Cost of Gasoline to Rise?

According to the report, in recent months corn ethanol producers have faced a number of financial setbacks, including at least one highly visible bankruptcy. Although greater use of ethanol is mandated by federal law, the industry is suffering from over capacity, and struggling to compete in an environment of falling gasoline prices. Federal mandates requiring so-called obligated parties, i.e., refiners, blenders, and importers, to use larger volumes of ethanol in the gasoline pool over the next few years will help the ethanol industry recover, this recovery will come at a cost, largely reflected in rising prices of gasoline and middle distillates.

Ethanol serves both as an extender and as an oxygenate–up to certain levels–for air quality purposes. However, the cost of blending even larger volumes of ethanol into the gasoline pool, beyond oxygenate levels, as required by law, is likely to escalate markedly in the coming years, particularly as ethanol exceeds 10 percent of the gasoline pool. The report concludes:

“Accommodating increasing volumes of ethanol into the gasoline pool will likely require substantial increases in the price of E-10 and diesel fuels as refiners and marketers face the higher costs of meeting the mandate. The higher costs will come from lower utilization rates at U.S. refineries and higher distribution costs for ethanol. There are several scenarios where refiners will have to recover as much as $1.00 or more for every gallon of ethanol blended into the transportation fuel. This cost can only be recovered through higher prices for E-10 and distillate, and depending on a wide range of factors, could easily drive gasoline and distillate prices up by 10-25 cents/gallon over the next 2-3 years as compared to a scenario without the fuel mandates.”

Similar price impacts are likely in California as the Air Resources Board moves to implement the Low Carbon Fuel Standard which relies heaviliy on ethanol and similar gasoline and diesel substitutes. Mandates such as the RFS and California’s LCFS are just stealth stimulus programs, aimed at helping favored industries (the renewable fuel idustry), with hidden costs passed to consumers.

The report by EPFF does assert that the ethanol mandate has redued net U.S. imports of petroleum. While overall demand have moderated, it more likely that the higher cost domestic production has been reduced at the margin.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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