Februarys largest jump in consumer prices in four years was due to rising gas prices driven ironically by a government policy touted for reducing consumer costs at the pump.
Ethanol surplus may lift gas prices was the headline on a Saturday New York Times article explaining the relationship between government-mandated ethanol use and the increasing cost of a gallon of premium gas.
At the root of the problem is the Renewable Fuel Standard law of 2007, which sought to decrease Americas reliance on foreign oil by requiring refiners to produce gas with at least a 10 percent ethanol content. It was also seen as more favorable to the environment by reducing greenhouse gas emissions, but that theory has been called into question by other harmful environmental consequences from growing corn to transporting and producing ethanol
As an incentive, refiners were paid a 45-cents-a-gallon tax credit, which expired at the end of 2011. However, the law also set annual quotas that were tied to a presumed rise in consumer demand for gas, but use instead has declined as Americans drive less or turn to more fuel-efficient vehicles that get higher gas mileage. Refiners are being required to purchase more ethanol than they can use in the 10 percent blend or E10 gas or what is known as the blend wall, the Times reported.
As a result, some refiners are meeting their quota by purchasing credits from other companies that have used more ethanol than mandated. Refiners have been trading so-called ethanol credits furiously, the Times said, driving price of credits from about seven cents at the beginning of the year to $1 a gallon and in turn pushing up the price of a gallon of premium gas recommended in about a third of this years car models. Premium gas is about 30 cents a gallon higher than regular now, or about six cents more than two years ago.
Refiners want the Environmental Protection Agency to reduce the yearly quota for ethanol use, especially if motorists continue to reduce their gas use, which would make it even more difficult to meet ethanol requirements. The ethanol quota last year was just over 13 billion gallons.
The ethanol industry, though, defends the quotas, attributing the problem to manipulating by the oil industry and the limited use of E10 blended gas. The EPA has approved limited use of E15 gas, but it requires gas stations to install separate, costly equipment. The Renewable Fuels Association says refiners should be investing in stations that can sell the higher blend.
Rising ethanol requirements could also cause refiners to export more gas, which would not have to comply with ethanol requirements.
Given the marketplace pressures, the EPA would be wise to reconsider any planned increase in ethanol based on outdated assumptions that drive up consumer costs.