It's not true that the price of everything oil-related is up. Just ask the producers of ethanol.
On May 17, Platts assessed the price of ethanol at approximately $2.62/gal. On Tuesday, we assessed it at $1.63/gal. (Editor's note: The Barrel has corrected an earlier incorrect figure.)
But that’s not the most dramatic movement in the price. Because ethanol is used as a blendstock with gasoline, primarily to boost octane in reformulated gasoline, its spread against gasoline tells much about its value. And there, the fall is even more dramatic. On April 2, Platts assessed ethanol in the Gulf Coast at roughly 35 cts over RBOB, which essentially is unfinished reformulated gasoline, waiting to be blended with ethanol. On Tuesday, RBOB had pulled to a more than 43 cts premium to ethanol, for a swing of almost 80 cts/gal.
What happened? It wasn’t as a result of a drop in demand; RFG production with ethanol has stayed largely steady, according to Department of Energy statistics. Meanwhile, ethanol use in conventional gasoline production has risen. Conventional gasoline production with blended ethanol has risen from 1.24-million b/d in late March, the year’s low, to 1.89-million b/d last week, according to the DOE. (That's total gasoline produced, not just the ethanol content).
But the supply side has changed. Through June, the latest month for which figures are available, ethanol production had risen to 418,000 b/d, up from 375,000 b/d in January, according to the Renewable Fuels Association. Given that new plants are coming on regularly, assume that figure will be even higher for each additional month this year.
On the import side, figures have been erratic, falling from 38,000 b/d in January to 28,000 b/d in June, according to the DOE. But Platts' Robert Sharp reports that July numbers are expected to show a doubling of imports from June, with Brazil, as usual, the biggest exporter.
A few standard beliefs have been vanquished in the process. One was that the normal spread between ethanol and reformulated gasoline should be about 50-55 cts, reflecting the 51 cts per gallon value of the ethanol blending tax credit. But the market has fallen so far from that level that it can be assumed that such a guideline can be tossed aside.
The second was that ethanol imports, primarily from Brazil, would not come to the US unless ethanol was significantly more than that 50-55 cts range, because of the 54 cts/gal tariff on ethanol. Import figures will need to be monitored, but it appears that guideline also can be tossed.
Finally, we can expect that ethanol blending into conventional gasoline will probably increase. Ethanol is problematic for summer blending, because of certain qualities, but that problem goes away with lower temperatures. And given its spread to gasoline, it makes economic sense to pump 10% into conventional gasoline, even though unlike RFG, it's not necessary for octane purposes. It's simply a smart thing to do.
Things have changed fast in the criticism of ethanol. Last spring, it was being blamed for pushing prices higher. But with current levels, it can safely be said that ethanol is probably working to keep prices down.
Without doubt, however It might be best to look @ ethanol as a stand alone. Viewing the component of RFG on parity serves no purpose. Look at the economics ie a falling crack this summer including inflated corn values, and overpriced nat gas. As far as the brazilians were concerned it was a no brainer wait for the best values of the summer, and release on the market including a fifty cent tariff they still landed better than 17500 pts. Let's not proclaim ethanol a solution, however @ times it can certainly put a pinch on the demand factor.
There is no question that ethanol has helped lower the price of finished gasoline. We really cannot get along with out it now -- it is about 5.1% of the gasoline pool. So, while we are still "addicted to oil" we are now also "addicted to ethanol."