Pricier blend: Ethanol’s cost tops gasoline’s

Source: By Mario Parker, BLOOMBERG NEWS • Posted: Monday, August 31, 2015

Oil has lost a fourth of its value in two months, bringing the average U.S. driver within pennies’ reach of $2.50 gasoline.

But at least one thing stands in the way of a steeper decline at the pumps: ethanol. While the crude rout has dragged gasoline futures down about 60 cents a gallon, ethanol has dropped a mere 15 cents — making it costlier than gasoline this week for the first time since January.

The biofuel’s value is being propped up by concern about this year’s corn-crop yield, corn being its main feedstock. Refiners are required by federal rules to blend the additive into gas.

“Because they’re forced to blend, they’re blending a more-expensive product,” said Chris Knittel, a professor of energy economics at the Massachusetts Institute of Technology in Cambridge. “A large fraction is passed on to the consumer.”

The federal Renewable Fuel Standard requires suppliers to add increasing volumes of biofuels such as ethanol into their mix. It already makes up 10 percent of the total U.S. gasoline pool, according to the federal Energy Information Administration.

Ethanol has traded at a premium to gasoline during only three periods in the past three years: once in 2014 and twice this year. Its traditional discount has helped make the federal rule more palatable to refiners and blenders, who have been able to pocket the difference.

On Wednesday, ethanol settled 6 cents a gallon above gasoline futures. That trend looks poised to continue. Ethanol for October delivery is at a 7-cent premium to gasoline for the same month. November is trading 9 cents higher than the motor fuel.

“It’s going to translate to higher pump prices,” said John Kilduff, a partner at Again Capital, a New York-based hedge fund. “It should rip through the supply chain.”