Ethanol Glut 2.0 May Cause Gas Prices to Jump

Ethanol Glut 1.0 was reported here over three years ago, but we didn't mention the trading of ethanol credits then. While the U.S. may not be trading carbon allowances like California initiated in November to reduce carbon emissions -  it does conduct a "niche market for US ethanol credits" as a result of the Renewable Fuel Standard, "created under the Energy Policy Act (EPAct) of 2005 (that) established the first renewable fuel volume mandate in the United States".  

Matthew L Wald gives the background on how a glut of ethanol causes the price of gas to increase - even though ethanol is cheaper than gasoline.

Gas companies are required under federal law to blend a certain number of gallons of ethanol into the fuel. But refiners argue that some cannot reach that requirement because they are nearing or at the so-called blend wall, the maximum percentage of ethanol in gasoline that most gas stations can handle, 10 percent.  

Bottom line: The mandate requires that refineries add more ethanol to their fuel mix than they can handle because "the blend wall has been reached". So - the refineries must buy the credits if they can't buy the actual ethanol and haven't 'banked the credits' - and it's the credits that are in short supply. Ethanol credits surged "to more than $1 from a few pennies". In addition to the effect on gas prices, it also may explain the "widening gap between the costs of regular and premium gas" as ethanol increases the octane.

Refineries can escape the Renewable Fuel Standard mandate altogether by exporting the gasoline. Texas Gulf refineries exported 60% of the gasoline they produced last year. More exports "could tighten supplies in the U.S." Either way - passing on the higher costs of credits, or exporting more fuel, presumably would increase gas prices.

However, the "ethanol lobby accuses the oil companies of ratcheting up the demand for fuel credits as a way of applying pressure on lawmakers to reduce the alternative fuel mandates." Ethanol producers want to see more gas stations selling e85 - a blend that is 85% ethanol for those "flex-fuel vehicles." As for the 15% blend - AAA warns against it though the Environmental Protection Agency has approved it for most cars.

Is it time to rethink the ethanol quota in light of this ethanol credit price spike - on top of other notable issues such as taking corn away from food production and into fuel production? (NYT Op-Ed: "Corn for Food, Not Fuel"). After all, how many people noticed when the subsidy for corn ethanol was terminated on Dec. 31, 2011? At the least, it would appear that the mandate numbers need to be reduced.

Congress may take a different route and try to extend the blend wall by getting the auto companies to accept E15. Rep. John Shimkus (R-Ill.) introduced a bill on March 15 to "provide damage-liability protection to manufacturers and sellers of gasoline containing 15 percent ethanol", writes E&E reporter Amanda Peterka. He introduced a similar bill last year.

In 2005, oil production in the U.S. was decreasing, imports were increasing, gas consumption was increasing and adding ethanol to the fuel supply made strategic sense.  

The situation has reversed - "the Dept. of Energy expects net oil imports to account for just 32% of consumption next year, down from a peak of 60% - of a larger amount - in 2005", wrote Liam Denning of The Wall Street Journal on March 14. The next year, consumption of gasoline 'peaked' at 9 million barrels per day.  

Does a 2005 biofuel mandate in an era of increasing domestic oil production, decreasing gasoline consumption, and declining oil imports make sense in 2013?