U.S. Ethanol Market: MTBE Ban in California

Correspondence issued by the General Accounting Office with an abstract that begins "The 1990 amendments to the Clean Air Act require that an additive be added to gasoline in areas with excessive carbon monoxide or ozone pollution. Specifically, those areas with "severe" ozone pollution are required to use reformulated gasoline, which contains at least two percent oxygen by weight. In California, as in other areas of the country, oil refining companies primarily use the oxygenate methyl tertiary butyl ether (MTBE) to meet that requirement. Because MTBE has been detected in ground water, the governor of California has banned MTBE in the state's gasoline by the end of 2002. If California decides to use ethanol to replace MTBE, ethanol production capacity from 2003 through 2005 could likely satisfy U.S. consumption. However, if other states also banned MRBE and moved to ethanol, consumption could increase and affect the industry's ability to meet demand. Moreover, production capacity projections may be overstated because they include not only existing plants and plants under construction, but also new plants being planned, which may not materialize. Although prices have been relatively stable so far, ethanol price spikes could occur in California if supplies were disrupted by either production or distribution problems.