End of Ethanol Subsidy Could Raise Gas Prices

7:07 PM, Jan 2, 2012   |    comments
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By Chris Woodyard
USA TODAY

Gasoline could cost 4.5 cents a gallon more starting as early as this week, and it's not because of rising oil prices.

It's because Congress declined to renew the 30-year-old federal subsidy for ethanol, letting it expire Sunday.

Ethanol, denatured grain alcohol used as a proven smog-cutting ingredient, currently makes up 10% of most gasoline-based motor fuel for general use, so-called E-10. In a few areas, E-85 fuel, 85% ethanol, also is available. E-85 can be burned only by vehicles equipped for "flex fuel."

How much the end of the subsidy could add to gas prices, and how soon, is yet to be seen. Ethanol blenders got a 45-cents-a-gallon tax credit, which amounts to 4.5 cents for the amount blended into each gallon of E-10 fuel.

It's hard to calculate the immediate impact. Oil prices and ethanol stocks are in flux. And unknown is the impact of another move by Congress: dropping the 54-cents-per-gallon tariff on ethanol imports. Brazil is a leading global producer of ethanol made mostly from sugar cane.

In the U.S., ethanol primarily is made from corn. That has made the ethanol subsidy controversial because of allegations that it raised food prices. The estimated $6 billion annual cost of the subsidy also has added to the federal deficit.

The end of the subsidy, however, has caused barely a ripple among ethanol backers or corn producers. Corn prices remain high because of healthy exports, especially to China. E-10 is now standard, and more demand for ethanol is guaranteed by an escalating federal alternative fuel mandate requiring more use of it.

"Things have changed. The marketplace has changed," says Matt Hartwig of the Renewable Fuels Association, which represents ethanol makers. "Today, ethanol is 10% of the nation's gas supply."

Trading in benchmark crude opens this week at $98.83 a barrel. Crude prices averaged $95.09 in New York trading last year, up from $79.64 in 2010 and $62.11 in 2009, the Associated Press reports. The Energy Department expects oil prices in 2012 to average $98 a barrel.

Gas prices averaged $3.28 for a gallon of regular (E-10) nationwide Monday, according to AAA, up from $3.07 a year ago. E-85 ethanol averaged $2.95. But because cars can't squeeze as much mileage out of every gallon of ethanol, the price when adjusted to equal the mileage of a gallon of regular was $3.88.


USA TODAY

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