Ethanol Driving Pump, Narrowing of Refining Margin

The gasoline market and its players have formed the opinion that crude oil and ethanol can be price determinants, but not profit margins. The margins in refining gasoline is slowing down, 50-cents-per-gallon lower than its year-ago level, according to Lundberg data, and year-to-date is less than half its calendar-year 2007 size. The margin in retailing is losing out too. The retailers, fortunately, have year to date about the same good margin on regular that they had in 2005, 2006 and 2007 (about 11 cents).

In the short term, refiners and retailers need to gain margin unless one of two things happen:

1. crude oil prices plunge, cutting costs for refiners and wholesale gasoline prices for retailers, or

2. demand growth has to resume handsomely which isn’t likely.

With the moving of demand during spring along its normal seasonal curve, the pressure is building up to pass through higher costs. Idle capacity in refineries will need margin incentive to come back, as do the sluggishness in gasoline import levels, to satisfy the upcoming three-month summer demand plateau.

Meanwhile, ethanol which is taking more share of the gasoline market by federal mandate is often underestimated as an input factor by those hazarding a guess in gasoline price projection.

Further forced purchasing by the refiners and marketers of the additive, whose prices have been zooming up of late, with the inclusion of this growing volume in spring refining exacerbates rising processing costs, and giving the motorist fewer miles per gallon at higher prices, are all part of the spring 2008 market.

As one refining industry leader said of ethanol last month at the annual meeting of the National Refining & Petrochemical Association [NPRA], "We don't make it, but we have to sell it." And they would be required to shoulder the cost and pass it on to the consumers who would soon become more aware that they are getting short-changed in terms of miles per gallon.

The possibility of street price surge by June of 50 cents to about $3.82 nationally, from ethanol-related rising costs and leading to the increase in industry’s margin. As the anti-oil antics in hearings and other public forums increase along with price and seasonal gasoline demand, those in the hot seat—from dealers to major oil companies—will be hard pressed to explain the multiple ill effects of this tax-subsidized, energy-short, environmentally handicapped, logistics-cost-hiking corn derivative, to defend themselves against the witch hunts.

As NPRA points out, U.S. ethanol has three market fixes: the fuel tax break, the sales mandate and the barrier against Brazilian competitors, courtesy of the federal government. When refining margins recover, as they must, and retailers expand theirs if they can, negative scrutiny of the gasoline industry will intensify. The general public may learn more about the consequences of ethanol's role than ever, in 2008, if politicians and anti-petroleum advocates elicit such information from those they accuse of profiteering.

Comments

[Bill6]

Up is down. Black is white. Red is blue. Ethanol is responsible for the gas crisis.

[rickh]

It is causing a rice shortage too.

[Rebecca]

Please see "Alcohol Can Be A Gas" to be enlightened, sir. You sound like you are a big oil advocate. You are giving out mostly total misinformation. Go Greener! Yes, to ethanol!

www.alcoholcanbeagas.c...=

[stang331]

ethanol is keeping gas prices down, why do you think diesel prices which isnt blended with ethanol are higher than gas. diesel should be cheaper than gas because it is less refined than gas is.

[31October]

Why is there a witch hunt against ethanol? It is locally grown, instead coming of from Venezuela or the Middle East. It creates a stable market for sorghum, corn, cane, and sugar beets, all while saving the local family farms. There is MORE than enough ariable land in the USA to meet all conceivable demand. The idea that we cannot supply enough corn is a MYTH. Corn would not be going to fuel instead of food if our dumb government would stop subsidizing farmers to NOT farm, because now farmers have quit planting corn -- which means the proces will rise further. Why arre there any subsidies at all - was not the ethanol mandate enough? Ethanol as fuel was done 10X more aggressively by Brazil (which grows its own food supplies and oil) and Sweden (which does not), and it was successful in both those countries. The ethanol mix reduces the amount of petrol in a gallon, thus slightly reducing overall petroleum demand, thus slightly moving the demand curve down, thus minutely REDUCING prices form what they might have been with pure oil. The only reason it is not working here is because of government intereference. Ethanol, although not as efficient in the car as petrol, is a great idea. The only real problem is that the government will not allow the market to settle on a profitable and stable supply. Cotton Mather would be proud of the fashonable attacks on ethanol. But it is an interfering Congress and counter-productive subsidies that hurt the world.

[TheRealWorld]

This guy needs to read up on today's market prices. I suggest reading Platt's Oilgram. Today ethanol is being sold BELOW gasoline and it's cost is BELOW gasoline. Refiners and blenders are taking the 50-cent credit into their pockets, not the ethanol producers. By the way there is NO rice shortage that's real.

[wheels14]

Please explain again how ethanol has pushed oil up to $120/barrel.

Our government also spends our money on subsidies to tobaco farmers. Why not switch those fields to producing food.

[wheels14]

Where I live, gasoline mixed 90/10 with ethanol is less expensive than pure gas. My car gets just the same miles per gallon with either one.

[wheels14]

Dear Amit,

Are you also in favor of more air polution?

[gsd]

How does this ethanol mixed fuel effect Retailers?? Looks like it is the suppliers that get benefitted from the mixed fuel than Retailers.

[HKL]

Basic supply demand law. Oil price may reach US$ 150 by year end. Why ? The ever increasing demand in US & China ! And the weak US$ ! The oil price is the culprit in driving up food cost.
Cost in cultivating, transportation and fertilizer. Will food prices remain as it is now if the oil price drop to US$ 80 ..70...60 ?
Will oil price be at US$ 120 if demand is low ? Say if 50% US cars are powered with ethanol ?
If you think you are clever, you've got to know the answer.

[User 184521]

It is a myth that ethanol is causing the high gasoline prices. The fact is that wholesale gasoline costs $3.00 /gal primarily caused by high oil prices, over $115 /bbl today. Ethanol, on the other hand, is about $2.50 /gal, plus the blenders get a 50 cent tax credit, meaning their effective cost is about $2.00 /gal.

[ETF STER]

NBF is not an ethanol producer. They produce biodiesel from animal renderings. I don't know what the other symbols relate to, I only know that Nova Biosource Fuels, Inc. is a diesel refiner.

[User 188410]

they get a blenders credit of .51 cents per gallon. How is this forcing up the price. this is just a bash piece on ethanol. Your websites reports garbage to the highest bidder

[pwake74]

Ethanol is energy negative. It costs more in fuel to prep ground, plant seed, spread chemicals, harvest crop, refine, and produce than oil. Period...For every gallon of ethanol produced, you've spent 1.1 gallon of diesel. Corn is not the answer. Removing CRP won't put a dent in the land needed as most crop reduction program subsided land isn't fertile enough for corn or what Brazil uses- cane. Greenies wake up- 1.1 gallons of diesel for 1 gallon of ethanol creates more greehouse gases for global warming or global cooling or whatever your new economic, I hate Bush, crisis is today.

[JHARVELL]

You keep mentioning gasoline, and ethanol. there are players producing biodiesel cheap, and there is a significant difference here. Darling International (DAR), and Nova Biosource Fuels(NBF) are using waste products to produce diesel. There margins are quite low, and is producing far less pollution. There are other companies producing biodiesel, with soy byproducts that is higher cost. Though Darling is making money, Nova is a startup. I think the U.S needs to open there eyes, and get away from OPEC. Let's employ America, not fattening these criminals pockets.

[ff27emt]

when the gas is traded on the stock market and people who have no business buying and selling gas, there will be no doubt the price is higher. and they help make the oil companies rich along with themselves. its time to go back to the old way of things and let the oil companies fight for our business. There is no reason for gas to be this high. Its all a scam.