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Demand For Gas Falls, Gas Prices Rise: Blame Ethanol (And Congress)

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For fans of fuel efficiency, the New York Times has good news and bad news.

The good news is: drivers in the U.S. are using less gas these days.

The bad news is: that's driving up the cost of gas.

To anyone who's taken Econ 101, that probably seems counter-intuitive -- mostly because it is.

To locate the source of this conundrum, we have to visit America's wellspring of counter-intuition: the United States Congress.

PAVED WITH GOOD INTENTIONS

In December of 2007, President George W. Bush signed into law the Energy Independence and Security Act [PDF]. Among the many bits and bobs included in that sprawling piece of legislation were heightened fuel economy standards, incentives for the development of hybrid and electric vehicles, and a requirement that refineries use more biofuels in the production of gasoline.

That's where the trouble began.

Six years ago, American refineries used fewer than 5 billion gallons of biofuel in the creation of gasoline. The Energy Independence and Security Act of 2007 required that figure to ramp up every year, until it reaches 36 billion gallons in 2022. (This year, the magic number is 16.55 billion.)

If U.S. demand for gasoline had continued to increase, the new regulations wouldn't have caused problems. But demand has stagnated. In fact, it's fallen. Perhaps that's because we're driving less these days. Or maybe it has something to do with the improved fuel economy of our vehicles and the growing availability of hybrid and electric cars -- ironically, two other provisions of the 2007 law.

EXTRA CREDITS

America's declining appetite for gasoline means that refineries have had to use an increasing volume of ethanol to keep up with the regulations imposed in 2007. That, too, would be just fine if cars and gas pumps could handle it, but many vehicles and service stations can't utilize anything beyond the mixture of 10% ethanol and 90% gasoline commonly known as E10.

So basically, refineries are required on paper to use more and more ethanol, but they can't in practice, because they won't have any way to distribute this hybrid fuel and customers won't be able to use it. What are they to do?

As luck would have it, refineries can purchase renewable energy credits, or RINs. These RINs serve as a system of ethanol indulgences: a means by which refineries can stay within the bounds of the 2007 law and avoid federal penalties.

Given the drop-off in gas consumption, trade in RINs has been brisk -- and sudden. A week or so ago, RINs cost mere pennies. Today, they can top $1.

No one can say for sure what's causing the current boom in RIN prices, but the effects are pretty clear. 

SERVICE STATIONS & SHOWROOMS

Naturally, refineries pass the cost of these RINs on to consumers. Today, the price for a gallon of premium unleaded gasoline sits at $4, or 31 cents above regular. Last year, the difference between the two was closer to 27 cents. In 2010, it was 24 cents, and way back in 2000, it was around 18 cents.

These prices at the pump, in turn, could have a nasty effect on new car sales, since a considerable number of new cars are meant to run exclusively on premium gas.

We hope that, just like the demand for gasoline, the volatile trade in RINs eventually ratchets down, which should reduce the price of premium gasoline. We'll keep you posted.

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Comments (10)
  1. I guess the law is a bit of a mess because it mandated the ethanol in absolute terms rather than a percentage of sales.

    I struggle with the description of whether gasoline sales are going down or are stagnant.

    The data is here
    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=wgfupus2&f=4
    I would say it peaked in 2007 at 9.6 million barrels per day and is now stagnant at 8.8 million barrels per day. However, you might make the claim that gasoline usage is declining.

    Maybe I missed it in the article, but I think corn-based ethanol is capped at 12 billion and all the additional ethanol must come from cellulose ethanol which no one seems to be able to make.
     
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  2. Less consumption equals higher prices in many industries. This is not counter-intuitive when the nature of business is taken into account. The trick is being in an industry that can simply raise prices collectively without all of their customers leaving them. You can chase your tail in circles looking for a specific reason that diesel is 25% more costly than gasoline or why prices continue to rise, but you could just as easily save yourself the effort and simply acknowledge Wall Street. After all, who was it exactly that paid for these bills to be passed?
     
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  3. It would be interesting to understand how much the fact that the US is now a net exporter of refined petroleum products plays into this price increase. We may import crude oil, be we net export refined petroleum products. By exporting refined diesel/gasoline products, US consumer prices become more coupled to global diesel/gasoline prices.. and these prices could be a lot higher than they would be otherwise. We've been hearing about wide "crack spreads" (ie profit margins) for refiners and refiners such as Valero have had their stock price jump over the last few years because they can buy from a variety of domestic/foreign crude sources (and shop for the best prices) and then sell the refined gas/diesel at the best domestic/foreign price.
     
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  4. Gas prices are high because oil companies have record margins this year. That's a fact. The simplest explanation is usually the best, despite this misdirection garbage the oil industry is throwing out there.

    Refiners get credits when they blend ethanol. These credits aren't bought from the ethanol companies (I work in the biofuels industry). They're just moving money around in their own industry. Whatever one company is paying to buy credits, the other refiner is receiving that money as payment for the credit (so are they passing on the savings from that?). There's no reason that should be reflected at the pump.
     
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  5. The reason is they won't put in E-85 pumps which would quickly soak up the excess ethanol. I wish I could buy it in Fla but in this large state, there are only 3? pumps I know of and none near me.

    Next is the E-10 vehicles, all since 1973 or so, can easily run E20 to E50 for more recent, FI ones. Fact is why don't they all run on any combination of gasoline/ethanol/methanol as it cost little if at all more and big auto does it in other countries already so no technical problems.

    The facts are big oil is behind this as they have already lost over 10% of the under 10k vehicle fuel market so they put out this kind of propaganda hoping others believe these straw man arguments. Especially it's since they won't put in E-85 pumps!!
     
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  6. I have two questions: 1)Who or/and where are those RINs minted (or printed)? 2) Where is all that money from RINs going to?
     
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  7. When a refiner blends ethanol, they receive a credit for that. Some refiners blend more ethanol than the law requires, so they have excess credits.

    They can sell those credits to refiners who are not meeting their blending obligation.

    They're selling credits to each other. That's why it's dumb to act like it should hike gas prices. If one refinery is losing money on RINs, the other refinery is making that money.
     
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  8. Don't blame ethanol: thank ethanol. The point of using ethanol is to reduce oil addiction and the ethanol mandate does a very good job at achieving that. The renewable energy credits are pure genius. The industry fiercely resists ethanol making sure that gas pumps aren't ready to handle E15 and pretending cars aren't but that only results in higher gasprices due to the RIN's which in turns motivates people to find ways to reduce their consumption of oil products. It's like a back door way to impose the gasoline tax that politicians just can't seem to sell to their voters. Maybe the proceeds could go to road improvement...

    Seems to me that the DOE has a set of very clever rules in place that really help to reduce oil addiction.
     
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  9. Need to get more biofuel in the market? How about selling more E85. There are a lot of vehicles out there that can use it but you can't find it anywhere.
     
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  10. Green Car Reports allows this kind of reporting? Ethanol is cleaner than gasoline and keeps our dollars circulating in the local economy rather than being sent overseas.

    Ethanol is currently a little over $2, how does that make the price of gasoline go up?Increasing from E10 to E15 is being delayed by those that make money on the status quo of our dependence on oil and gasoline.
     
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