NYMEX as an institution is completely price neutral: on each business day, there is an equal number of contracts bought as well as sold on the Exchange, and we do not have a vested interest in the profits or losses of either side of the market to the detriment of the other side. NYMEX does not take a position on the environmental impact of ethanol or MTBE, and we do not prefer or advocate the use of either additive to gasoline to fulfill the current federal requirements for oxygen standards in Reformulated Gasoline (RFG).

NYMEX’s concern is to see uniformity of grade and quality standards governing RFG specifications across the New York Harbor region which, as a marketplace, is one contiguous region despite distinctions in state borders.

History teaches us that changes in regulations that Balkanize formerly uniform gasoline markets indeed result in price changes, and often unpredictable price spikes. New York’s standards regarding MTBE and ethanol are due to take effect in just over six months. Industry’s plans for implementation are sketchy, at best. The proposed change in banning MTBE in New York, while New Jersey permits its continued use, will indeed separate the market value of gasoline in the two neighboring states. The fact that New York’s flavor of gasoline will be different from the standards in effect in New Jersey means that transactions for gasoline in New York, both wholesale and at the retail pump, will be priced on their own supply and demand factors.

While New Jersey will also be affected by the lack of uniform standards in a contiguous marketplace, New Jersey will not be isolated in the standard it selects, and the widespread availability of “New Jersey” gasoline through pipelines from Gulf Coast refiners, local refiners and importers will certainly mitigate any potential for price spikes or likely price increases to New Jersey’s consumers as a result of the split between states.

New York, on the other hand, is far more likely to see the same types of spikes in price and price increases as has occurred in other populated areas that adopt gasoline standards that isolate it from its surroundings. Ethanol–based gasoline cannot be shipped by pipeline, because of the inherent qualities of ethanol. If there is any shortage of ethanol-based gasoline in New York, there are no neighboring markets from where the fuel can be obtained, and it cannot be brought in by pipeline. Imports of ethanol, or ethanol gasoline, are unheard of at this time. With respect to its gasoline market, New York will be an island, subject to a lack of real options to deal with sudden supply shortages except to see pump prices spike until demand falls.

Practically, what does New York’s plan portend for New York’s consumers? The federal agency, Energy Information Agency, which is a branch of the Department of Energy, has written and been quoted in the press estimating that the average price of gasoline in New York will increase 9¢ - 10¢ per gallon at the pump. Of course, an average price increase does not account for the possibility, or the likely probability – as has been the experience in California and the Chicago region – of price spikes resulting from the switch to ethanol and the isolation of the marketplace where that switchover has occurred.

The EIA, for example, reports three instances where the cost of gasoline based on ethanol was approximately 25¢ per gallon above the price for readily available Gulf Coast RFG using MTBE. Price differences at the wholesale market are typically enlarged as the product moves downstream to the retail consumer at the pump buying a few gallons at a time. In California, the price of retail gasoline relying on ethanol gasoline is routinely 9¢ higher at the pump than it would otherwise be (source: EIA), but in several instances, and as recently as early April, the price has spiked at least 25¢.

The anticipated costs to the consumer of isolating New York from the rest of the naturally contiguous marketplace can reasonably be expected to be in line with the experiences elsewhere, i.e. a routine increase in prices at the pump of 9¢ - 10¢ with spikes in price conservatively estimated at 25¢ per gallon at the pump.

Using public figures about the quantity of gasoline consumed by New York’s consumers, the effect of such price increases range from approximately $400 million annually to $1 billion annually. What sounds like pennies is far from pennies when examined as a factor in the overall economy. The expected increased price of retail gasoline because of government action has the equivalent effect of a hidden tax on New York consumers.

The federal government is in the process of drafting a comprehensive Energy Bill which, if adopted (and it has the strong backing of the Bush Administration), would end the oxygenation requirement for gasoline in this region sometime in 2004. In effect, MTBE would largely disappear from the scene, and ethanol would not be required in reformulated gasoline in the New York area. Thus, our dilemma with ethanol and MTBE would be resolved. Such a bill is likely to be decided upon by this fall.

It would be ironic, and costly, for New York to effectuate an MTBE ban, and impose the infrastructure costs on the industry and consumers, only to turn around to undo the decision soon thereafter. In our view, the prudent move would be to wait, and ultimately act in a coordinated fashion with New Jersey and Connecticut to protect consumer interests and the environment.

In conclusion, NYMEX appreciates that the legislature of the State of New York has announced a ban on MTBE because of its belief that such a move would improve the environment. However, the uncertainty of intervening federal actions which would render New York’s MTBE ban unnecessary, and the almost certain increases of consumer prices resulting from the planned implementation, merit an announced delay until January 1, 2005 at the earliest.