mandate effective May 5. Refiners don't have to suddenly pull the plug on MTBE, but they view doing so as prudent. The substance has been identified as a major pollutant of drinking water, and the Senate blocked the protection refiners sought from lawsuits for an estimated $25 billion in cleanup costs.
Without MTBE, refiners will have to replace 4 percent of fuel volume nationwide because plain gasoline could violate other pollution limits. Refiners are gravitating toward ethanol, the corn alcohol that has been used as an MTBE alternative in the Midwest and California. But it will be costly to ship ethanol, which already is priced higher than gasoline, by truck from the Midwest to places it has never been used before in the mid-Atlantic and Texas. (Ethanol can't be added to gasoline in the pipeline as MTBE was.) Refiners could import ethanol from Brazil, where it is made from sugar cane at a fraction of the U.S. cost, but a 2.5 percent tariff and additional 54-cent-per-gallon duty--vigorously defended by U.S. corn growers--would negate the economic advantage.
Atop the man-made chaos, add Mother Nature. With 23 percent of Gulf of Mexico oil production still down from last year's hurricanes, a new storm season could roil prices further. Forget the islands. It will be hard to fill the tank just for a drive to the beach.
Info on fuel-efficient cars: www.usnews.com/mpg
This story appears in the April 24, 2006 print edition of U.S. News & World Report.
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