Here's One Thing Standing Between You and Cheaper Gasoline

  • Gasoline was cheaper than ethanol for first time since January
  • Ethanol prices propped up by uncertainty over corn crop

Oil has lost a third of its value in two months, bringing U.S. drivers within pennies’ reach of $2.50 gasoline.

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

Ethanol's one thing that'll keep gasoline prices from a total free fall.
Ethanol's one thing that'll keep gasoline prices from a total free fall.

The biofuel’s value is being propped up by concern over yields for this year’s corn crop, its main feedstock. Meanwhile, refiners are required to blend the additive into gasoline to comply with the federal regulations.

“Because they’re forced to blend, they’re blending a more expensive product,” Chris Knittel, professor of energy economics at the Massachusetts Institute of Technology in Cambridge, said by phone. “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 Energy Information Administration.

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

On Wednesday, ethanol settled 6 cents a gallon above gasoline futures. And 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 LLC, a New York-based hedge fund. “It should rip through the supply chain.”

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