Don’t Get Used to Lower Gas Prices-Big Ethanol is Pouting

Weakening demand for gasoline–which also affects ethanol producers–is getting ready to hit the front pages of a few major news outlets–but you won’t see this on any televised news–and not for a reason known by average Americans. U.S. ethanol producers are approaching the so-called “blend wall,” a term used to define a condition where the 10% blend of ethanol with gasoline reaches its mandated limit. At that point, the value of ethanol collapses and producers begin lobbying for a higher blending percentage. Beware. That day has already come.ethanol

So despite the fact that we the people are already paying for $4 billion each year in subsidies to the major oil companies by paying 70% of their rent to oil rig platform owners, now the big ethanol producers want more of our money as well. Odd that the GOP has no problem subsidizing the most profitable businesses in the world, but mention Medicaid and they all get a case of the vapors. Over the past 6 years Democrats have tried four times to merely cut the amount above in half but the GOP House or GOP filibusters in the Senate killed the bills each time. But I digress.

So despite the fact that American taxpayers are paying for oil producers’ rent, this wasn’t enough to satisfy the GOP’s desire to  make the richest companies in the world even richer at the expense of the middle class.

Congress, at the behest of George W. Bush, first established the Renewable Fuel Standards (RFS) under the Energy Policy Act of 2005, which mandated that a minimum of 7.5 billion gallons of renewable fuels be used by 2012. Two years later, the Energy Independence and Security Act of 2007, also under GWB, greatly expanded the mandated volumes to 36 billion gallons of celluloid ethanol by—a vastly inferior fuel which damages engines and is less efficient fuel than unleaded gasoline alone–after heavy lobbying efforts from the major celluloid energy producers.

The four-week rolling average blending rate for ethanol in the U.S. reached 9.94% in the week ending October 10th according to Platts. The 10% blend rate was surpassed for one week in mid-September.

Ethanol blenders–including major independent refiners like Valero Energy Corp. (NYSE: VLO)–prefer the low price of ethanol, which dropped below $1.60 a gallon earlier this month. That price is less than half the price of a gallon of ethanol at its peak just this past August.

But these same gasoline blenders took a beating in 2013 when corn prices skyrocketed, demand was falling, and blenders bought renewable energy credits called RINs, bidding the price of their products up from a few cents to more than $1.00. Therefore, the price of a gallon of gasoline had everything to do with the price of ethanol and nothing to do with the price of crude oil…and this my friends is why Keystone is irrelevant to the price of gasoline that Americans pay.

So producers like Archer Daniels Midland (NYSE: ADM) and Pacific Ethanol Inc. (NASDAQ: PEIX) are not so happy this year. The producers want the federal government to raise the federally mandated blending amounts again–for 2014. Refiners and blenders oppose raising mandated limits and sent a letter to the U.S. EPA outlining its case for leaving the mandated levels where they are:

Why this matters to consumers is if the EPA waits too long and increases the blending requirements — unlikely but possible — the scramble for RINs and more ethanol could actually reverse the drop in consumer gasoline prices we’ve been seeing at the gas pump.

The price of RINs represents the gap between the cost of producing another gallon of ethanol and the price of ethanol that is needed to induce consumers to buy another gallon. Compliance with the ethanol mandates falls to owners of oil refineries who must purchase a specified number of RINs per gallon of gasoline produced. If this is forced upon the refiners they will, of course, pass along the cost to the consumer.

So the price of gasoline, though dropping dramatically because of weaker demand, more efficient vehicles, and production levels higher than ever before, ends up costing the consumer more because of lobbying efforts by ethanol producers Archer Daniels, Pacific Ethanol, etc. U.S. consumers are hit both in the price at the pump but, in the damage ethanol does to their automobiles. Also, if the lobbying efforts are successful—and we know that they will be—the huge producer conglomerates will be made whole by you the American consumer.

If the oil companies don’t get us, eventually the celluloid ethanol producers will.

Harvey A. Gold