Drillers vs. Distillers: Ethanol Motor Fuels Should Compete in a Free Market

Gabe Collins, “Drillers vs. Distillers: Ethanol Motor Fuels Should Compete in a Free Market,”,” China Oil Trader™, No. 13 (29 March 2013).

It’s time to end the Renewable Fuel Standard, which along other things, mandates that a specified volume of ethanol be included in the U.S. motor gasoline supply.

The continuing rapid rise in U.S. oil production and declining motor gasoline consumption are sharpening the conflict between the drillers who produce (and often refine the crude oil) and the distillers, who rely on a government-imposed ethanol blending mandate that forces the drillers to blend a prescribed volume of corn-based ethanol into the gasoline they produce.  Falling gasoline demand means that refiners actually need less ethanol to meet the 10% blending requirement and, as The Economist points out, must either purchase extra physical ethanol or renewable identification number (RIN) credits from other companies that have used ethanol in excess of the amount they were required to under the mandate. Prices of RINs have been rising, which artificially inflates gasoline prices relative to what they should be based on the prices of the underlying raw materials–crude oil and ethanol.

The result of this collision? U.S. gasoline prices are rising despite demand declines for each of the past four quarters, global crude oil prices that have remained relatively steady, a rising volume of oil supplies in the U.S that are priced based on cheaper WTI crude oil.

This market distortion reflects the politically mandated transfer of wealth from U.S. drivers and oil refiners to corn ethanol producers. Just as happened in the solar power sector with Solyndra and the lithium battery sector with A123 (both of which have declared bankruptcy), Federal policy is underwriting–at consumer expense–alternative energy sources that cannot survive without government-provided economic outpatient care.

We engaged this issue more than six months ago in “Oil From the Bakken and Eagle Ford Shales Can Enhance Global Food Security,” China Oil Trader™, No. 6 (27 August 2012). Our analysis focused on the global grain market distortions corn-based ethanol production causes, and recommended that the Ethanol Mandate be allowed to lapse and the U.S. unconventional oil boom be allowed to take up the supply pie slice previously held by mandated ethanol.

Washington should let let ethanol compete in an unfettered motor fuel market. The fewer political distortions alternative energy sources bring to the market, the more credible they will be and the better off consumers will be as well.

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