Fuel Fix: Ethanol leading to a corn-based bubble

June 10, 2013

Zain Shauk, June- A corn-based bubble is building on the horizon, with expectations of a large oversupply of high-priced ethanol that has nowhere to go.

The phenomenon is a product of environmental requirements and subsidies that are currently leading refiners to buy ethanol at record prices, according to analysis from the U.S. Energy Information Administration.

Refiners and other parties that produce fuels are required by the U.S. Environmental Protection Agency to buy supplies of ethanol to blend with their gasoline. For each gallon of ethanol they blend into their fuel, refiners get a credit, also known as a Renewable Identification Number, or RIN.

Refiners need to acquire a set amount of RINs annually to meet EPA requirements, and can also do so by buying RINs from other parties.

While the current supply of corn-based ethanol is down, because of a drought that affected production, output is expected to grow to levels that will leave the country with an oversupply of the fuel that will go unused unless something changes.

That’s because the EPA is requiring refiners to buy more ethanol at a time when fuel makers say they can’t blend any more of it into their gasoline.

The nation’s consumption of gasoline is falling and refiners say they can only replace 10 percent of their main gasoline blend with ethanol.

Ten percent of the nation’s expected 2013 gasoline consumption 13.3 billion gallons, a volume of ethanol that would fall within the mandate this year. But 10 percent of gasoline consumption will likely fall short of mandates in the future, EIA analyst Sean Hill said.