Two recent events may presage a change in U.S. government policy concerning a key additive used to produce oxygenated gasoline, reports the U.S. International Trade Commission (ITC) in its publication Methyl Tertiary-Butyl Ether (MTBE): Conditions Affecting the Domestic Industry.

MTBE, formerly used primarily as an octane enhancer to replace the tetraethyllead phased out of gasoline in the late 1970s and early 1980s, is now used mainly as an oxygenate blended with gasoline to add sufficient oxygen to meet the oxygen requirements of the Clean Air Act Amendments of 1990. MTBE is used in about 84 percent of U.S. reformulated gasoline; fuel ethanol is used in much of the remainder.

However, MTBE production and consumption in the United States could be significantly affected by two recent events: an executive order issued last March by the governor of California that requires the phaseout of MTBE in California by the end of the year 2002, and a report issued last July by the U.S. Environmental Protection Agency's "Blue Ribbon Panel on Oxygenates in Gasoline" that recommends reduced use of MTBE in the United States, with efforts to curtail use to begin immediately.

The ITC, an independent, nonpartisan, factfinding federal agency, recently completed the report for the U.S. Trade Representative (USTR).

As requested, the ITC's report provides an overview of the global MTBE market, including consumption, production, capacity, and trade trends during 1994-1998, emphasizing the United States and Saudi Arabia; a description of the U.S. MTBE market and the major factors affecting it, including imports, especially from Saudi Arabia; an overview of the current MTBE production processes; and profiles of the U.S. and Saudi Arabian MTBE industries and importers, as well as government policies affecting MTBE production, investment, and trade. Other highlights of the report follow.

• The United States is the world's largest MTBE producer, producing about 3.5 times more in 1998 than Saudi Arabia, the second largest producer. U.S. MTBE production, trade, and consumption all increased during 1994-98. After increasing during 1994, U.S. production capacity remained constant during 1995-98. Construction of new domestic production facilities in the United States has been discouraged by uncertainty concerning future U.S. consumption and recent increases in global production capacity. U.S. capacity utilization rose steadily during 1994-97 to 86 percent before declining to 81 percent in 1998.

• The United States is also both the world's largest importer and consumer of MTBE. During 1994-98, U.S. demand increased from 175,100 barrels per day to 251,300 barrels per day, or by about 44 percent; the import-to-consumption ratio also increased, from 23 percent to 35 percent. Saudi Arabia, the world's largest MTBE exporter, was the largest source of U.S. imports during 1994-98. Although U.S. imports from Saudi Arabia more than doubled during this time period, their share of U.S. consumption increased from 7.4 percent to 11.2 percent. The next three largest sources in terms of quantity during those years were Canada, the United Arab Emirates, and Venezuela (by 1998 ranking).

• The Saudi Basic Industries Corporation, a primarily state-held entity, is the main MTBE producer in Saudi Arabia, accounting for about 97 percent of total Saudi MTBE production capacity through three joint-venture operations. Saudi MTBE is said to be primarily intended for export.

• Government policies in the United States and Saudi Arabia are considered by many to have had a major impact on production, trade, and consumption of MTBE. For example, on the demand side, the U.S. reformulated gasoline and the California Air Resources Board Phase 2 programs are widely recognized as the major factors influencing the increase in U.S. and global MTBE consumption. On the supply side, Resolution No. 68, issued by the Council of Ministers of the Kingdom of Saudi Arabia on November 25, 1992, implemented a 30 percent feedstock discount for domestic users on liquefied gases, including butane (an input in MTBE production), based on their export price. The butane discount, reportedly intended primarily to offset transportation costs incurred in exporting the product and to peg the price of butane for all Saudi consumers at 70 percent of Saudi Aramco's export price, is said to be available to all companies operating in Saudi Arabia regardless of geographical location or company ownership. Inasmuch as feedstock costs represent a significant portion of MTBE production costs, feedstock prices can be one of the deciding factors as to whether a project is considered to be competitive.

The foregoing is from the ITC's report Methyl Tertiary-Butyl Ether (MTBE): Conditions Affecting the Domestic Industry (Inv. No. 332-404, USITC Publication 3231, September 1999). The report will be posted on the ITC's Internet server at www.usitc.gov. A printed copy may be requested by calling 202-205-1809 or by writing the Office of the Secretary, U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436. Requests may be faxed to 202-205-2104.