Expiration of US ethanol subsidy affects gas prices

13 January 2012 18:19  [Source: ICIS news]

HOUSTON (ICIS)--The expiration of a US subsidy to refiners for blending ethanol into gasoline has played a small role in the recent increase in prices, an analyst said on Friday.

According to the US automobile organization AAA, current average regular gasoline prices are at $3.391 per gallon. Prices one month ago were at $3.264 a gallon and one year ago, regular gasoline was at $3.095 a gallon.

The subsidy on ethanol, enacted in 1978, gave a 45-cent tax credit to refiners for each gallon of the biofuel blended into gasoline. It expired on 31 December 2011.

For 2012, federal law requires a minimum of 7.5bn gallons of renewable motor fuels, mainly ethanol for motor gasoline, to be blended into the gasoline pool. The law does not require every gallon of gasoline or diesel to be blended with renewable fuels.

Analyst Phil Flynn with PFGBest said the subsidy expiration has contributed to the increase in prices.

"It’s the reason we’re seeing the gasoline price moving higher than normal with demand being as weak as it is," he said.

Consumption levels of finished gasoline fell to 8.179m bbl/day for the week ending 6 January, which was the lowest level since February, according to the weekly US Energy Information Administration (EIA) data.

“When you break down a gallon of gas, 70% is the cost of crude. That other 30% is ethanol and other things,” said Flynn. “Global concerns come and go, but you cannot deny the fact that the price of crude will impact the price of gasoline.”

An analyst said the actual effect of the subsidy expiration has been minimal, and it is not the sole factor in prices rising.

“Prices had been falling since mid-October and the first increases started the week of Christmas,” said analyst Patrick DeHaan with GasBuddy.com. “Prices went up a small amount because of the end of the ethanol subsidy, but I believe the fear and emotion surrounding Iran’s threats to close the Strait of Hormuz have been a primary reason for the rising prices.

“Current gasoline prices are ahead of last year by 25-40 cents per gallon across much of the US, and 2012 doesn’t look much better," he added.


By: Anna Matherne

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