In about nine months, the law drops a federal requirement for US refiners to add chemicals to gasoline to make it burn more cleanly. Those additives also help stretch US gasoline supplies, meaning that the phase-out could spur spot shortages of fuel next summer, officials warn.

"Any loss in volume further constrains the supply system and increases the potential for price volatility," said Tancred Lidderdale, an analyst with the US Energy Information Administration.

The most popular additive is methyl tertiary butyl ether or MTBE, which in 1979 replaced lead in gasoline to make car engines run smoother. Then Congress in 1990 required refiners to use oxygenates like MTBE to clean up tailpipe emissions.

MTBE helps air quality, but it hurts water quality. The additive has leaked into water supplies in many states, sparking a flurry of legal claims from water districts demanding that refiners pay cleanup costs.

US refiners lobbied Congress but failed to persuade lawmakers to include in the new energy law language that would have shielded them from some MTBE product liability lawsuits.

Now, they face a dilemma: continue making MTBE and face billions of dollars in potential liability, or phase it out and risk supply shortages.

While corn-based ethanol will replace some of the MTBE added to gasoline, ethanol is costlier and more difficult to transport. Ethanol is now mostly used in the US Midwest and California, which banned MTBE several years ago.

LEGAL WORRIES

US refiners already have enough problems, including a spate of unplanned outages and looming federal rules requiring them to make diesel fuel that is nearly sulfur-free. "Next year is shaping up to be a very complicated year," said Seth Kleinman at PFC Energy, a Washington consulting firm.

Now, refiners must decide how to fill shortfalls from loss of the so-called oxygenate mandate. MTBE accounts for about 1.6 percent of gasoline supplies, according to the National Petrochemical and Refiners Association.

Valero Energy Corp., the biggest US MTBE refiner, last month decided to phase out MTBE in its gasoline supplies.

Other big MTBE producers including Huntsman Corp. and Exxon Mobil Corp. said they have not yet decided how to proceed.

"The fact that the No. 1 US producer of MTBE is ending it is less about economics than a legal liability issue, and that could well be the bellwether for the rest of the industry," said Mark Routt of Energy Security Analysis Inc.

Valero's decision alone will pull about 60,000 barrels per day (bpd) of gasoline off the US market, which totals about 9 million bpd.

If other US refiners follow Valero's lead, the US market would lose about 260,0000 bpd, Valero said.

"If everyone takes the position (Valero) is taking, that we are not going to produce it if we don't have liability protection, you are going to lose a lot of supply," Valero Chief Executive Bill Greehey told analysts last month.

Huntsman said it has no immediate plans to stop making MTBE.

"We have very good customers now who are buying MTBE," said company spokesman Don Olsen. Huntsman is eyeing the MTBE export market but "right now it's full speed ahead," he said.

EXPORT MTBE OR MAKE SOMETHING ELSE?

The American Petroleum Institute, the biggest industry lobbyist, said US refiners have time to prepare.

"If it is as quick as Valero says it is, it could tighten the market, but it's too early to say," said Ed Murphy, a refining expert at the API. "It's a relatively small volume in the face of a very large market with nine months to prepare."

US refiners have several options.

They could continue to make MTBE and ship it to South America and Europe, where MTBE is a popular additive. Or they could convert their MTBE units to make other octane-enhancing products.