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Uncle Sam's hand in high gas prices?
Critics say ill-timed legislation is partly responsible for prices at the pump, but others say the industry should have seen what was coming.
By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - As gasoline prices spiral upward ahead of the high-demand summer season, some traders and consumer advocates are laying at least part of the blame squarely on the doorstep of the federal government.

While near-record crude prices account for nearly 60 percent of the cost of making gasoline, and unabated demand from U.S. drivers has done nothing to ease prices, part of the run-up has to do with problems with switching from one type of gasoline additive to another.

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The switch is happening because lawmakers didn't include liability protections for makers of MTBE, a suspected cancer-causing additive easily soluble in groundwater that has been the subject of several lawsuits, when they enacted an energy bill last August.

So refiners are scrambling to switch to ethanol, a corn-based additive that also makes fuel cleaner burning, which is required in most major metropolitan markets. But with just six months to make the switch, supplies of ethanol and the trucks and rail cars needed to bring it to market are stretched, which has helped push gasoline futures to their highest level in over six months and prices at the pump closer to the $3 a gallon mark.

"We're staring down the barrel of a policy problem that's causing this situation for consumers," said John Kilduff, an energy analyst at Fimat in New York. "They should have been given more time."

Geoff Sundstrom, a spokesman for AAA, a drivers' advocacy group formerly known as the American Automobile Association, agrees.

"Without a phase out period, industry has been saying it would result in this," said Sundstrom. "It seems the whole process could have been managed better by the federal government."

But Bob Simon, the Democratic staff director for the Senate Energy and Natural Resources Committee refused to take the blame, saying the change has been in the works for years and that energy companies should have been prepared.

"The refineries were betting that they were going to get MTBE liability protection, and they placed a bad bet," said Simon, noting that the committee's chairman said publicly last year that there was no way the product would ever get liability protection. "I don't know how much clearer it could have been."

Sen. Byron Dorgan, D-N.D., said he thought the switchover had very little to do with the high price of gasoline.

"I think it's a preposterous argument," said Dorgan. "It has to do with the OPEC countries organizing a cartel, larger oil companies and an orgy of speculation."

Making the change is hard because ethanol, unlike MTBE, absorbs water and therefore can't be transported by pipeline, which is how most gasoline moves from refineries to regional markets, said Mary Rose Brown, a spokeswoman for the refining company Valero (Research).

So ethanol needs to be transported separately by truck or railcar from the Midwest, where it's produced, to the pipeline terminus, where it's then blended with gasoline as the gas is loaded onto trucks for delivery to gas stations, said Brown.

"We've yet to see how hard it will be, but we will see spot outages," she said, noting that there have already been outages in Dallas and Houston, where the switch is currently taking place.

Brown admitted the industry didn't think it was going to have to stop using MTBE, but said having a grace period like the one in California when that state banned its use would have been nice.

"Having a year-long phase out period took a lot of pressure off the market," she said.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.