[Congressional Record Volume 145, Number 56 (Thursday, April 22, 1999)]
[Senate]
[Pages S4105-S4107]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                MTBE IMPORTS AFFECT U.S. ENERGY SECURITY

  Mr. DASCHLE. Mr. President, we are approaching the tenth anniversary 
of the birth of the reformulated gasoline (RFG) program. This 
initiative, enacted in 1990 as part of the Clean Air Act Amendments, 
established strict fuel quality standards for the nation's most 
polluted cities in order to reduce air pollution. It includes a minimum 
oxygen content requirement, which was intended to provide an 
opportunity for America to reduce its dependence on foreign oil through 
the use of domestically produced ethanol and MTBE.
  Reformulated gasoline was introduced in the American marketplace in 
1995. Today it accounts for approximately one-third of all gasoline 
sold in this country.
  Congress had several objectives in establishing the RFG program: (1) 
to substantially reduce harmful air pollutants caused by fuel-related 
emissions, especially ground level ozone and air toxics; (2) to reduce 
imports of crude oil and petroleum products, especially those from 
unstable regions like the Middle East; and (3) to stimulate investment 
in domestic ethanol and ether plants, thus creating jobs and adding 
value to grains and other domestic raw materials.
  The first objective has been not only met, it has been exceeded. In 
fact, EPA Administrator Carol Browner has called the RFG program ``the 
most successful air pollution reduction program since the phase-out of 
lead in gasoline.'' The other two objectives also have been met, though 
not to the extent that many of us had hoped.
  A major impediment to full realization of the potential of the RFG 
program has been the importation of massive volumes of MTBE, much of it 
subsidized by the Saudi Arabian government, into the United States. 
Domestic ethanol and MTBE producers have been harmed, and American 
plants have not been built, largely due to the influx of subsidized 
product from offshore that makes potential investors unwilling to 
commit capital to U.S. ethanol and ether plants.
  The winners in this situation are the Saudi government and a few 
multi-national corporations. The losers are U.S. corn farmers, butane 
suppliers and plant workers as well as American consumers who remain 
potential hostages to foreign energy suppliers.
  Mr. President, the benefits of the RFG program have been substantial. 
However, as we prepare to enter Phase II of the program, it is 
incumbent upon policymakers to reflect upon whether it is achieving its 
potential in terms of air quality improvements and oil import 
reductions.
  It seems clear that the answer to the first question is ``yes.'' RFG 
is generating substantial air quality benefits and even exceeding the 
predictions that many had made when the original rules were written.
  The answer to the second question, however, is a resounding ``no.'' 
Imports of Saudi Arabian MTBE are growing, and the exclusionary effect 
of unfairly traded MTBE imports on ethanol usage in key markets such as 
California has become increasingly problematic.
  On April 1, 1999, the International Trade Commission (ITC) held a 
public hearing on its Investigation No. 332-404, concerning MTBE 
imports and their impact on the domestic oxygenate industry. This 
inquiry is timely and important. It will cut through the rhetoric, 
provide policymakers with a clear picture of the nature and effect of 
MTBE imports on domestic production and U.S. energy security, and set a 
factual foundation for discussion of what, if anything, should be done 
about this situation.
  With those objectives in mind, I commend to my colleagues attention 
the testimony presented before the ITC by Bob Dinneen, Legislative 
Director of the Renewable Fuels Association, and Todd Sneller, 
Executive Director of the Nebraska Ethanol Board, that underscores the 
damage that has been done by unfairly traded MTBE imports. Mr. Dinneen 
and Mr. Sneller present cogent analyses of the impact that increasing 
volumes of heavily subsidized MTBE are having on the domestic 
oxygenates industry. Their testimony should be a warning to us all.
  I ask unanimous consent that the testimony of Mr. Dinneen and Mr. 
Sneller be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

    Testimony of Bob Dinneen, Legislative Director, Renewable Fuels 
                              Association

       Mr. Chairman and members of the Commission, on behalf of 
     the members of the Renewable Fuels Association, the national 
     trade association for the domestic ethanol industry, I want 
     to thank you for the opportunity to provide comments today on 
     the Commission's investigation of MTBE. Ethanol and MTBE are 
     competitive additives to gasoline that increase octane and 
     oxygen to

[[Page S4106]]

     fuels, resulting in dramatically reduced emissions. As such, 
     the domestic ethanol industry is directly and negatively 
     impacted by the importation of subsidized MTBE, and we 
     commend the Commission's decision to investigate this issue.
       Ethanol is a renewable fuel produced from corn and other 
     agricultural feedstocks. Today, ethanol is the third largest 
     user of corn, behind only feed and export markets. Virtually 
     all ethanol consumed in the U.S. is produced domestically. 
     Last year, the U.S. ethanol industry processed approximately 
     560 million bushels of grain into 1.4 billion gallons of fuel 
     ethanol at 53 plants located in 20 states. A report completed 
     for the Midwestern Governors' Conference, The Economic Impact 
     of the Demand for Ethanol, concludes that the ethanol 
     industry: increases net farm income more than $4.5 billion; 
     boosts total employment by 195,000 jobs; improves the balance 
     of trade over $2 billion; adds over $450 million to state tax 
     receipts; and results in a net savings to the Federal budget 
     of more than $3.5 billion.
       Background: Since the twin oil supply shortages and price 
     shocks of the 1970's, promoting increased energy security has 
     been a national priority. Toward that end, beginning with the 
     National Energy Security Act of 1979, the Congress has worked 
     to stimulate the production and use of domestically-produced 
     alternative fuels. As noted by the U.S. Senate Committee on 
     Energy and Natural Resources:
       ``Increased dependence on oil imports means, inevitably, 
     increased dependence on the nations of the Persian Gulf. The 
     potential for economic disruption and war in the event of 
     interruptions in Persian Gulf supplies will increase...
       ``If the projected United States dependence on Persian Gulf 
     oil materializes, not only will the probability of economic 
     disruption and war increase, but policies available to the 
     United States to deal with political turmoil in the world, 
     including the Mideast, will be affected.''--S. Rep. No. 72, 
     102nd Cong., 1st Sess. at p. 204.
       In 1990, the Congress extended its commitment to the 
     development of domestic energy resources by passing the 
     Daschle/Dole amendment to the Clean Air Act requiring 
     refiners to add certain levels of oxygen to new reformulated 
     gasolines. A critical rationale for the oxygen requirement 
     was the energy security benefits attributable to the 
     increased use of ethanol and other domestically-produced 
     oxygenates. At the time, more than 400,000 troops were 
     stationed in the Persian Gulf, in large part to protect the 
     free flow of oil from the Mideast. The U.S. Environmental 
     Protection Agency estimated the oxygen requirements of the 
     Clean Air Act would reduce energy imports by 500,000 to 
     800,000 barrels per day. Consider these statements by 
     proponents of the RFG program:
       ``I support this amendment because it will reduce the toxic 
     aromatics currently used to boost octane in gasoline; it will 
     reduce ozone-forming automobile emissions; it will begin to 
     reduce our dependence on imported oil; and it will enhance 
     rural and farm economies. [136 Cong. Rec. S3522 (Statement of 
     Senator Kent Conrad)(daily ed. March 29, 1990)]
       ``The second thing we ought to recognize is this is the 
     only part of the bill that helps our extraordinary dependence 
     on imported oil.'' [136 Cong. Rec. S3519 (Statement of 
     Senator Tim Wirth)(daily ed. March 29, 1990)]
       But the promise of increased market opportunities for 
     ethanol in the RFG program has been undermined by the 
     unanticipated and rising levels, of MTBE imports. EPA data 
     shows that despite the intention that ethanol market 
     opportunities be significantly expanded in RFG, ethanol has 
     actually garnered just 12% of the RFG market, primarily in 
     Chicago and Milwaukee. In coastal RFG markets where MTBE is 
     readily imported, ethanol has virtually no market 
     penetration.
       At the same time, the RFG program has proven a boon to 
     imported MTBE. MTBE imports have risen from just 30 million 
     gallons in 1990 to more than 1.4 billion gallons in 1998. 
     Moreover, the majority of MTBE imports are from Saudi Arabia 
     and other OPEC countries. In 1997, 70% of U.S. imports of 
     MTBE came from Saudi Arabia and other OPEC countries. Imports 
     now represent a third of U.S. MTBE consumption, and is 
     roughly equal to U.S. merchant production.
       To respond to these alarming levels of MTBE imports, 
     particularly from Saudi Arabia Senate Democratic Leader Tom 
     Daschle (SD) has introduced legislation that would require 
     the Commerce Department to investigate, under Section 702 of 
     the Tariff Act of 1930, whether Saudi Arabia has provided 
     unfair subsidies to its exporters of MTBE, giving them an 
     unfair market advantage in the U.S. oxygenate market. If it 
     is determined to be so, S. 2391 would impose an import fee 
     large enough to offset the subsidiaries. The RFA supporters 
     S. 2391, as MTBE imports have increased U.S. dependence on 
     foreign supplies at the expense of domestic oxygenate 
     producers.
       The following is a break-down of 1998 MTBE production and 
     imports:

                          1998 MTBE PRODUCTION
------------------------------------------------------------------------
                                                           Annual gals
               Source                 Production  b/d       (billion)
------------------------------------------------------------------------
Merchant Plants....................  103,000 b/d......  1.5
Captive Plants \1\.................  102,000 b/d......  1.5
Imports............................  90,000 b/d         1.4
      Total........................  295,000 b/d......  4.4
------------------------------------------------------------------------
\1\ A captive plant refers to MTBE produced at refineries, used by those
  refineries for octane trimming and is not available for merchant
  oxygenate or octane markets.
 
Source: Energy Information Administration.

       In the absence of such precipitous MTBE import level, the 
     domestic ethanol industry would have been able to double in 
     size--creating more domestic jobs, providing increased rural 
     economic development and further enhancing our balance of 
     trade.


                            MTBE Duty Rates

       An important issue for the Commission to consider is the 
     variable duty rates paid on MTBE. There are currently three 
     classifications of the Harmonized Tariff Schedule (HTS) under 
     which MTBE may be imported: as a motor fuel (2710.00.15); as 
     MTBE (2909.19.14); or as a gasoline additive (3811.90.00). 
     Each classification has a different duty rate. Current HTS 
     duty rates for each classification are as follows:

------------------------------------------------------------------------
                                       HTS
            Product               classification    General rate of duty
------------------------------------------------------------------------
Motor Fuel (RFG)..............         2710.00.15  52.5 cents/bb1 (1,25
                                                    cents/gal).
MTBE..........................         2909.19.14  5.5% ad valorem
                                                    (approx. 5 cents/
                                                    gal).
Gasoline Additives............         3811.90.00  2.2 cents/kg & 10.8%
                                                    ad valorem (approx.
                                                    11.6 cents/gal) \1\.
------------------------------------------------------------------------
\1\ Assumes $0.90 cost and .74 kg. weight of MTBE.

       It is becoming clear the MTBE is increasingly being 
     imported under the HTS classification for motor fuel. 
     According to the Energy Information Administration, 66,000 b/
     d of MTBE was imported last year. But an additional 24,000 b/
     d of MTBE was imported in finished RFG. (Assumes MTBE at 11% 
     by volume to meet federal 2.0 wt.% oxygen requirement in 
     RFG.) This compares to 74,000 b/d as MTBE and 18,000 b/d as 
     RFG in 1997. Thus, the trend is to import more MTBE as 
     finished RFG, and pay the reduced duty. Moreover, according 
     to DeWitt & Company, an MTBE industry trade publication and 
     research group, the actual amount of MTBE imported in 
     finished gasoline could be much higher. That is possible 
     because importers could overblend MTBE for shipment and blend 
     down to meet U.S. RFG oxygen specifications at the gasoline 
     terminal. It is, in effect, a means of circumventing the duty 
     on MTBE. It should be stopped.

                              MTBE IMPORTS
------------------------------------------------------------------------
                                               MTBE in RFG
             Year                   MTBE      (assumes 11%      Total
                                               by volume)
------------------------------------------------------------------------
1997..........................  74,000 b/d..  18,000 b/d +  92,000 b/d +
1998..........................  66,000 b/d +  24,000 b/d +  90,000 b/d +
------------------------------------------------------------------------

       Thus, under current law refiners importing MTBE in RFG are 
     short-changing the Treasury at least $16.5 million annually 
     (24,000 x $0.90 x .05 x 42 [42 gallons/barrel] x 365) by 
     importing MTBE under the motor fuel classification.

              OXYGENATE TYPE ANALYSIS 1997 RFG SURVEY DATA
------------------------------------------------------------------------
                              Percent of samples with majority of oxygen
                                               from \1\
            Area             -------------------------------------------
                                                                 Combo/
                                MTBE     Ethanol   ETBE   TAME    other
-------------------------------------------------------------------\2\--
Atlantic City, NJ...........     97.47      1.27   0.00   1.27      0.00
Baltimore, MD...............     98.94      0.00   0.00   1.06      0.00
Boston-Worcester, MA........     95.93      1.74   0.00   2.33      0.00
Chicago-Lake Co., IL, Gary,       5.84     94.16   0.00   0.00      0.00
 IN.........................
Dallas-Fort Worth, TX.......    100.00      0.00   0.00   0.00      0.00
Hartford, CT................     98.44      1.56   0.00   0.00      0.00
Houston-Galveston, TX.......     92.73      0.00   0.00   6.57      0.69
Los Angeles, CA.............    100.00      0.00   0.00   0.00      0.00
Louisville, KY..............     74.75     25.25   0.00   0.00      0.00
Manchester, NH..............    100.00      0.00   0.00   0.00      0.00
Milwaukee-Racine, WI........      4.60     95.40   0.00   0.00      0.00
NY-NJ-Long Is.-CT...........     98.93      1.07   0.00   0.00      0.00
Norfolk-Virginia Beach, VA..    100.00      0.00   0.00   0.00      0.00
Phila.-Wilm, DE-Trenton, NJ.     98.69      0.65   0.00   0.98      0.00
Phoenix, AZ.................     49.18     50.82   0.00   0.00      0.00
Portland, ME................    100.00      0.00   0.00   0.00      0.00
Poughkeepsie, NY............     97.76      2.24   0.00   0.00      0.00
Rhode Island................     98.82      1.18   0.00   0.00      0.00
Richmond, VA................    100.00      0.00   0.00   0.00      0.00
Sacramento, CA..............    100.00      0.00   0.00   0.00      0.00
San Diego, CA...............    100.00      0.00   0.00   0.00      0.00
Springfield-MA..............     98.20      1.80   0.00   0.00      0.00
Washington, D.C. area.......     98.07      0.00   0.00   1.54      0.39
------------------------------------------------------------------------
\1\ RFG Survey samples taken at retail gasoline stations. Categorization
  based on the oxygenate providing more than 50% by weight of total
  oxygen in a sample.
\2\ The ``Other'' category is composed of samples containing
  combinations of oxygenates with no single oxygenate providing more
  than 50% of total oxygen.


[[Page S4107]]


                                  ____
Comments Submitted By: Todd C. Sneller, Administrator, Nebraska Ethanol 
                                 Board


                               background

       The Nebraska Ethanol Board is a state agency established in 
     1971 by Nebraska statute. The board is directed to assist the 
     private sector in establishing ethanol production facilities; 
     promote air quality improvement programs; establish marketing 
     procedures for ethanol based fuels; and sponsor research 
     related to the use of ethanol fuels.
       In 1988 the board entered into an agreement for research 
     and development of ethanol based ethers and fuels containing 
     combinations of alcohol/ether mixtures. Partnership in this 
     effort was with American Eagle Fuels (AEF), a private 
     corporation. The board and AEF expended more than $2 million 
     to develop a small commercial scale facility capable of 
     producing ethyl tertiary butyl ether (ETBE). ETBE was 
     produced at the facility near Lincoln, Nebraska and small 
     quantities of the product were sold in Japan, Europe and the 
     United States for experimental purposes. At the same time, 
     the board engaged in an extensive cooperative testing program 
     with Sun Refining Company and other parties to examine the 
     properties of ethanol/ether combinations. This work was 
     intended to form the basis for an application to the U.S. EPA 
     that would seek approval for higher concentrations of 
     ethanol/ether mixtures to be blended in gasoline for 
     commercial sale.
       The board's investment in research and development of ETBE 
     was based on the expectation that ethanol and ETBE would play 
     a significant role in oxygenated and reformulated fuel 
     programs required under the Clean Air Act Amendments of 1990. 
     Discussions during debate on CAA amendments, and recorded 
     floor debate in the Senate, clearly reflect the expectation 
     that ethanol and ETBE use would increase significantly as a 
     result of the oxygenate requirements included among the 1990 
     amendments to the Act.


                             impact of mtbe

       Despite expectations that ethanol and ETBE would capture a 
     significant share of the oxygenated fuel market, experience 
     in the marketplace differed significantly from early 
     expectations. In one of the first oxygenated fuel markets, 
     the Colorado Front Range, the oxygenate most often used at 
     the outset of the Colorado program was MTBE. In the initial 
     years of the program, MTBE use constituted as much as 95% of 
     the oxygenated fuel sold during the carbon monoxide abatement 
     program. This occurred despite the fact that ethanol could 
     easily be transported by rail and truck from Nebraska and 
     other locations at rates competitive with gasoline. In other 
     oxygenated fuel program areas in the Midwest, such as 
     Milwaukee, MTBE quickly captured the market for oxygenated 
     gasoline despite the proximity of such areas to large ethanol 
     production facilities. In oxygenated fuel program areas 
     outside the Midwest, the aggressive marketing of low priced 
     MTBE allowed virtual market control. Price was clearly a key 
     and MTBE was available at rates equal to or below the cost of 
     gasoline.
       The experience in reformulated gasoline market areas was 
     similar to the carbon monoxide abatement program. A review of 
     U.S. EPA market surveys of RFG areas for 1995-97 clearly 
     illustrates the trend toward MTBE. Early surveys show modest 
     use of ethanol in a few metropolitan areas and nominal use of 
     ETBE in fewer areas. However, the data show a clear trend 
     toward MTBE use following he first year of the federal RFG 
     program. The trend generally continues, with few exceptions, 
     in 1999.
       The technical attributes of ETBE are well documented. 
     Compared to MTBE, ETBE is superior in virtually all areas 
     except price. ETBE, in the opinion of many refiners and auto 
     makers, is the perfect oxygenate because ``it acts like 
     gasoline''. Octane and distillation properties, low vapor 
     pressure characteristics, and ability to reduce aromatic and 
     sulfur levels while maintaining other performance qualities 
     of gasoline make ETBE an excellent component for cleaner 
     burning gasoline. However, economics in the highly 
     competitive world of petroleum refining and marketing is the 
     key criteria in most oxygenate purchasing transactions. MTBE 
     has a distinct advantage in pricing due, in large part, to 
     the low cost of methanol.
       Methanol and MTBE are global commodities and as such 
     respond to pricing strategies of the largest producers of 
     these products. The public announcement of King Fahd's 1992 
     royal decree was clearly a confirmation that a significant 
     incentive was being instituted in the pricing of methanol and 
     related components of MTBE. This incentive has been 
     calculated to provide raw material price discounts at levels 
     thirty per cent below world prices. The impact of this decree 
     has been apparent over the past seven years. MTBE production 
     from Saudi Arabian plants has increased rapidly and steadily, 
     to nearly 100,000 barrels per day according to published 
     reports. That volume constitutes nearly half of total U.S. 
     MTBE demand. Due to this low cost, made possible by the Saudi 
     Arabian subsidy, a significant volume of the MTBE used in the 
     U.S. today is imported directly or indirectly from plants in 
     Saudi Arabia. As a result, ETBE cannot possibly be 
     competitive with this product on a cost basis, despite the 
     obvious technical advantages of ETBE. In addition, domestic 
     MTBE producers are keenly aware of this pricing differential 
     and the adverse impact it has on domestic supply and price.


                               conclusion

       The result of the Saudi Arabian subsidy is clear. Domestic 
     ethanol and MTBE producers are disadvantaged and oxygenates 
     from domestic production facilities are often displaced by 
     low cost MTBE imports from Saudi Arabia. The intent of 
     Congress has been thwarted by imported MTBE use in the 
     oxygenate programs which were intended to stimulate a 
     domestic industry. U.S. grain producers who were told of the 
     predictions for increased corn and grain sorghum use via 
     ethanol and ETBE plants have not seen that domestic market 
     materialize in the substantial way predicted in 1990. The 
     U.S. balance of trade, already reeling from a high level of 
     imported petroleum products, is further exacerbated by 
     increased imports of MTBE from off shore plants. Oxygenate 
     pricing, pegged to the lower cost MTBE imports from Saudi 
     Arabia, reduces revenue and return on investment of domestic 
     oxygenate producers, thereby discouraging investment in new 
     or expanded plants in the United States. As a result, the 
     oxygenated fuel provisions of the Clean Air Act are not 
     generating domestic economic benefits to the extent possible. 
     The mechanism generating these adverse impacts, instituted 
     following the 1992 royal decree, must be removed or offset to 
     protect domestic economic interests.

                          ____________________