Rising Gas Prices and Ethanol

Brian Hicks

Written By Brian Hicks

Posted July 23, 2013

A spike in gasoline prices is nothing new during the summer, but this year ethanol is a primary culprit.

Because of the 2005 Clean Air Act, refiners are required to blend a certain amount of ethanol into gasoline. Ethanol in the 10 percent range is considered a “blend wall” because roughly 95% of cars cannot handle ethanol beyond that benchmark.

ethanolHowever, the EPA’s stance on pushing for more renewable energy sources requires refineries to go beyond that 10 percent mark each year, despite lack of demand across the country and the fact that many stations in the United States are ill-equipped for higher ethanol amounts.

Despite protestations from AAA, the American Petroleum Institute, and energy producers, greater ethanol mandates in gasoline will continue, with a planned E15 for 2015. Some environmental groups are opposed to the EPA’s push for ethanol because of concern for deforestation, greenhouse gases, and a strain on the nation’s food supply.

It is worth noting that many who are opposed to the EPA’s requirements are not anti-ethanol or bio-fuels but are against the idea of government forcing a product on the consumer and the energy industry when there is no real demand for it.

Refiners have used an alternative strategy of purchasing ethanol credits, or Renewable Identification Numbers, instead of increasing ethanol amounts, but the problem is that these credits went from pennies on the dollar earlier this year to $1.40 – a refinery expense that is being passed on to consumers at the pump.

And limited stockpiles are driving up prices, since refiners are exporting more gasoline abroad to countries where ethanol is not a mandatory requirement.

The agency believes that any car manufactured after 2001 is suited to accept E15 going forward.

But a sizeable amount of the population still drives cars manufactured before 2001. And ethanol has been known to overheat engines and cause other malfunctions.

The 10 percent mark is pushing the brink, but many fear how older model cars will fare with a 15 percent or more gasoline/ethanol blend.

When the law was enacted in 2005, lawmakers did not factor in lower gasoline demand and rising crude prices.

But consumption of gasoline is expected to reach 133 billion gallons this year, 16 billion less than was predicted when the Clean Air Act went into effect, Yahoo! Finance reports.

Other Causes

Aside from ethanol, crude prices have been steadily rising in the past few weeks. On Tuesday morning, WTI crude hit $106.91 and Brent $108.07. Average national gasoline prices are currently $3.68.

A spike in crude prices can be attributed to conflict in Egypt and general unrest in North Africa. Also, the Federal Reserve’s plan to scale back of stimulus funds soon has caused a steadfast drop in gold prices, forcing many investors over to oil futures.

Yet despite general decreased gasoline consumption in the United States, more people are on the road during the summer seasons, forcing refineries to operate at capacity and causing limited supplies in oil stockpiles.

Analysts expect another 5 to 15 cent increase at the end of July, and prices will not likely go down before September of this year. But the good news is that many states will not see prices rise above $4.

Hurricane season is also playing a large role in rising gasoline prices, with fears of damage to refineries and pipelines.

Regardless of the causes, there are ways to alleviate higher gas prices. Fishing around for the lowest priced gasoline stations in your community is a great way to mitigate damage to your wallet, and many do not realize stations can have as much as a 70 cent price differential between them. There are various apps like GasBuddy that will allow you to find the cheapest stations in your area.

If you’re on the prowl for credit cards, find a rewards program that is friendly to gas purchases. The payment method also matters; check with your local station to see if there are any discounts associated with paying by debit, credit, or cash.

And there are also supermarket loyalty programs that will allow you to save on your fueling needs as well as your grocery budget.

Investor Benefit

Many consumers are dealing with the brunt of growing ethanol requirements, but from the angle of investors, ethanol’s future looks brighter in the coming years.

Federal incentives have transitioned ethanol from a fledgling industry into a thriving energy source that is here to stay.

Overall, ethanol has the potential to produce 14.7 billion gallons per year.

In the past eight years, corn growers increased crops of corn from 79 million to 90 million since ethanol requirements were put in place.

Ethanol extends to cattle feed as well.

40 percent corn in the United States is produced for ethanol, and of that 40 percent, 12 percent will be a byproduct used for animal sustenance.

Internationally, keep an eye on BP (NYSE: BP), whose recent venture partnerships with AB Sugar and Dupont (NYSE: DD) in the construction of the Vivergo bio-ethanol plant will be the largest in the United Kingdom for animal feed. The plant can also rely on wheat as a feedstock source.

BP is further investing in ethanol by skipping over the EU, in fear of looming regulations, and over to Brazil, where the British giant has several ethanol-based sugar mills.

BP is looking to convert some of its mills to cellulosic ethanol (ethanol made from non-edible plants) in recognition of ethanol’s drain on food resources. BP believes it can generate 60 percent ethanol output using its Brazilian sugar mills and would be quite successful dealing in the domestic market.

But above all, BP is looking to invest in the United States.

Other energy companies embracing U.S. ethanol are Marathon Oil (NYSE: MRO) and Valero (NYSE: VLO).

Ethanol is currently a controversial topic in the energy community, but cellulosic ethanol has a strong presence in the United States and could further evolve ethanol’s status as a worthy and accommodating fuel source.


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