Ethanol Surplus May Lift Gas Prices

by Matthew L. Wald (New York Times) A glut of ethanol in the gasoline supply is threatening to push up prices at the pump and may have exacerbated the growing cost gap between regular gasoline and premium, some oil experts say.

Refiners have been trading so-called ethanol credits furiously in an effort to meet federal environmental mandates, helping to significantly push up the cost of those credits — a jump to more than $1 from a few pennies in the last several days, and drivers are feeling the effects, experts say.

Prices for premium gas are now about 30.2 cents over the price of regular, according to Trilby Lundberg of the Lundberg Survey. That is up from 24.1 cents in 2010 and 18.2 cents in 2000. Any increases could affect about a third of this year’s car models, because premium fuel is required or recommended for them, according to Edmunds.com.

...The argument over ethanol and gas prices highlights the politics of the Renewable Fuel Standard, set by a 2007 law. 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. Congress could change the rules, or the Environmental Protection Agency, which set up the electronic marketplace where ethanol credits are traded, could adjust them.

The ethanol credits, like some other kinds of environmental credits, can be banked as well as bought and sold. Some companies have a surplus. But those without them have rushed into a market that is thinly traded, driving the spike in prices, according to the American Fuel and Petrochemical Manufacturers, a trade association.

...But at the Renewable Fuels Association, Bob Dinneen, the president, said that the refiners were the sellers of the credits as well as the buyers, so that it was a flow of money among the oil companies. Ethanol companies make the fuel, he said, and sell it to refiners, who either use it themselves to meet their obligations, or use it but spin off the credit for sale to someone else.

“When I see volatility like that in any market, it’s not market fundamentals at work, it’s probably something else all together,” he said. “It’s more like the oil companies trying to create a little hysteria to support the notion that the Renewable Fuel Standard is broken, but I think it’s working just fine.”

He said oil companies should be investing in stations so that they can sell e85, the blend that is 85 percent ethanol and 15 percent gas, which millions of “flex fuel” cars can use, or e15, the 15 percent blend.

... Using ethanol once was a cheap way to increase octane to make premium fuel, said an oil expert, Lawrence J. Goldstein, of the Energy Policy Research Foundation, because it has an octane of 113. But refiners have reached the limit of the amount they can blend, he said.

In addition, he said, an increase in American oil production, mostly from shale, allows refiners to use domestic crude instead of imported crude, but some of the new domestic supply has fewer high-octane ingredients than the African crudes it is replacing.

...The long-term outlook for premium fuel is uncertain. Auto companies can build cars that get more miles per gallon if they use high-octane fuel, and the auto companies have agreed to double the average fuel economy of their cars and light trucks by 2025.

At Edmunds.com, analyst Bill Visnic said the demand for premium would be higher except that carmakers had learned to use an alternate technology, direct injection of fuel, combined with turbocharging, to get higher mileage.

But the number of cars that use high-octane fuel is substantial. READ MORE and MORE (Ethanol Producer Magazine) and MORE and MORE (Biofuels Digest)