Ethanol Surplus May Lift Gas Prices

Source: By MATTHEW L. WALD, New York Times • Posted: Monday, March 18, 2013

Steve Hebert for The New York Times
Zarco 66 in Lawrence, Kan., sells blended gas.

WASHINGTON — 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

Experts disagree on the reasons for a widening gap between the costs of regular and premium gas. Reasons for the ethanol surplus are even more broadly in dispute, between producers and the oil companies. Gas companies are required under federal law to blend a certain number of gallons of ethanol into the fuel. But refiners argue that some cannot reach that requirement because they are nearing or at the so-called blend wall, the maximum percentage of ethanol in gasoline that most gas stations can handle, 10 percent. They also note that is the maximum level recommended by auto manufacturers for most cars.

Refiners blame Congress, arguing that the ethanol quota was set at a time when gasoline demand was expected to rise steadily. Instead, demand has declined, and refiners, obligated to blend more ethanol than they can actually use, have resorted to buying a lot of ethanol credits, known as renewable identification numbers (or RINs), to meet the mandated levels.

Ms. Lundberg described this as “buying forgiveness from the government.” The credits’ popularity has driven up the price nearly tenfold since January.

On the other side of the debate are the ethanol producers, who say prices are pushed lower because their product is cheaper than gasoline. This is true on a gallon-per-gallon basis, although ethanol provides less energy per gallon.

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.

“The market’s broken, because the Renewable Fuel Standard has been broken since the day it was enacted,” said Charles T. Drevna, president of the group. The refiners rely on a certain amount of ethanol as a way to increase octane, but they have been fighting the standard since it was created, partly because it requires them to use advanced biofuels that are not actually in commercial production.

Oil refiners also warn that higher prices for the credits will encourage fraud, something the ethanol trading system has encountered in the past.

There are two ways the ethanol credit issue could drive gas prices higher. Mr. Drevna said that refiners would probably seek to recover the cost of the credits, which were a mere seven cents or so at the beginning of this year, in the prices they charge. And Eric G. Lee, an analyst at Citi Research, said that some refiners might seek to avoid the ethanol requirement by exporting their gas, which could tighten supplies in the United States.

According to Mr. Lee, large refiners spent $100 million to $300 million each for credits in 2012, when prices were about 4 cents. “At $1 a gallon levels, the numbers become astronomical very quickly,” he said Wednesday.

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. The E.P.A. has approved e15 for most cars but the manufacturers advise against using it, and most service stations would need substantial investments in new equipment to sell it.

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. And some refiners may increase their exports of gas in response to high credit prices, experts said. If the gasoline is exported, it does not have to meet the American ethanol requirement.


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, 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.


Michael Webber, of the Center for International Energy and Environmental Policy at the University of Texas at Austin, said he asked his students how many of them drove cars that needed premium fuel. “Out of 100 people, 10 hands went up,” he said. These were probably not mostly luxury cars, he said. “Grad students normally aren’t rich,” he said.