Gas: Soothing spring price spikes

Switching gasoline blends is often cited as one reason why prices jump, but experts say there's little that can be done to stop that from happening.

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By Steve Hargreaves, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- As sure as spring brings showers and flowers it also brings gasoline price spikes.

Every year analysts say the switch from winter to summer gas is partly responsible for surging prices. In fact, in addition to summer and winter gas, there are about 40 different blends of gasoline sold in the U.S.

These blends are specially formulated for specific regions, making them susceptible to shortages. If there were one or two blends of gasoline sold nationwide it could lead to fewer shortages, and thus fewer price spikes.

But most experts say that while simplifying gas blends might lead to less volatility in the spring and slightly cheaper gas in some areas, most of the country would pay more as refiners would be forced to make the cleanest - and most expensive - blend.

Refiners make different blends of gasoline for different regions of the country depending on the pollution levels in each region.

More congested places like the Northeast, southern California, east Texas and around Chicago require a cleaner burning gas to comply with the nation's clean air laws. The cleaner burning gas has a slightly different chemical structure, and is more expensive to produce.

Refiners also make winter and summer gas. The winter gas generally doesn't have to be as clean, as ground-level pollution isn't as bad when it's cold. Winter gas is therefore cheaper. It's also formulated slightly differently to make engines run better in cold weather.

Why prices spike in the spring. Every spring refiners switch to the summer blends, which require wholesalers empty their tanks of winter gas. This is where the problems begin.

Traders start bidding up gas prices in anticipation of outages, which can happen as the supplies are switched and gas from one region can't be shipped to another to make up for a shortfall in supplies due to the different standards. Last week there were reports of gas outages in the New York City area.

There were also reports of cars dying due to bad gas in New Jersey. Evidently, water from the bottom of those storage tanks got into the gasoline when the tanks were emptied, fouling engines across the Garden State.

No easy fix. There have been calls to simplify this complex system of blends, making just one or two blends that could be sold anywhere in the country.

'If you had fewer blends, you'd have bigger markets," said Mark Cooper, director of research for Consumer Federation of America. "Bigger markets are generally better for consumers."

Cooper said a lot of the blends are similar in cleanliness, and could be combined without too much additional cost.

The cost part of the equation is were the experts differ.

"I'm for streamlining the fuel, it would create a wider supply pool," said Brian Milne, refined fuels editor at DTN, an information provider. "But you want to be careful of the consequences."

For starters, you'd want to be careful about creating more pollution, said Milne. Also, while about 30 to 40 percent of the population use the strictest formulation of gas and may see lower gas prices if the standard was simplified, those who have less stringent blends would likely pay more, he said.

Charlie Drevna, executive vice president of the National Petrochemical and Refiners Association, was more blunt.

"If you're going to have one or two fuels, you're not going to go backward on environmental quality," said Drevna. "They would gravitate toward California fuel, which is the highest in the world to produce."

The U.S. Energy Information Administration studied the issue back in 2002.

"There does not seem to be a means of reducing price volatility in the short term by reducing the number of fuel types," EIA analysts wrote in a report. "The measures needed to reduce price volatility could cost the nation more than they would save a particular region."

EIA said price spikes, especially in areas that required cleaner gasoline, could be reduced by simplifying blends, but that it might add 5 cents for consumers in other parts of the country.

For the refiners, Drevna said making the different blends isn't that much of an issue.

If lawmakers want to bring down the price of gasoline in the long term, he suggested opening areas of the country currently off limits to drilling, like the Arctic National Wildlife Refuge and off the East and West Coasts. He also said the law requiring refiners to use more biofuels, which he said is costly, should be repealed.

Some politicians, including many Republicans, have called for more domestic drilling.

But many Democrats - and those in the renewable energy business - have called on higher taxes for oil companies, with the money being used to fund renewable sources.

In the short run, some Democrats are trying to get the Bush Administration to stop filling the Strategic Petroleum Reserve, a move some analysts say would have little effect on prices.  To top of page

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