Energy Economy

Will Rising Ethanol Prices Wipe Out Consumer Savings on Gasoline?

Biofuel Cans
Source: Thinkstock
At the close of trading on Monday, reformulated (RBOB) gasoline for February delivery had a wholesale price of $1.38 a gallon. Ethanol on the Chicago Board of Trade was selling for $1.58 a gallon. And renewable energy credits (called renewable identification numbers, or RINs) were priced at just less than $0.85 (for a one gallon credit). At the end of December, RINs were selling for nearer $0.60.

What all this means is that pump prices that currently sit at five-year lows may not stay there for as long as everyone thinks. As the price of crude oil — and gasoline — continues to fall, U.S. drivers buy less fuel-efficient vehicles and tend to drive more, both of which push up demand for gasoline.

As demand for gasoline rises, so must demand for biofuels, of which ethanol is the mainstay. If not enough ethanol is available to meet federally mandated blending levels, refiners and blenders must purchase RINs to offset the ethanol they cannot buy to blend with their motor gasoline. Thus, the market for RINs starts rising.

At some point, probably when RINs rise above $1 or so, blenders and refiners will begin to add something to the cost of fuel sold to local gas stations to offset the higher cost of RINs. Eventually demand for motor fuel could be constrained by lack of ethanol or RINs, at which point pump prices will begin to climb higher even though crude oil prices may remain historically low.

Ethanol producers like Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO) and Pacific Ethanol Inc. (NASDAQ: PEIX) stand to benefit from rising ethanol prices, provided the U.S. corn crop can support their demand.

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