THE SOARING COST

of gasoline is a problem that extends well beyond the pump. Those $50 fill-ups have curtailed consumer spending, crippled SUV sales and provoked lawmakers to take legal measures to prevent price gouging. Gas approaching $4 a gallon has also made

extremely unpopular.

The reasons behind the spike in gas prices are many and well-documented: Gulf Coast hurricanes, greater demand from China and India, internal strife in oil-rich Nigeria, tensions over Iran's nuclear program, refining-capacity restraints in the U.S. the list goes on. What's less obvious is the added impact that ethanol is having on the cost of a tank of unleaded. That's right: ethanol.

Popularly thought of, when it's thought of at all, as an alternative fuel source that's failed to live up to its promise, ethanol has quietly emerged as a critical additive to everyday gasoline. And we're not referring to the 85% blend known as E85 that sells at a few filling stations in Iowa. We're talking about the gas that flows from the pumps at the local QuikTrip.

Ethanol, a kind of alcohol often derived from fermenting grain or corn, is often blended with gasoline to reduce the carbon-monoxide emissions that are generated while driving. Many states mandate the use of some chemical in gasoline to do just that. A common blend, such as California's, contains about 6% ethanol. Demand for the additive has crept up so much lately that ethanol futures, which were first listed on the Chicago Board of Trade in March 2005 at $1.19 a gallon, now fetch between $2.25 and $2.75 per gallon.

"By our reckoning, ethanol has added about 20 cents a gallon to the cost of gasoline here in California," says Charles Langley, a gasoline analyst for Utility Consumers' Action Network, a nonprofit advocacy group based in San Diego. (Langley was referring to peak pricing in March, when ethanol went for $2.76 a gallon.)

As recently as 2003, most reformulated gasoline was blended with an artificial chemical called methyl tert-butyl ether, or MTBE, instead of ethanol. That option became less popular when MTBE was shown to be accumulating in drinking water supplies (At best, the substance causes a peculiar smell; at worst, it may be carcinogenic.) Moreover, the Energy Policy Act of 2005 doesn't shield the makers of MTBE from lawsuits alleging contamination of the water supply; that was all the energy companies needed to get on board the ethanol train. (As added motivation to make the switch, MTBE has been banned or legally restricted in at least 17 states, including New York and California, which accounted for 39.2% of the country's MTBE consumption, according to the Department of Energy.)

The U.S. consumes about nine million barrels of gasoline a day, roughly three million of which is reformulated to burn cleaner. Today, two million of those reformulated barrels contain ethanol, while the remaining million barrels still contain MTBE, according to the federal Energy Information Administration. But that's changing. In fact, most states along the Northeast corridor from Virginia up to New Hampshire are making that transition now (with the exception of Connecticut and New York, which banned MTBE in October 2003 and January 2004, respectively). It's not going smoothly.

One of the downsides of ethanol is that it's extremely difficult to transport across great distances because it can't be moved through a pipeline. Since the vast majority of ethanol production is concentrated in the Midwest, ethanol must be shipped via barge, railway or truck to blending facilities around the country.

Now, at the same time that energy companies are figuring out how best to transport ethanol from the Midwest to those hard-to-reach states making the switch, the entire country is shifting from a winter blend of gasoline to a summer blend, which is less likely to evaporate harmful chemicals during the warmer months. Each of those transitions can require that energy companies put extra trucks on the road (some hauling ethanol; others hauling summer-blended gas), but energy companies only have so many trucks. As a result, there were gas shortages earlier this month in places like Dallas and Norfolk, Va., which are transitioning to ethanol from making the MTBE.

"In a sense, it's sort of a perfect storm in the gasoline markets," says Mike Burdette, a petroleum analyst at the Energy Information Administration. "But the good news is that it's happening before the driving seasons. Honestly, we hope to have a lot of this resolved before Memorial Day."

After that, the distribution issue may fade, but another problem will become more glaring: supply. During 2005, ethanol reserves declined by 5.6 days' worth to 19.9 days, according to the Renewable Fuels Association. Over the same period, demand rose by 26.5% to 310,000 barrels a day. In December, more than 12% of the ethanol consumed domestically had been imported.

Of course, we're still a few steps away from the campaign to stop dependence on foreign ethanol. Still, the price pressures are real, and a rough corn harvest could make them worse. The good news is that the country is moving to expand production. Today's ethanol refining capacity is about 4.49 billion gallons a year, according to the Renewable Fuels Association, the Washington, D.C.-based trade group for the ethanol industry. An additional 2.17 billion gallons' worth of capacity is currently under construction.

Not only are energy companies like Archer-Daniels-Midland and Canada-based Iogen building more ethanol refining facilities, but they're also working on new ways to produce ethanol that draw on agricultural waste products like cellulose. "There isn't an ethanol producer in the United States today that isn't engaged in a cellulose research program," says Matt Hartwig, communications director at the Renewable Fuels Association. "Once you're able to add cellulose to grain, then you're talking about a much larger industry 40, 50 billion gallons a year," he says. "Then you're starting to talk about having an impact on reducing dependence on foreign oil."

Of course, those programs are years away from commercial viability. Several prototype plants exist to make cellulosic ethanol, but ethanol experts say the process remains cost-prohibitive on a larger scale.

Rest easy, Big Oil. For now.