Rising Federal Mandate for Ethanol Likely to Increase Gasoline Prices

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Additional volumes of ethanol are mandated to enter the U.S. gasoline pool in 2010 and 2011. These additional volumes cannot be blended into E-10 as regular gasoline and must marketed for flexible fuel vehicles. The high cost of moving these additional supplies of ethanol into the gasoline pool will likely raise gasoline prices by 10-25 cents/gallon over the next 2-3 years.

What we are now seeing in both the ethanol and gasoline markets are costly and predictable dislocations from federal mandates.

The Energy Policy Research Foundation, Inc. (EPRINC) has published a report that evaluates the consequences to the U.S. transportation fuel sector of increasing the volume of ethanol in the U.S. gasoline pool above current volumes -- now approaching 10 percent of the fuel supply. The full report can be downloaded at http://eprinc.org/pdf/costofethanolmandate.pdf.

Additional volumetric increases in ethanol use are mandated by federal law. As federal mandates take the U.S. gasoline pool above 10 percent ethanol blend, and ultimately to higher levels through E-85, the value of additional ethanol supplies is likely to decline dramatically. This cost can only be recovered through higher prices for E-10 and distillate, and depending on a wide range of factors, the mandated volumes could easily drive gasoline and distillate prices up by 10-25 cents/gallon over the next 2-3 years as compared to a scenario without the fuel mandates.

Ethanol has contributed to the U.S. fuel supply and reduced net petroleum imports. If wholesale gasoline prices had remained above $3.00/gallon and were accompanied by rising demand for gasoline, the ethanol volumes mandated by Congress could have been accommodated into the market at a relatively modest cost. However, we are now entering a period of low (or even negative) demand growth for transportation fuels, and more importantly, wholesale gasoline prices remain well below $1.50/gallon. In this market environment, accommodating increasing volumes of ethanol into the gasoline pool will likely require substantial increases in the price of E-10 and diesel fuels as refiners and marketers face the higher costs of meeting the mandate. The higher costs will come from lower utilization rates at U.S. refineries and higher distribution costs for ethanol through E-85 outlets. There are several scenarios where refiners (and other obligated parties) will have to recover as much as $1.00 or more for every gallon of ethanol blended into the transportation fuel sector.

When asked about the findings in the report, Lucian Pugliaresi, President of EPRINC, said "What we are now seeing in both the ethanol and gasoline markets are costly and predictable dislocations from federal mandates."

About the Energy Policy Research Foundation, Inc. (EPRINC)

EPRINC was incorporated in 1944 in New York and is a not-for-profit organization that studies energy economics with special emphasis on oil. It moved from New York to Washington, D.C. in 2007. It is known internationally for providing objective analysis of energy issues. EPRINC researches and publishes reports on all aspects of the petroleum industry which are made available free of charge to all interested organizations and individuals. It also provides analysis for quotation and background information to the media. EPRINC has been called on to testify before every session of Congress in the last decade. The Foundation briefs government officials, public groups, legislators, and provides written background materials on request. EPRINC does not speak for the industry or any of its segments.

Views expressed in publications, interviews and testimony result from the Foundation's own analysis and are not meant in any way to represent a consensus of industry views. EPRINC's supporters recognize the importance of a credible, authoritative and impartial organization that can help industry and government officials, the media, and the general public better understand the petroleum industry and the markets in which it operates.

EPRINC publications are available for free on the Foundation's website: http://eprinc.org/publications.html

Ben Montalbano
(202) 944-3339

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