How A 2007 Ethanol Law And A Decline In Driving Could Be Contributing To A Rise In Gas Prices

indiana corn field

Walls are generally bad. Just ask the Chinese, the East Germans, or Roger Waters.  

The U.S. is about to slam head-first into its own barrier: the renewable fuel “blend wall.”

This is the limit on the amount of ethanol — aka corn byproduct — refiners are capable of adding to consumer gasoline.

The reason why they aren’t adding more: Americans aren’t using as much gas as they did when the current renewable fuel standard was passed.

That was 2007 — the idea was to both curb fossil fuel use and reduce dependence on overseas oil. Congress said refiners must blend an ever-increasing amount of ethanol into their products, and must hit 36 billion gallons of renewable fuel by 2022 — regardless of how much fuel is actually in demand.

And since 2007, U.S. fuel use has plummeted. According to Bloomberg’s Mark Drajem, average daily gasoline use in 2012 was 8.3 per cent lower than in 2007.

In theory, refiners could get around the problem by using a higher concentration of ethanol.

But that’s actually another constraint: refiners are basically confined to using a blend with very low ethanol concentration — E10 (which is 10% ethanol).

That’s because there are lots of hurdles to using blends with the highest ethanol content. E85 can only be used in flex-fuel vehicles, and the infrastructure capable of transporting and storing even E15 remains limited. 

So what’s the answer?

Refiners seeking to bypass the requirement are supposed to buy renewable identification numbers — RINs.

But as Reuters’ Gerard Wynn writes, demand — and prices — for RINs have been skyrocketing, suggesting we’re careening into the wall. 

RIN prices surged $0.12 yesterday to reach a new all time high of $1.32. And those prices are going to be passed on to consumers. 

The ethanol industry has denied there’s a correlation between higher gas prices and increasing RIN rates. 

But that was in March, when prices were barely over a dollar. The EIA says there’s some evidence RIN prices could already be driving diesel and jet fuel higher.

The EPA is expected to finalise its targets for ethanol consumption in 2013 within the next two weeks.

“It’s really not a pretty picture next year,” an East Coast ethanol blender told him.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.