Is clean-burning, domestically-produced ethanol the reason that gas prices are topping $3 per gallon? That’s what Big Oil and the Wall Street Journal (WSJ) are saying. From Monday’s WSJ:
Demand for ethanol as an additive has caused its price to soar about 65% since early May to around $4.50 a gallon in U.S. spot markets, according to the Oil Price Information Service. That makes it far more expensive than gasoline, which costs about $2.90 a gallon at the pump on average, according to the AAA driving club. “¦ “We’d probably have retail gasoline prices between $2.30 and $2.40 a gallon if not for ethanol,” estimates economist James Glassman of J.P. Morgan.
Actually, ethanol is reducing the price of gasoline. Here’s why:
1. Ethanol is a liquid fuel that displaces 2 percent – or 4 billion gallons – of the transportation fuel market. That’s four billion gallons of fuel that is not petroleum based – which is good news with oil selling over $70 per barrel.
2. Ethanol’s high octane rating means that less crude oil is used in the refining process to generate higher octane gasoline. A conservative estimate would suggest that ethanol extends the supply of clean-burning, high octane gas and increase the volumes of finished gasoline by as much as 10 percent.
3. 85 percent of ethanol is sold on long-term, fixed price contracts – the average price for existing contracts at the moment is between $2.00 and $2.50 per gallon – not on spot market prices that the Journal cites.
Bottom line? If we did not have the more than four billion gallons of ethanol to extend our limited gasoline supplies, prices at the pump would be even higher than they are now.
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