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Upside Down Gasoline, Ethanol Prices

The sharp decline in petroleum prices, dating from summer 2014, has been a boon to farmers. It lowered their expenses for fuel while they cope with the persisting slump in commodity prices. Wholesale gasoline prices dropped to around $1 a gallon (the lowest price in more than a decade) last month, as crude oil prices continued to slide lower.

Gasoline prices have fallen so precipitously that they have run below the price of corn ethanol, ordinarily a cheap source of octane, since last August. Attractive prices and abundant supplies were long considered the major factors in expanding ethanol’s share of the gasoline market. So at first glance, the upside-down pricing “seems to be flashing a warning sign about the competitiveness of ethanol in gasoline blends,” say agricultural economists Darrel Good and Scott Irwin of the University of Illinois. 

In fact, Good and Irwin conclude, price is not the decisive factor for ethanol consumption today, although ethanol prices followed gasoline prices downward. Jordan Godwin, biofuels analyst for Platts, says ethanol seems to have reached a floor price. Processors simply can’t absorb lower prices, he says. So ethanol will be the higher-price fuel option for the near-term, a view the Illinois economists share.

The pillar supporting ethanol prices is the federal biofuels mandate, according to Good and Irwin. Gasoline distributors have to pay a high enough price to keep ethanol refineries in operation, which they peg at $1.11 a gallon for an average plant in Iowa at recent purchase prices for corn and returns from ethanol, dried distillers’ grains, and corn oil. 

“With ethanol demand stuck at the E10 (10% ethanol) blend wall . . . ethanol prices cannot fall below the shutdown price for ethanol plants because this would result in less production than is needed to fulfill the mandate,” they say.

For corn growers, Irwin says, “in terms of corn use for domestic ethanol production, there is virtually no downside risk to hedge.” EPA set a target of using 14.5 billion gallons of renewable fuels this year, which would keep corn-for-ethanol steady to slightly growing at around 5.2 billion bushels.

“In fact, we may see some modest increases in ethanol use as the E10 blend wall increases due to rising gasoline use,” says Irwin. “Bottom line, I see total U.S. ethanol production moving in a narrow range of 14.5 to 15 billion gallons going forward, regardless of the price of ethanol.”

Farm and ethanol industry groups are challenging EPA in U.S. appellate court, arguing the agency should have set the ethanol mandate at 15 billion gallons this year. Iowa’s congressional delegation, looking ahead, has asked EPA to boost the mandate to 15 billion gallons in 2017, to take advantage of large corn stockpiles and encourage biofuel use.

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