Ethanol Increasing Gas Prices

Why Gas WILL Hit $5.00 by July

By

They said it would make gasoline cheaper.

Boy, were they wrong!

In fact, since the introduction of the Renewable Fuels Standard (RFS) in 2005, which mandated that 7.5 billion gallons of renewable fuel be blended into gasoline by 2012, gasoline prices have actually risen.

This isn't solely because of the RFS; there are a number of factors that have resulted in higher gas prices.

However, the continued production of corn-based ethanol in the United States could actually push gas prices even higher this year...

You see, shortly after the initial RFS was put in place, the Energy Independence and Security Act of 2007 was passed, which required the RFS to be increased to 36 billion gallons by 2022.

Of course, if certain refiners are unable to blend enough ethanol, they can purchase what's known as Renewable Identification Numbers (RINs) from other parties that have exceeded their RFS requirements.

RINs allow the EPA to track compliance with the RFS. Each gallon of renewable fuel is assigned an RIN.

The problem is the cost of RINs have gone from just pennies a gallon to more than $1 per gallon. And according to analysts at Barclays, this could cost refiners $7 billion this year alone.

The ethanol industry claims that in an effort to avoid paying high prices for RINs, refiners should just blend more ethanol. How convenient!

Meanwhile, refiners don't want to increase their ethanol blends beyond what the EPA and automakers have recognized as “safe.” Certainly there are liability risks there. Either way, consumers are the ones that are ultimately going to take it on the chin on this one.

$5.00 Gas Coming

According to Valero Energy Corporation (NYSE: VLO), refiners have only three options to counter short-term spikes in RINs:

  1. Increase gasoline exports to countries that do not have added RIN costs;

  2. Decrease the amount of gasoline refined; and/or

  3. Shift costs to consumers.

Valero claims that a combination of all three is likely to happen.

But what really makes this sting is that such efforts will be undertaken during the summer driving season, when gas prices historically head north. And that has some analysts now calling for $5.00 gas by July.

Fortunately, my 50-mpg Prius will keep me from hemorrhaging cash at the filling station. But for most folks who are only getting 25 to 30 mpg, $5.00 gas could put a real dent in summer vacation plans.

Oh, and in case you want to eat, get ready for higher food prices, too — although we're expecting that anyway, as continued droughts wreak havoc in the Midwest where grain is now grown for both food and fuel.

But the impact of the drought isn't the only thing pushing ethanol prices up...

Everyday I'm Hustlin'

As should be expected with any kind of government scheme designed to save us from ourselves by inventing various mandates and regulations, the RFS has been victimized by crooks and hustlers.

Over the past couple of years, there have been numerous cases of brokers and biofuel companies selling millions of dollars' worth of fake RINs. One guy actually sold more than $9 million worth of fake RINs from his garage in Maryland. He never produced a single drop!

Now Congress has claimed it's seeking new methods for combating fraud. But this seems like an awful lot to go through for something that is neither economically nor environmentally sustainable. And claims of bolstered national security through the production of domestically-grown biofuels hold little water now that the U.S. is once again a major oil and gas producer.

Some analysts believe that if this summer's drought proves worse than last year's, the EPA will finally relent and pull back on the RFS mandate. After all, with no corn, it's hard to produce ethanol.

Either way, even if RFS rules are relaxed, it will be unlikely that we'll see this happen before the summer driving season kicks into high gear.

So we need to invest accordingly.

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A Silver Lining

One advantage to high gas prices is it lights a fire under those seeking to integrate alternative fuels into the mix.

Providers of natural gas fueling stations and truck engines should benefit from this, and electric car manufacturers like Tesla Motors (NASDAQ: TSLA) should also see a nice jump in sales once we hit that magic $5 mark.

You can also play the United States Gasoline Fund (NYSE: UGA), an ETF that tracks movements in gasoline prices...

Or if you're in the market for a new car, just focus on finding a vehicle that's more fuel efficient. You can save anywhere from a few hundred to a few thousand dollars a year simply by driving a more fuel-efficient vehicle.

Here's a list of the most fuel-efficient vehicles on the market this year:

  • Toyota Prius – 50 mpg

  • Toyota Prius C (Compact) – 50 mpg

  • Ford C-Max Hybrid – 47 mpg (this rating is currently being tested and may not be accurate)

  • Toyota Prius V (Midsize Station Wagon) – 42 mpg

  • Scion iQ – 37 mpg

  • Smart for two – 36 mpg

  • Audi A3 (diesel) – 34 mpg

  • Volkswagen Jetta Sportwagon (diesel) – 34 mpg

  • Chevrolet Spark – 34 mpg

And here's a list of 2013's most fuel-efficient trucks:

  • Lexus RX 450h (Small SUV) – 30 mpg

  • Toyota Highlander Hybrid – 28 mpg

  • Mazda 5 (Minivan) – 24 mpg

  • Toyota Tacoma – 23 mpg

  • Chevrolet Silverado Hybrid – 21 mpg

  • GMC Sierra Hybrid – 21 mpg

  • Ram 1500 – 21 mpg

  • Chevrolet Express 1500 (cargo van) – 17 mpg

  • GMC Savana 1500 (cargo van) – 17 mpg

Whether you invest in fuel stocks or invest in fuel efficiency, the silver lining to higher gas prices is you can wet your beak along the way.

Yes, the Renewable Fuels Standard will ultimately go down in history as one of the most counterproductive pieces of legislation ever to be forced upon us. The whole thing is a giant scam designed to reward campaign donors and screw taxpayers. That's really what it boils down to.

But until its repealed (which I doubt will ever happen), we might as well invest appropriately and make a few bucks.

To a new way of life and a new generation of wealth...

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Jeff Siegel

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Jeff is the managing editor of Energy and Capital and contributing analyst for the Energy Investor, an independent investment research service focusing primarily on stocks in the oil & gas, modern energy and infrastructure markets.  He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor's page.


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